Commercial Leases

Differences Between Commercial Leases & Residential Leases

Commercial Leases

  • Binding
  • Greater Securization required
  • Greater upfront financial commitment (i.e. Tenant Improvements)
  • Significant restoration clauses (i.e. removal of tenant cabling post lease)
  • Majority of Tenants represented by third party provider (commercial brokers)

Residential Leases

  • More consumer protection laws
  • Standard forms
  • Not as much negotiability and flexibility
  • Nominal securitization required
  • Majority of Tenants unrepresented by third party provider (residential brokers)

Commercial Lease Types

  • Retail
  • Office
  • Industrial

Basic Lease Cost Determination

  • Monthly cost determined by multyplying square footage by the cost per square foot
  • CAM
  • Taxes

What Are Commercial Lease Types?


  • The landlord pays for utilities, insurance, taxes, and repairs.
  • Rent is usually higher with this type of lease because many of these costs are included, but the tenant will pay the same amount each month.
  • The payment of utilities is on a case by case basis, typically the responsibility of the Tenant.


  • The tenant pays the rent amount and pays for utilities, insurance, taxes, and repairs.
  • Tenant pays for rent and taxes (100% assessed). In both scenarios, Tenants usually pay for their own utilities.


  • The tenant pays the rent amount and pays the landlord for insurance and property taxes.
  • Tenant pays for rent, Property Tax, and Property Insurance.


  • The tenant pays the rent amount and pays the landlord for the cost of utilities, insurance, taxes, and repairs.
  • The tenant is responsible for rent, building insurance, taxes, all common area repairs and maintenance.
  • This type of commercial lease is usually seen in commercial free standing buildings and retail leases.

Other Important Terms

Repairs & Improvements

  • It is important to note who takes on responsibility for removing improvements to the demised premises upon expiration of the lease.
  • This can be costly and sometimes can be a surprise to tenants.

Rent &  Rent Increases

  • Short-term vs. long-term
  • Comparables
  • Incentives
  • An annual rent increase clause is typical and normally based on a percentage or determined by determined rent increase/”bump”.

Percentage Rent

  • In many retail leases, Percentage Rent is paid in addition to a fixed minimum rent
  • Percentage Rent is calculated as a percentage of the Tenant’s gross sales
  • Generally, the Percentage Rent kicks in when the Tenant’s gross sales exceed a minimum sales volume breakpoint amount

Term Option

  • Bargain for a short initial lease with the option to renew.
  • Landlord may ask for higher rent and possibly a fee. Landlord will provide less construction improvement allowance to Tenant.
  • If the landlord will not agree to a short initial term, consider negotiating for an early termination option exercisable by tenant for payment of a termination fee.

Exclusivity & Radius Clauses

  • Retail clauses
  • Exclusivity allows the Tenant to monopolize certain categories (i.e. groceries or coffee)
  • Protects Tenant’s investment and diversification of tenant mix
  • Radius clause benefits Landlord in ensuring that Tenant will not compete with itself within a certain radius of the store

Co-Tenancy Agreements

  • Provides for penalties or rent reductions in case a specific tenant leaves or overall occupancy drops below an acceptable level.
  • Helps to get retail centers leased when occupancy levels are low.
  • Protects smaller tenants in the event that an anchor tenant leaves.

Personal Guarantees & Security Deposit

  • How common in the local area?
  • How common by the landlord?
  • Other options?
  • Consider negotiating for a reduction/elimination of a security deposit/letter of credit/guaranty over time based on tenant’s compliance with the lease
  • Tenants should negotiate for a cap on the guaranty
  • Tenant personal guarantees are typical for companies with a low credit score, those that might be coming out of BK. Many times a Landlord will push (not always successful) for a subsidiary to have the lease backed by the parent company. For small offices, S-Corps, LLC’s, Law Firms, Landlord will push for personal guarantees. I have had less than 2% of my clients sign personal guarantees in 13 years.
  • How common by Landlords- not typical at all. During the last economic hit, the roles somewhat reversed, Landlords were being asked to provide financials and place all commissions, tenant improvement dollars into Escrows prior to Lease execution. We are seeing less and less of this.

Subleases & Assignments

  • Ask for the right to sublease or assign the space.
  • That way if business fails or you decide to move, you can easily leave without financial hardship and breaking the lease.
  • If the lease contains restrictions on assignments, tenants should make it clear that transfers of interests in the tenant and changes in control, such as in the context of a merger or acquisition do not require the consent of the landlord. These may be difficult to do in some circumstances but can be important in the future.

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