Why Commercial Leases Are Different from Residential
Your apartment lease is regulated, standardized, and tenant-protective. Commercial leases are none of these.
Commercial leases are:
- Negotiated agreements between (theoretically) sophisticated parties
- Heavily landlord-favorable in standard form
- Binding for years with serious breach consequences
- Personally guaranteed in most cases
- Complex documents running 30-100+ pages
You're signing an obligation that may outlast your business. Understanding what you're agreeing to matters.
Lease Types: What You're Actually Paying
Gross Lease
You pay one rent figure. Landlord covers taxes, insurance, and maintenance.
Pro: Predictable monthly cost Con: Landlord builds in cushion, you may overpay
Common in: Multi-tenant office buildings, some retail
Modified Gross Lease
You pay base rent plus some operating expenses (usually CAM), but landlord covers taxes and insurance.
Pro: Some cost sharing Con: Complexity in defining what's included
Common in: Office, smaller retail
Triple Net (NNN) Lease
You pay base rent plus property taxes, insurance, and CAM/maintenance.
Pro: Lower base rent Con: Variable costs you can't predict; if taxes spike, you pay
Common in: Retail, industrial, single-tenant properties
Absolute Net Lease
You pay everything including structural repairs and roof.
Pro: Lowest base rent Con: Major capital expense risk
Common in: Single-tenant freestanding buildings
Understanding Your Total Occupancy Cost
Base rent is not your cost. Calculate:
Total Monthly Cost = Base Rent
+ CAM Estimate
+ Tax Estimate
+ Insurance Estimate
+ Utilities
+ Maintenance (if responsible)
Ask landlord for historical operating expense data. Then add 10% cushion.
CAM Charges: Where Costs Hide
Common Area Maintenance charges cover shared expenses: parking lot maintenance, landscaping, snow removal, security, common area utilities, management fees.
CAM Charge Problems
No definition of "common area": Landlord includes expenses you didn't expect
Management fee percentage: Landlord charges 15% management fee on top of actual costs
Capital expenditure pass-through: Landlord replaces roof and passes cost to tenants over 5 years
Administrative charges: Landlord adds administrative fees for managing CAM
CAM Negotiation Points
Cap annual increases: "CAM shall not increase more than 3% per year" limits surprises
Exclude capital expenditures: Or require amortization over useful life (15+ years)
Cap management fee: 5% is reasonable; 15% is profit center for landlord
Require detailed accounting: Itemized CAM reconciliation annually
Audit rights: Right to audit landlord's books if you suspect overcharges
CAM Reconciliation
Most leases have annual CAM reconciliation:
- You pay estimated CAM monthly
- At year end, landlord calculates actual costs
- You pay difference or receive credit
Without audit rights, you're trusting landlord's math.
Personal Guarantees: Your Biggest Risk
A personal guarantee makes you personally liable for lease obligations. If your business fails, landlord can pursue your personal assets.
Standard Guarantee Language
"Guarantor unconditionally and irrevocably guarantees to Landlord the full performance of all Tenant obligations under the Lease, including payment of all Rent and other sums due..."
This is:
- Unlimited in amount (full lease value)
- Unlimited in time (entire lease term plus remedies period)
- Joint and several (all guarantors fully liable)
- Surviving business closure
Negotiating the Guarantee
Burn-off provision: Guarantee reduces or terminates after tenant performance period (e.g., 24 months of timely rent payment)
Amount cap: Guarantee limited to 6-12 months rent rather than full lease value
Specific obligations only: Guarantee rent but not tenant improvement obligations
Separate guarantors for portions: If multiple owners, each guarantees percentage
Corporate guarantee alternative: If you have strong parent company, its guarantee instead of personal
When You Have Leverage
- Strong tenant credit
- Desirable business for the property
- Soft rental market
- Long lease commitment
- Multiple location tenant
Landlords want quality tenants. Personal guarantee is risk mitigation - if you reduce perceived risk otherwise, guarantee becomes negotiable.
Renewal Options: The Details That Matter
A renewal option lets you extend the lease at specified terms. Sounds simple. It isn't.
Option Exercise Requirements
Most renewal options require:
- Written notice
- Specific timing (e.g., 180 days before expiration)
- Tenant not in default
The timing trap:
Your lease expires December 31. Renewal notice due June 30. You forget until August.
Your option is lost. Landlord can now negotiate new terms at market rate or not renew.
Rent During Renewal Term
Fixed increase: "Renewal rent shall be current rent plus 5%" Predictable but may not match market.
Fair market rent: "Renewal rent shall be fair market rent determined by..." Could be higher or lower than current.
Fair market with floor: "Renewal rent shall be fair market rent but not less than current rent" Protects landlord from decreases.
Fair Market Rent Disputes
If you and landlord disagree on fair market rent:
Specified process: Lease should describe: each party's appraiser selects third appraiser, third appraiser decides.
Timing: Process can take months. Start early.
Binding vs. advisory: Is appraiser's decision binding?
Without clear process, you're negotiating without leverage after your option period.
Assignment and Subletting
What if you need to exit before lease ends?
Assignment
You transfer the lease entirely to a new party. Assignee takes over all obligations.
Standard landlord requirements:
- Landlord approval (not unreasonably withheld)
- Assignee financial qualifications
- You may remain liable (continuing guarantee)
- Assignment fee
The "not unreasonably withheld" problem:
What's reasonable? Courts vary. Without clear standards, landlord has leverage.
Negotiation point: Define objective approval criteria (net worth, credit score, experience)
Subletting
You remain tenant but another party occupies and pays some/all rent.
More common than assignment because:
- You retain control
- Landlord may be more comfortable
- Works for partial space
Subletting issues:
- You remain fully liable
- Subtenant may pay more (landlord may want share of profit)
- Operational coordination with subtenant
Recapture Rights
Some leases give landlord right to "recapture" space if you want to assign/sublet:
"If Tenant requests consent to assignment, Landlord may instead terminate the Lease and deal directly with proposed assignee."
This gives landlord, not you, the opportunity to capture value from a profitable assignment.
Negotiation point: Delete recapture rights, or limit to specific circumstances.
Exclusivity and Use Clauses
Use Clause
What business can you operate?
Narrow use: "Premises shall be used solely for operation of a coffee shop"
If your business pivots, you need landlord consent.
Broad use: "Premises shall be used for any lawful retail purpose"
Flexibility for you, but also for neighboring tenants.
Exclusivity Clause
Landlord won't lease to competing tenants.
Why it matters: You sign a lease for coffee shop. Landlord later leases to Starbucks next door. Your business suffers.
Drafting considerations:
- Define what's "competing" (any coffee sales? Only primary coffee business?)
- Radius (same shopping center? Adjacent property?)
- Remedies if violated (rent reduction? Termination?)
- Carve-outs for existing tenants
Continuous Operations
Some leases require you to remain open:
"Tenant shall continuously operate its business during normal business hours"
Problem: If business fails, you can't close while finding assignee - you must keep paying to operate a failing business.
Negotiation point: Delete continuous operations requirement, or add exceptions for assignment/subletting period.
Tenant Improvements
Who pays to build out your space?
Landlord Work Letter
Specifies what landlord builds before you move in:
"Shell condition": Basic building structure, HVAC, electrical to space
"Turnkey": Landlord builds to your specifications
Tenant Improvement Allowance
Dollar amount landlord contributes to your buildout.
Structure:
- $/square foot (e.g., $50/SF)
- Lump sum
- Amortized into rent (you pay back over lease term)
TI Allowance Issues
Use restrictions: Can you use for furniture? Signage? Or construction only?
Disbursement: Reimbursement after completion? Progress payments? Up front?
Timing: What if construction takes longer than expected?
Ownership: Improvements become landlord's property when installed?
Negotiating TI Allowance
In soft markets: Landlord may offer substantial TI to attract tenants
For long leases: More TI allowance justified by longer commitment
For credit tenants: Lower landlord risk justifies more TI investment
Exit Strategies
How do you get out if needed?
Early Termination Clause
Right to terminate before lease expiration, usually with penalty.
Structure: "Tenant may terminate after 36th month with 6 months notice and payment of unamortized TI allowance and 3 months rent"
When to negotiate: Before signing. Much harder to add later.
Lease Buyout
Negotiate exit with landlord. Usually involves:
- Payment of some rent acceleration
- Loss of security deposit
- Potential liability for landlord's re-letting costs
When landlord might accept:
- Market rents have increased (landlord can re-lease higher)
- Good replacement tenant available
- Relationship value exceeds litigation cost
Default
Walking away. Consequences:
- Security deposit forfeited
- Personal guarantee triggered
- Landlord mitigates but can sue for damages
- Credit damage
- May affect other business relationships
Default is expensive. But may be less expensive than performing a terrible lease for years.
Pre-Signing Checklist
Before signing any commercial lease:
Economics
- Total occupancy cost calculated (not just base rent)
- CAM caps negotiated
- Tax and insurance exposure understood
- Hidden fees identified
Term and Renewal
- Renewal option terms clear
- Exercise deadline calendared
- Renewal rent determination method acceptable
- Early termination right negotiated (if possible)
Personal Guarantee
- Scope limited (burn-off, cap, or eliminated)
- Joint and several implications understood
- All guarantors reviewed terms
Flexibility
- Assignment rights adequate
- Subletting rights adequate
- Use clause sufficiently broad
- Continuous operation deleted or limited
Protection
- Exclusivity clause included
- Landlord obligations clear
- Default cure periods adequate
- Audit rights for CAM
When to Hire a Lawyer
Always recommended for:
- First commercial lease
- Lease value over $100K total
- Personal guarantee involved
- Long-term commitment (5+ years)
- Complex build-out
Cost: $1,500-5,000 for lease review and negotiation
Value: Identifying issues that cost $10,000+ over lease term
The Bottom Line
A commercial lease is one of your largest business commitments. Unlike most contracts, you can't easily exit.
Before signing:
- Understand total cost, not just rent
- Negotiate personal guarantee limitations
- Secure assignment/subletting rights
- Calendar all option deadlines
- Have counsel review
The best time to negotiate lease terms is before you sign. After signing, you're bound by what you agreed to - even if you didn't understand it.
Take the time to understand what you're signing. Your future self will thank you.
