Buying a property for business requirements often demands a robust financial commitment. It poses a challenge, particularly for the new businesses where the cash flow is vital.
On the other hand, renting doesn’t need as much upfront capital as purchasing does. Businesses often opt for lease properties, especially if they require it for various operations like working space, to set up franchises or even manufacturing units, etc.
While signing a commercial lease becomes the first milestone, businesses often struggle to comprehend the commercial lease agreement’s clauses.
What is a Commercial Lease Agreement, and why is it important?
In simple words, a commercial lease agreement is a legal contract between the landlord and the tenant to rent a property.
Essentials of a Commercial Lease Agreement
- Lessor – the landlord who is renting out the property
- Lessee – the tenant who is paying for the leased property
- A binding document – the lease that specifies the terms and conditions
- The period of the lease
How the contract benefits both the landlord and the tenant?
|If the owner is not using a property, he can turn it into an income source and receive the rental payments.||Leasing gives freedom to the tenant to get a place that requires less disbursement than purchasing.|
|Gets a recurring income from rent and maximizes the return on their assets.||The tenant can invest the saved capital in more critical components like products or services.|
|The landlord enjoys the benefit of capital appreciation over time.||Enables the tenant to freeze the rent for a period, especially at locations where the rent escalates significantly.|
|Within the legal boundaries, the landlord gets an advantage to operate the building in the best manner.||It offers flexibility to the tenant in the maintenance or enhancement of the property.|
|While leasing, the owner still holds power on key property-related decisions like whether a tenant can or can’t sublet the premises.||A break clause in the agreement benefits the tenant to contract, expand, or relocate in the future.|
However, customarily, these agreements favor the landlords. If the tenant jumps the gun and signs it off without a diligent review, a small overlooked clause can later open a Pandora’s box.
A well-articulated and thoroughly reviewed commercial lease agreement leaves no scope of ambiguity. Such documents help your businesses soar.
Common types of the Commercial Lease Agreement
Net Lease – The tenant pays all or some additional expenses, which include taxes, insurance, or maintenance costs, in addition to the stated rent. There are three types of net leases:
- Single Net Lease – The tenant pays rent and property taxes.
- Double net lease – Aside from rent, the tenant also pays for taxes and insurance.
- Triple Net Lease – The tenant pays taxes, insurance, and maintenance along with the fixed rent.
Gross Lease/Full Service Lease – The tenant pays only the rent, which also covers all property operating expenses like utilities and other services.
Modified Gross Lease – It lies between a full-service gross lease and a triple net lease. The tenant is responsible for some degree of operating expenses along with the rent. These contracts vary widely.
The meet and greet
Steve Williams, 37, is the new kid on the block. He recently registered his company in the distribution business for a leading electronics goods manufacturer.
“Property has its duties as well as its rights.” – Thomas Drummond
He now needs to set up multiple warehouses to stock the products in the assigned territory.
To minimize costs and enable fast deliveries, he has finalized the optimal locations in his region. Steve coordinates with multiple landlords to freeze the right lease parameters that fit his business.
The nightmares of an ill-drafted agreement
A commercial lease agreement is a contract that outlines the terms under which the lessee (tenant) has exclusive rights to use a property for a fixed period.
It specifies the short term as well as long term details related to the rental lease relationship.
However, if not drafted carefully, the agreement later becomes a bone of contention between the landlord and the tenant.
Steve wants to incorporate all the necessary clauses into the document. He undergoes an unnerving experience and faces many challenges.
- Haste makes waste – He doesn’t want to rush into signing the lease to find himself in a soup later.
- At his wit’s end – He is getting perplexed in the heap of agreements and struggles to track the status.
- The devil is in the details – He is also apprehensive about the clauses written by the landlord and noticed some dubious statements.
- The rabbit hole – Drafting an agreement turns into a nightmare for him as he juggles through multiple documents, innumerable iterations, and meetings with landowners.
What are the key elements of the Commercial Lease Agreement?
- The essential details – Defining who is renting (the lessee) and from whom (the lessor).
- The term of the lease – It specifies the starting occupancy date and the length of the period until the lease is applicable. The tenant should ensure the lock-in period is in sync with the business goals. For example: If the tenant has plans to relocate or move to a larger premise in the future, it is viable to go for a smaller period.
- Lease amount – It is a vital part of the contract. It defines how the rent is computed and what all elements should be included. The amount is different depending on the type of property, area, nature of the business, and the term period.
- Security deposit – A deposit the tenant pays to the landlord to be kept for cleaning or repairing damages to the premises upon the contract’s expiration or termination.
- Maintenance and repairs – This clause specifies who is responsible for maintaining the premises during the lease period. It includes components such as routine repairs of floors, ceilings, walls, etc.
- Alterations and improvements – It identifies whether the tenant has the landlord’s consent to improve, modify, redecorate, and make additions to the space.
- Utilities and services – It clarifies that the tenant is solely responsible for the utility expenses. The expenses include but are not limited to water, gas, heat, light, power, telephone, and other utilities and services consumed on the premises.
- Permitted use – This clause determines the type of business to be carried out in the leased premises.
- Insurance – It specifies the type of insurance cover holds by both the parties. It defines what coverage is required and who will pay for it.
- Renewal – This clause explains the procedure to renew the lease when the term ends. It also specifies the notice period and the time frame to notify the landlord before vacating the premises.
- Subletting and assignment – It is hard to anticipate what the future holds for the business. The challenging business requirements may force the tenant to leave, expand, or relocate. This clause protects the tenant from the insurmountable rent. It offers flexibility to sublet the entire or a part of space to another tenant before the term ends.
- Termination – This clause explains how the lease may be terminated – the minimum rental period, the notice period requirements, etc.
- Disputes – It specifies the way to resolve the disputes through mediation, arbitration, or court.
The right tool – nip the “who” in the bud
Steve feels like he has hit a wall. He desperately looks for resources that can pace him to sign off the deal. The solution to all his concerns is Revv – a document management tool with a ready-to-use commercial lease agreement template.
The action-oriented features of the tool solved all his problems in no time.
- Pre-designed, tailor-made templates – Steve finds a comprehensive Commercial Lease Agreement template on Revv and modifies it as per his need.
- Notes @mentions and chat – This allows Steve to collaborate with different landlords right on the document and perform the iterations. Now he can add notes and mention specific people with @comments to review a document’s clause or condition.
- Activity tab – This feature allows the user to track various stakeholders’ activity on the document. For example, Steve can check which landlord has opened the commercial property lease agreement contract (and how many times). He can check whether the document is approved or rejected. It helps him to overcome the hurdles in the process.
- E-sign – Once Steve drafts the document from the template, he can instantly send it to the landlords for e-signature.
- Folders – With all his commercial lease agreement documents in one place, Steve can now easily navigate through all the agreements and track progress.
The Revv way
The decision to invest in the document management tool has been very lucrative to Mr. Steve.
- Now he can draft each agreement effortlessly, share it, and track its progress.
- It has saved him multiple hours and the hassles of to-and-fro.
- The safe and easy e-signature has made the gigantic task of ratification a cakewalk.
- He can now secure all the documents in one place, which has significantly reduced access and retrieval time.
Want to minimize your effort in drafting an all-inclusive commercial lease agreement? Check out our templates here.