Many new business owners and executives elect to rent space for business operations instead of purchasing commercial property. Commercial leases minimize upfront investment and enhance the flexibility of the arrangements for the company.
People may approach the commercial leasing process with a false sense of confidence. They believe that because they may have rented residential property before, they must be able to make sense of commercial lease documents. The reality is that commercial leases frequently include complex and confusing language that tenants need to understand to effectively negotiate with landlords.
What sorts of terminology do prospective commercial tenants need to understand?
Types of commercial leases
Many different types of commercial leases exist, and the language describing them can be confusing. Unlike residential leases, where the main differentiating factor might be how long the lease lasts, the obligations imposed on the landlord and the tenant can be very different depending on the type of lease that the tenant signs.
A gross lease or full-service lease only imposes base rental payments on the business tenant. The landlord covers any incidental costs related to facility maintenance. They manage tax and insurance obligations, while the tenant pays rent and utilities in many cases.
Many landlords offer net leases. Net leases pass operating expenses on to tenants. They have to pay certain costs in addition to rent and utilities. Triple net leases make tenants responsible for all operating expenses, insurance and taxes.
Double net leases make the tenant responsible for taxes, insurance, rent and utilities. However, landlords cover maintenance expenses. Single net leases make landlords responsible for insurance and maintenance expenses, while tenants have to pay property taxes.
Modified gross leases are also an option. The tenant pays a certain portion of maintenance and building operating expenses, often in the form of common area maintenance (CAM) fees.
Clauses related to the tenancy
Other terms that may confuse prospective tenants relate to unique terms set in the lease. Landlords may include subletting or lease assignment clauses that address whether the tenant can allow someone else to take over their lease.
Force majeure clauses allow either party to terminate the lease prematurely in cases where unpredictable and uncontrollable factors make continuing the lease impossible. Use clauses may limit what type of activity the tenant conducts at the property. Rent escalation clauses allow the landlord to adjust the amount of rent due as operating expenses and the economy change.
Depending on the type of space acquired and the landlord’s priorities, there may be many other confusing terms integrated into a commercial lease. Those preparing to negotiate and sign commercial leases may benefit from hiring a lawyer to review the lease and communicate with a landlord. Securing legal advocacy can limit the risk involved when initiating a commercial tenancy.