Commercial Property Leases: A Complete Guide
A commercial property lease is a complex thing. If you’re researching the ins and outs of commercial property leases, this is your primary resource. Our article is designed to help you get your head around the complexities of a lease for commercial property, know the differences between a commercial building lease and a residential lease, and understand all the implications of a commercial property lease agreement. Read on to see commercial property leases explained simply and clearly.
What is a Commercial Lease?
What is a commercial property lease? A commercial lease is simply a specific type of legally binding contract made between a business tenant and their landlord. The lease provides the tenant with the right to use the property for a business or other commercial activity, for a specific time period. In return for these advantages, the tenant pays rent.
The lease details all the rights and responsibilities of you, the landlord, as well as your tenant. The ‘parties to a lease’ are called the lessor (the landlord), and the lessee (the tenant). You might also have a guarantor or surety, someone who agrees to repay any losses to the landlord if the tenant can’t pay their rent or breaches their agreement in another way.
Difference Between a Commercial Property Lease and a Residential Lease
So how do commercial property leases work? Commercial property leases differ from residential ones. On a basic level, a commercial lease is needed by a tenant to rent space for business and a residential lease is needed by a tenant to rent a home. Because the parties to a commercial lease know their business onions, they usually involve a lot more negotiating ability. This means there’s less protection from the government than there is for residential leases. A commercial property lease features details about:
- The property type
- The terms and renewal of the tenancy
- The base rent, which depends on whether it’ a percentage lease, FRI lease, net rent lease or gross rent lease
- The kind of business the tenant can carry out on the premises
- The security and damage deposit
- Rules for sub-letting the property
- Information about how the tenancy can be terminated – this can be either a fixed or periodic end date and can include a break clause
- Landlord improvements and tenant improvements
- Whether the tenant can assign or sublet
A commercial property lease comes with much more complex lease terms and greater legal protections. It details the responsibilities around maintenance and repairs and sets out who is responsible for them, and includes a warranty of habitability showing the property meets basic safety standards.
Are Oral Agreements Valid?
There’s no law against making a verbal or oral agreement, but they come with serious risks. It’s very hard, sometimes impossible, to legally enforce an agreement that hasn’t been made in writing. A dispute taken to court involves the court hearing evidence so they can decide who to believe. When you have a written agreement, the court will usually uphold it, even if it doesn’t like what’s been agreed to. In some cases a contract has to be in writing to be enforceable. And that’s why you’ll always need to arrange written agreements.
Elements of a Commercial Property Lease
As we’ve mentioned, a business property for lease agreement provides the tenant with the right to use a building for business or commercial activity for an agreed period of time. Let’s look closer at the most important elements of a commercial property lease agreement.
Type of Property
The ‘legal description of premises’ section includes the address, boundary details, and possibly the floor plans. It can include descriptions of fixtures, and descriptions of fittings (also called chattels). The legal description of a premises reveals how the property is identified by estate agents and the law, and the description can be found in a deed, mortgage, or other purchase document. You should also be able to identify it via land titles or by asking your tax advisor.
Tenancy Term and Renewals
Tenancy terms and renewals deal with defining the length or duration of a commercial lease. It can include automatic renewal details, a fixed end date as agreed, periodic tenancy details, security of tenure details and more.
- A Fixed End Date lease gives certainty to the landlord and tenant, providing the exact day the tenancy will end. Neither party has to give notice to terminate, it ends automatically.
- A Fixed End Date lease provides the start date for the lease and the number of weeks, months or years it’ll run – again, neither party needs to give notice, it ends automatically.
- A Periodic lease can be weekly, monthly or yearly, but it continues until one of the parties involved terminates the lease by giving notice in a specific way laid down by statute law.
Commercial property rents are usually paid in advance every quarter, but there’s often room for flexibility. There’s a long list of varied rental options:
- The base rent is the basic rent a tenant pays excluding percentage rents and extra costs
- A percentage lease is the base rent plus a percentage of the business’s monthly income
- A full repair and insuring lease or FRI Lease makes the tenant is responsible for all the building’s maintenance costs
- Net rent leases are the type most commercial leases fall under, where tenants agree to pay all or a proportion of any additional costs, things like utility bills, maintenance, and property taxes
- Gross rent lease is the exact opposite of net lease. In this case the tenant pays base rent plus a number of pre-agreed and pre-defined expenses. In this case the landlord pays for everything else
Rent review agreements are often a possibility, where there’s provision written in to review and possibly revise the rent. And landlords will sometimes ask for a Guarantor, especially for new businesses where there’s no record of a good or poor payment history to rely on
A security deposit is paid by the tenant to the landlord to guarantee the tenant will abide by the terms of their lease. The landlord hangs onto the money for the whole term of the lease and if the property is damaged beyond the usual amount of wear and tear, they recoup the debt from the deposit. At the end of the lease the tenant gets the deposit back minus deductions. The deposit is usually one month’s rent and the landlord will carry out a schedule of condition inspection and report to pin down what, if anything, they’re owed.
Subletting a lease involves the tenant giving the right to use a property or part of it to a third party, for a portion of the remaining lease term. This section of the lease confirms whether subletting is allowed in the first place and if so, formalises the sub-letting terms and conditions.
Lease termination details the options available to terminate a lease earlier than agreed, and there are four choices.
- Assignment means you sell the lease to new tenants with the landlord’s permission and bearing in mind their conditions for doing so. It might mean the outgoing tenant needs to act as a guarantor for the new one
- A deed of surrender simply means an early lease termination
- Subletting the whole premises of part of it is sometimes an option, again with the landlord’s consent
- A break clause means you can terminate the lease under the clause, but many commercial property leases don’t include a break clause. It’s a desirable part of every commercial lease so if there isn’t one in the lease you’re considering signing, ask for it to be included
Know Your Commercial Building Lease
If you’re planning to put up a commercial property for lease, a retail space for lease, or a warehouse space for rent, now you know what the ins and outs of a commercial property lease are. Everyone with a commercial building to lease benefits from expert support around the law, the tax implications and every other aspect of the leasing process and associated paperwork. We wish you luck as a prospective property investor or developer. If you’re a prospective tenant, click here to see a choice of commercial property for rent.