What is a Commercial Lease Agreement?
A commercial lease agreement is a legally binding contract between a business (the tenant) and a landlord. It gives the tenant the right to use a property for business purposes in exchange for rent. The agreement outlines the rights and responsibilities of both parties during the lease period.
What’s the Difference Between a Commercial Lease and a Residential Lease?
While both commercial and residential leases involve paying for the right to use a property, there are some key differences.
Firstly, there’s less legal protection for commercial tenants. If you’re taking on a commercial property, it’s assumed that you’re experienced in running a business and understand the responsibilities.
Secondly, commercial leases are more flexible. There’s more room for negotiation on terms like rent and break clauses because both parties are expected to know what they’re doing.
Are Oral Lease Agreements Allowed?
In most cases, no. Oral lease agreements are tricky to enforce, and if a dispute ends up in court, it’s one person’s word against the other. A written lease is always better because it clearly outlines the terms, making it easier for a court to enforce the agreement.
What’s Included in a Commercial Lease?
A commercial lease typically covers:
- The type and address of the property.
- The length of the lease (fixed or periodic).
- Rent amount and payment schedule.
- The type of business allowed to operate on the property.
- Responsibilities for leasehold improvements.
- Details of the security deposit.
Additional provisions might include renewal options, subletting permissions, and responsibility for insurance.
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Which Governing Bodies Handle Disputes?
The law governing your lease will be based on where the property is located, not where you or the landlord live. If any disputes arise, it’s usually the local council that handles them. This is why it’s important to understand the specific laws and regulations in the property’s area.
Who Signs the Lease?
There are typically two parties involved in signing the commercial lease:
- The landlord (also known as the lessor).
- The tenant (also known as the lessee).
In some cases, the landlord may request a guarantor. This is someone who agrees to cover the rent or any losses if the tenant fails to meet the terms of the lease.
Understanding the Property Terms
When leasing commercial property, there are a few key terms to know:
Fixtures
These are items permanently attached to the property, like sinks or built-in cabinets. They are considered part of the premises.
Chattels
These are moveable items, like furniture or appliances, and are not considered part of the property.
Leasehold Improvements: These are permanent improvements made to the property, like new flooring or lighting. They are usually considered assets but depreciate in value over time.
What You Need to Know About Rent
In commercial leases, rent is usually paid quarterly, often on the 25th of March, June, September, and December. However, this can be negotiable.
Some important rent-related terms include:
- Base Rent: This is the minimum rent amount specified in the lease, excluding additional costs.
- Percentage Lease: Common in retail spaces, this involves paying a base rent plus a percentage of the tenant’s gross income.
- Full Repairing and Insuring (FRI) Lease: In an FRI lease, the tenant covers the costs of repairs, maintenance, and insurance.
- Gross Rent Lease: Here, the tenant pays rent, and the landlord handles maintenance and operational expenses like utilities and insurance.
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Security Deposit
As with residential leases, tenants must pay a security deposit. This is held by the landlord and can be used to cover unpaid rent or repairs if needed. The deposit is typically equivalent to one month’s rent but can be higher depending on the property. In some industries, it might be as much as three months’ rent.
Subletting and Assigning Leases
If allowed by the landlord, you may be able to sublet or assign your lease to someone else:
- Subletting means renting part or all of the property to a third party while you remain responsible for the lease.
- Assigning a lease means transferring the entire lease to another party. This usually requires the landlord’s permission and might involve you acting as a guarantor.
Terminating a Commercial Lease
You can typically end a lease when the term finishes by notifying the landlord. However, ending the lease early is only possible if the agreement includes a break clause, allowing you to terminate the lease without penalty (usually with two months’ notice).
Other ways to end a lease early include:
- Subletting the property or assigning the lease to someone else.
- The landlord agreeing to early termination.
If none of these apply, you must continue paying rent until the lease expires.
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