Commercial Leases: Types, Terms, and Negotiation

By: Kaitie Moore Underwood | REALTOR®, Blue Collar Commercial Group

Commercial real estate leases form the foundation of landlord-tenant relationships and are critical to the success of both parties. Understanding the different types of leases, key lease terms, and effective negotiation strategies is essential for landlords and tenants alike. This article provides an overview of commercial real estate leases, highlights important lease terms, and offers tips for successful lease negotiations.

Types of Commercial Real Estate Leases:

There are several types of commercial real estate leases, each with its own structure and terms:

• Gross Lease: In a gross lease, the tenant pays a fixed rent amount, and the landlord covers all operating expenses such as property taxes, insurance, and maintenance costs.
• Net Lease: In a net lease, the tenant pays a base rent amount plus a portion of operating expenses, typically property taxes, insurance, and maintenance. The three common variations of net leases are single net lease, double net lease, and triple net lease, each shifting different responsibilities to the tenant.
• Percentage Lease: A percentage lease is commonly used in retail properties, where the tenant pays a base rent plus a percentage of their gross sales. This type of lease allows landlords to share in the tenant’s success.
• Modified Gross Lease: A modified gross lease combines elements of both gross and net leases. The tenant pays a base rent, and the operating expenses are shared between the landlord and the tenant based on a predetermined arrangement.

Key Lease Terms:

Understanding and negotiating key lease terms is crucial for both landlords and tenants:

• Lease Duration: The lease duration, also known as the lease term, specifies the length of time the lease will be in effect. It is essential to agree upon an appropriate term that aligns with the needs and goals of both parties.
• Rent Structure: The rent structure defines the amount and frequency of rent payments. It is crucial to determine the base rent, any escalations over time, and how it will be calculated (e.g., fixed amount, percentage, etc.).
• Maintenance and Repairs: The lease should clearly outline the responsibilities for maintenance and repairs. It is important to specify who is responsible for which aspects of property upkeep and how expenses will be allocated.
• Use Restrictions: Use restrictions outline the permitted use of the leased space. Both landlords and tenants should ensure that the intended use aligns with local zoning regulations and any specific restrictions within the lease agreement.
• Renewal and Termination: The lease should address renewal options, notice periods for termination, and any associated penalties or conditions for early termination. It is important to understand the flexibility and obligations related to lease renewal or termination.

Lease Negotiation Strategies:

Effective negotiation is key to achieving favorable lease terms:

• Conduct Thorough Research: Both landlords and tenants should research the local market, comparable rents, and industry standards to gain leverage during negotiations.
• Identify Priorities: Determine your key priorities and areas of flexibility before entering into negotiations. This will allow you to focus on what matters most and find common ground with the other party.
• Seek Professional Advice: Consider engaging experienced real estate brokers or attorneys who specialize in commercial leases. Their expertise can provide valuable insights and guidance throughout the negotiation process.
• Communicate Clearly: Maintain open and honest communication with the other party to ensure mutual understanding. Clearly articulate your needs, concerns, and expectations, and be willing to listen and address the concerns of the other party.
• Consider Value-Added Provisions: Explore value-added provisions such as tenant improvement allowances, rent abatement periods, or options to expand or contract the space. These provisions can add flexibility and incentivize both parties to reach a mutually beneficial agreement.

Understanding commercial real estate leases, their types, key terms, and negotiation strategies is crucial for landlords and tenants. I’d love to be a resource on the above and answer any questions you may have! Please feel free to reach out today.