Financials and Cash Flow

Understanding your commercial lease

Find out how to craft a commercial lease that will help you make the most of your new business location.

Published: March 01, 2012
Updated: February 28, 2018

Signing a commercial lease is a big milestone for any business owner, whether you have years of experience or are launching your first venture. To protect your interests, make sure you consult with an attorney who specializes in commercial leases before you sign an agreement.

In addition to your attorney's advice, consider these tips to help you land the best lease possible for your business.

Know what you're looking for

  • Consider what type of commercial space would best accommodate your needs. For example, will the space be used for production or retail? Also, think about your space requirements. For instance, how many employees do you have? Will your customers need parking? How much do you expect to grow in the next few years and beyond?

  • Research the neighborhood surrounding potential business retail locations. Does your target customer base live or work nearby? Is there foot traffic? Are there competing businesses?

  • It's easy to become emotionally attached to one space, so increase your level of objectivity by creating a spreadsheet that outlines the positives and negatives of each option. Be sure to visit at least two or three commercial spaces that would potentially work for you before making a firm commitment.

Understand the terms and conditions

Commercial leases vary significantly from residential leases. They're more negotiable, there's no commonly accepted standard lease — and they typically offer you, the tenant, less legal protection. Therefore, it's extremely important to educate yourself about the terms and conditions of your specific commercial lease.

Negotiating with your future landlord

Whether you set up shop in a commercial space as it is or you plan to remodel some or all of the unit, it's always wise to approach your commercial lease as a project you can build from the ground up. Because once your lease is finalized, your agreement with the landlord will be just as real as the property itself.

  • Once you’ve identified a specific commercial space to lease, ask for a pro forma (example) of the lease. See what terms and conditions the landlord has included in the lease and evaluate whether anything needs to be added or modified. This is where a commercial leasing attorney can be a valuable asset.

  • Know which type of commercial lease (e.g. net, net-net, or triple net) you are signing. With a net lease, you are responsible for the rent and some or all utilities. In a net-net lease, you are responsible for rent, utilities, and some maintenance or replacement costs. In a triple net lease, you are responsible for all costs associated with the property, including taxes and insurance. It is important to factor these costs into your projected budget.

  • The more details included in your lease, the less likely there will be misunderstandings and misinterpretation. At a minimum, your commercial lease should include the following terms: a description of space for rent including hallways, lobbies and storage; duration/term; rent and utilities; termination conditions for landlord and tenant; rent increases; renewal conditions; subleasing restrictions (if any); improvements to be made before move in; compliance with the Americans with Disabilities Act; any representations made to you by landlord and to landlord by you; zoning details; parking; signage; use and exclusivity clauses; and security deposit.

Once you've obtained a pro forma copy of the lease, consult with your commercial leasing attorney and draft a list of changes or additions you'd like to propose. Keep in mind the following guidelines:

  • A short-term lease with an option to renew can give you the upper hand by allowing you to revisit terms sooner, rather than years down the road. Although a long-term lease may cost less month-to-month and provide a degree of long-term stability, new business owners should be conscious not to over-commit themselves. 

  • It is possible to negotiate a reduction in rent for improvements you make to the property, so come prepared with research about how improvements would raise the value of your business location.

  • Remember that security deposits are not set in stone and can often be negotiated. A letter of credit can be used instead of a security deposit. With a letter of credit, a bank promises to pay the landlord if certain conditions are met. The terms should be as specific as possible and include a sworn statement from your landlord. Letters of credit are not free, but they are often significantly cheaper than cash deposits. 

Learn more about negotiating your commercial lease.