What Business Owners Should Know Before Signing a Commercial Lease - Purple Fox Legal

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What Business Owners Should Know Before Signing a Commercial Lease

By Purple Fox Legal

May 18, 2022

Signing your first commercial lease as a business owner is a very big deal! It should not, however, be one taken lightly. This decision will impact your company for years to come, and it’s one that deserves the appropriate research and consideration. It doesn’t matter whether you’re looking for a retail space to act as your storefront or a professional location to conduct business, it is critical to choose your commercial property correctly the first time. 

In this article, we will explain what a commercial lease actually is, the main types available, and how you can choose the right one for you. Then, we will share three questions every business owner should ask before signing their first commercial lease to help you stay safe and protected. 

What is a Commercial Lease?

As the name suggests, a commercial lease is an agreement between you and a lender that grants you tenant’s rights to a commercial property. Commercial lease agreements are legally-binding contracts and are generally created to help generate income for a business. However, not all commercial leases are the same, which is why due diligence is required throughout this process. 

What are the Main Types of Commercial Leases?

There are many different types of commercial leases, depending on your lender and specific business needs. For the most part, however, the most common commercial leases available include:

  • Net Lease

A net lease refers to a type of commercial lease that includes base rent as well as additional fees for operating and maintaining the building. There are three main net lease options: single net, double net, or triple net lease agreements. Depending on the lease agreement, the tenant could be responsible for paying all three “nets”, including the building’s property taxes, insurance, and Common Area Maintenance (CAM). 

  • Full Service (Gross Lease)

Full service leases are agreements in total opposite to net lease agreements. In full service commercial leases, the landlord is responsible for all costs outside of rent, including property taxes, insurance, and CAM. The exact terms of the lease may vary, but full service lease agreements tend to be most favorable to the tenant. 

Questions to Ask Before Signing a Commercial Lease

Once you’ve identified a potential real estate property and the type of lease that you want, it’s time to really research. Try asking yourself some important questions before jumping in on a commercial lease. 

  1. Do I Understand the Terms of the Lease?

It is critical to ensure that you actually understand your commercial lease before signing it. Do you know the terms included? Do you agree with them? Take time to look through your commercial lease, and try to identify areas where you may be able to negotiate. Some of the most important elements of your commercial lease to examine include:

  • Term length
  • Parking agreements
  • Building hours/access
  • Security deposit
  1. Are There Hidden Fees?

There will be plenty of expenses that pop up on your commercial lease, including CAM and rental fees. You should take the time to look for any other hidden fees that may be waiting before you sign your first commercial lease. Some fees that could pop up unexpectedly might be:

  • Rent increases
    • Does your rent agreement include an escalation clause that caps the amount your rent can increase?
  • Capital improvements
  • Administrative fees
  • Tenant improvement costs
  1. Will the Space Meet Your Business Needs?

Before making your final decision on the commercial space, take the time to truly imagine your business there. Think about your operations and all that you will be conducting in that location and ask yourself if it’s the right place for your company. Some important things to consider before making that final decision include:

  • Building location and accessibility 
  • Building size and space
  • Amenities available to you
  • Operating expenses
  • Surrounding area/neighbors

Staying Safe While Negotiating a Commercial Lease

Settling on the commercial lease for your business is a heavy task, and one that requires lots of time and planning. Not only to make sure you’re making the right decision for your business but also to avoid fraud and scams. Watch for red flags from the seller, like requesting money too early in the process or refusing to meet with you in person. 

For the best experience, consider hiring a lawyer to help with your endeavor. This is the best approach for protecting yourself and your business.