The U.S. commercial real estate market had an estimated value of $20.7 trillion as of 2021. If this market continues to grow, it's likely to have more tenants signing commercial lease agreements. A growing market indicates more demand for commercial space and the willingness of landlords to sign leases.
A commercial lease agreement is a real estate contract between a tenant and a landlord. It outlines the terms and conditions of a rental commercial property. With lots of misinformation surrounding this topic, here's what you should know before signing one:
Different Types of Commercial Lease Agreements
The main types of commercial lease agreements include gross, net, and modified gross leases. In a gross lease (common in retail spaces), the tenant must pay a fixed rent to the landlord. The landlord will then pay all operating expenses.
In a net lease, tenants pay a base rent to the landlord. They also pay a share of the operating expenses. Net leases are more common for office space and industrial space.
A modified gross lease allows the tenant to pay a base rent to the landlord. They also pay a share of some of the operating expenses. The lease is a hybrid between a gross and net lease.
The Key Terms of a Commercial Lease Agreement
A typical commercial lease agreement has terms like rent, lease term, security deposit, leasehold improvements, assignment and subletting, and early termination. Rent is the amount of money that the tenant will pay to the landlord. The lease term is the time a tenant can occupy the property.
A security deposit is the amount the tenant pays the landlord. It helps guarantee they will fulfill their obligations under the lease.
Leasehold improvements are any changes the tenant makes to the rental property. Depending on the lease terms, the tenant can assign the lease to another party.
Getting Out of a Commercial Lease Agreement
Always do your research before negotiating a commercial lease agreement. Research can give you a good starting point for negotiations. Be ready to walk away if you aren't happy with the terms.
Some commercial lease agreements contain an early termination clause. The clause allows the tenant to end the lease before it expires. However, the tenant must pay a termination fee to the landlord.
The tenant and landlord may agree to end the lease agreement mutually. It can happen if the tenant can't continue to use the rental property. They can also agree to do so when the landlord finds a new occupant.
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Commercial lease agreements fall into three categories, including gross, net, and modified gross leases. Each features terms like rent, lease term, security deposit, leasehold improvements, assignment and subletting, and early termination. When negotiating a lease, research, be ready to walk away, and seek legal advice.
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