Feeling overwhelmed reviewing and understanding a commercial lease? Leases are a type of legal contract that allows a party the right to use and occupy property for a certain length of time in exchange for payment. If you’re a commercial tenant in Pittsburgh, PA, or any surrounding area, and need help understanding a commercial lease, know that you aren’t alone in trying to wrap your head around these agreements.
This guide is for growing businesses, law firms, financial institutions, tech companies, and more who need help with commercial real estate. Whether you’re moving into an office space, or renting out facilities for production, at some point you’re probably going to have to reserve a space for your business.
We will walk through key aspects of commercial leases, renewal options, and negotiation strategies to help ensure you’re well-equipped. Understanding a commercial lease doesn’t have to be a headache. Donahue Real Estate Advisors is here to help provide some clarity.
What’s in a Commercial Lease Agreement?
In commercial real estate, a lease can seem like its own language. These documents use specific words that might be unfamiliar. You’ll see the phrases ‘base rent,’ ‘lease term,’ and ‘triple net (NNN)‘ often. Before we start defining terminology around commercial real estate leases and commercial space it is vital to take a moment to understand what goes into a solid and advantageous commercial lease agreement.
Parties, Premises, and Lease Terms
A lease spells out who is involved. This includes the landlord and the tenant. It also describes the commercial property being rented and how long the rental agreement lasts. Make sure everything is correct.
Rent, Security Deposit, and Adjustments
The lease agreement specifies basic rental payments, when they’re due, and how to pay. The agreement will cover things such as acceptable payment methods. It should also state how the landlord will handle the security deposit. Also included are potential rent increases during the lease term. It will also detail escalation clauses if your base rent may be subject to change.
Renewal Details
Many commercial leases give an option to renew. These options are often negotiable. The agreement should say when and how to give notice if you want to renew your lease.
Common Areas
Leases for multi-tenant buildings also describe common areas. Common areas are defined as space that is shared by the other tenants in the building. The lease will include who is responsible for caring for areas such as hallways and lobbies. Landlords add a building’s common area factor to the usable square footage to calculate your rentable square footage. So if your suite is 2,000 SF and the common area factor is 25%, your rentable SF would be 2,500 SF.
Utilities
The lease defines who pays for utilities, such as gas, electric, water, and sewage. This is dependent upon the various lease structures.
Property Usage
The lease describes what you can do within the property. For example, you may not be able to have lab space within the office building. Therefore, make sure your usage complies with zoning ordinances and the landlord’s accepted uses.
ADA Compliance
It also helps to ensure that the leased space meets all requirements of the Americans with Disabilities Act (ADA) and local ordinances. Tenants have primary responsibility for ensuring their premises is ADA-compliant, while the landlord is responsible for the rest of the property, including common areas.
Insurance
The commercial lease agreement covers necessary insurance policies and who handles them. Make sure you obtain liability and personal property protections for yourself. This is a detail not to be overlooked.
Maintenance and Repairs
The lease should state who maintains the property and is responsible for repairs. This would involve items such as HVAC systems, mechanical, electrical, and plumbing for the building, roof, parking lot, and more.
Assignments and Subletting
It covers rules about assigning the lease or subletting the commercial space.
Improvements
Commercial lease agreements cover any modifications to a tenant’s premises and the building’s common areas. This would include who pays and owns those changes when the lease ends.
Property Access
It spells out when the landlord and tenant can each access the property and premises.
What Happens if Things Go Wrong?
What happens if there’s a fire or another disaster? The lease covers these scenarios, plus what happens if either party fails to meet the agreement. Finally, it outlines the conditions for ending the agreement, how you should leave the property when it ends and it outlines remedies if the landlord doesn’t live up to their obligations under the lease, and vice versa. Also keep in mind that tenants should be aware that commercial evictions are often much faster and have fewer protections than residential leases.
Negotiating a Commercial Lease Like a Pro
Timing Is Everything
Waiting until the last minute takes away your power, especially when negotiating lease terms. Landlords know that moving a business is difficult and expensive. Starting early provides options and offers greater flexibility.
Think Ahead and Expand Options
About one and a half to two years before your notification date, you should work with a tenant rep and start looking at other options to give yourself more leverage when you’re trying to negotiate a commercial lease. Tour other buildings, gather proposals, and see if other premises work for your needs. This insight helps to find locations that work better for your long-term strategy.
Why So Long Before the Notification Date?
The early bird gets the worm. That’s especially true when it comes to commercial real estate. Getting a head start gives you plenty of room to make your next move. It gives you adequate time to build out the new premises and the necessary lead time to do construction cost pricing.
Here’s what planning ahead can get you:
Touring alternative buildings.
Gathering proposals from different landlords.
Test-fitting the other premises to see if they meet your needs.
Getting construction costs priced, so you know what it’ll take to get a new space ready.
Having adequate time to negotiate a new lease.
Having enough time to build out the new premises.
If you get started 12 months or more prior to the lease expiring, the items in this list become much less of a headache to manage.
Knowing Your Worth as a Tenant
Are you a good tenant? Landlords want reliable tenants. This will have an influence in commercial real estate. They look at your payment history and how well you care for the property. Knowing this helps you push for better terms, giving you leverage.
Navigating Different Types of Commercial Leases
Gross Lease
The gross lease is straightforward. The tenant pays a flat fee, and the landlord covers most property expenses. This can make budgeting easier because tenants pay one rental rate. The landlord pays the bulk of the expenses.
This type of lease is the most common. Be sure you are consulting with an experienced real estate professional for guidance, especially when you start trying to negotiate a commercial lease. Each building offers varying concessions that have nuances to their lease type.
Net Lease
Under a net lease, the tenant pays base rent, plus a portion of property costs. These include property taxes, insurance, and maintenance. This arrangement gives landlords lower base rents to tenants and is a popular choice where tenants shoulder some property costs alongside their base rent payments.
Double Net Lease (NN)
Breaking this down a bit further: in a double net lease (NN Lease), along with paying the base rent, you cover a portion of both the property taxes and the building’s insurance premiums. In a single net lease, the tenants pay one of those property costs, and the landlord takes care of the rest.
Triple Net Lease (NNN)
NNN stands for Triple Net Lease. It is a type of lease where the tenant pays base rent plus a portion of the property taxes, insurance, and maintenance costs for the property. The tenants pay those overhead fees along with the rental payment.
Understanding CAM Fees
CAM stands for Common Area Maintenance. These fees cover shared expenses such as landscaping, maintenance, and repairs in common areas. Leases address these charges, describing what they include, how they’re calculated, and when they’re paid. Review CAM fees carefully.
Essential Clauses
Beyond rent and CAM fees, leases contain several vital clauses that outline additional specifics about responsibilities, conditions, and the parties’ expectations. Key clauses to note are below.
Use Clause
The use clause states how the leased property can be used. This is really important because it outlines restrictions for goods and services that can be sold on premise, as well as the types of businesses that can operate in the building. You want to be very specific when defining how this commercial space will be used.
Subletting and Assignment
The language here defines if a tenant is permitted to sublease the commercial space. Also covered is if the original tenant is allowed to transfer the responsibilities to another business or party. Most landlords require the right to approve the new tenant and run background financial statements.
Alterations and Improvements
This states what a tenant is allowed to do when making alternations. This often occurs if businesses need modifications to an existing commercial space to better meet business needs. Think carefully here and specify responsibilities by identifying exactly who foots the bill to execute changes to the physical building.
Early Termination
An early termination clause defines the stipulations for exiting out of the lease prior to it expiring. There is typically a large financial penalty or specific financial expectations involved when terminating the contract early. Be sure that you fully read through this section prior to engaging in this type of contact.
Option to Renew
Some commercial contracts specify an “option to renew”. When and how should tenants notify landlords in the event they decide to continue renting the space? It will also outline the general process in those steps. In general, waiting until the notification date means the commercial tenants likely lose leverage on negotiation power.
Real-World Scenarios
Imagine you’re a growing tech company, and suddenly the office you loved is feeling cramped. It’s a constant scramble for space; hallways are crowded, and every meeting room is booked. This lack of space will hamper your future growth, so you need more room. Renewal time for your lease is approaching, and it’s time to get strategic.
Before you automatically sign your renewal, thoroughly explore your options. You can negotiate for more space with your landlord and see if there is room to expand where you are. Or, you can consider relocating. Taking action early gives you a leg up—especially if you’re a responsible tenant.
Seeking Expert Advice
Get Professional Input
Commercial leases can be confusing, so it’s smart to have experts on your side. Commercial real estate attorneys and tenant representatives play key roles in the leasing process. They each bring important skills to the table that can save you money and headaches.
The Role of Attorneys in Commercial Leases
Commercial real estate attorneys focus on the legal parts of the lease. They make sure the language protects your interests. They understand complex legal terms and can spot potential problems in the lease agreement. Attorneys can help with negotiations. They also make sure the lease follows local and federal laws.
The Role of Tenant Representatives in Commercial Leases
Tenant representatives, like Donahue Real Estate Advisors, focus on the business side of your lease, like insights on the Pittsburgh commercial real estate market and understanding market trends. Tenant reps help you find the right space for your business and coordinate lease negotiations to get you the best possible terms. This includes the cost efficiency of the space.
Here’s how a tenant representative adds value:
Finding the right space: They know the available properties that meet your needs.
Negotiating lease terms: They fight for favorable rent, build-out allowances, and other key terms.
Understanding renewal options: They track your lease expiration date and notification date, ensuring you don’t miss important deadlines.
Planning for the future: They help you think about your company’s growth and make sure your lease has the flexibility you need.
Knowing when your lease expires is very important. You should explore other options at least a year or more before your notification date to give you leverage. If you wait until the last minute, you lose negotiating power.
Both attorneys and tenant representatives work for you to protect your interests. They make sure you understand your lease and help you make informed decisions. Engaging both in the leasing process can be a game-changer for your business.
Personal Guarantees and Exposure
Often, landlords might ask for a personal guarantee, especially from small businesses, or tenants with very small revenues. This means you’re personally responsible if the business can’t pay the rent. Work with your legal counsel to negotiate this aspect of your contract. If possible, you want only your entity or legal business to take on the risk when signing a business lease.
Insurance Guidelines and Cautions
Make sure to plan for every “what if?” scenario by purchasing adequate insurance and including what is outlined by the lease. Contact your insurance provider to review the insurance clause of the lease to make sure you have the coverage you need to be protected.
Notification of Renewal
For a lease renewal to happen successfully it needs a notice of renewal, but many companies miss their deadlines.
To fix it and save yourself trouble, note the deadline for renewing your commercial lease. Make sure it is clearly outlined and displayed where appropriate for responsible and transparent record keeping. Set a reminder a year out from the deadline so you can be proactive.
Review
Review and analyze current rents and rates for similar properties nearby, as this helps with fair market value.
Consult experts on legal implications so that you’re aware of your legal business responsibilities and limitations. It helps bring better protection and clarification for legal compliance requirements on complex topics such as CAM, usable square feet, and early termination of contract.
Revise
Outline and describe clear terms such as timeline and conditions to keep your business ready, strong and sound when you finalize for signatures. This step assures everyone gets exactly what they’re intending, so everyone gets a long-term successful situation.
Here is a helpful table to assist in visualizing common commercial lease clauses:
| Clause | Description | Tenant Consideration |
|---|---|---|
| Use Clause | Specifies the permitted uses of the leased space. | Negotiate for flexibility to accommodate potential business changes. |
| Subletting and Assignment | Defines whether the tenant can sublease or assign the lease. | Understand conditions for approval and potential fees. |
| Alterations and Improvements | Outlines rules for making changes to the property. | Clarify who pays for improvements and ownership at lease end. |
| Early Termination | Specifies conditions and penalties for ending the lease early. | Be aware of financial implications and explore options for a smoother exit. |
| Option to Renew | Gives the tenant the option to extend the lease term. | Note the notification deadlines and negotiation power considerations. |
FAQs
How do leases work for commercial property?
Commercial leases work like any other type of lease where there are key considerations you should take with you. They tend to last longer and have higher complexity levels to fully read over them. Legal business counsel on contracts is recommended when analyzing them.
Penalties for broken contracts carry expensive monetary consequence, so taking due care can prevent costly liabilities from occurring.
How do you read a commercial lease rate?
A commercial lease rate is the amount tenants should anticipate needing to plan around and budget, accounting for fees, utility coverage costs as specified within the lease such as if it’s a modified gross lease. It’s best to review financial knowledge around CAM and other extra overhead fees, or even costs to fix HVAC situations depending on your financial agreement. To better maintain clarity over these agreements, tenants will have clear payment schedules, including late fees and terms such as property tax rates, when payments are due, and other penalties or consequences as stated or involved on either party’s responsibility of agreements.
What is the most common commercial lease agreement?
Across office tenants and small businesses, the gross lease agreement remains the prevalent option because of simple and fair overhead distribution over utilities, responsibilities and coverage by both responsible parties. The agreement comes as a benefit over clarity where small nuances don’t exist due to legal terms of real estate complexities like triple net, percentage clauses, or other details most business owners may not recognize when seeking the perfect commercial agreement, resulting in headaches in their long-term planning. The rent payment will be easier to forecast.
What to know before renting commercial property?
If it’s the first time taking over commercial property, business renters should consider carefully reviewing zoning laws, researching landlords, and understanding CAM fees to be better adept in responsibilities and limitations. It is important to set realistic budgeting with additional protection of personal/rental. You want to always involve outside business experts familiar with reading the contracts, like a tenant representative. You also need to determine the usable square feet to make sure your equipment can fit.
What is base rent in a commercial lease?
Base rent is the fixed amount of rent a tenant pays regularly, not including any additional fees like CAM or property taxes. The lease agreement specifies the base rent and outlines any potential rent increases during the lease term.
What is a lease term?
The lease term is the length of time that the lease agreement is in effect. Commercial leases typically have longer terms than residential leases. The agreement specifies the start and end dates.
What does NNN mean in commercial real estate?
NNN stands for Triple Net Lease. It is a type of lease where the tenant pays base rent plus a portion of the property taxes, insurance, and maintenance costs for the property. The tenants pay those overhead fees along with the rental payment.
Conclusion
Understanding a commercial lease is tough, but manageable. Starting early and being informed are your best moves. Also, getting help from experts can be well worth the cost when you think of the risks involved. Approaching your commercial lease confidently helps to ensure success and stability for your business. Remember the pointers in this article so you have adequate leverage. If you need assistance reviewing and understanding your current lease, contact Donahue Real Estate Advisors today.
