Everything You Need to Know About Signing a Commercial Lease

Everything You Need to Know About Signing a Commercial Lease

Signing a commercial lease is a significant decision for any business. Whether you’re setting up your first office or expanding to new premises, the terms and conditions of your lease can impact the long-term success of your business. Understanding the key elements of a commercial lease and negotiating terms that suit your business is essential. Here’s everything you need to know before signing that dotted line.

1. Lease Duration and Renewal Terms

One of the first things to consider when reviewing a commercial lease is the duration of the agreement. Commercial leases typically last for a longer period than residential leases, often between 3 to 10 years. Make sure to clarify the exact length of the lease and review any renewal options available to you.

Some landlords offer favourable renewal terms, allowing you to stay at the same rate or with minimal increases. Others may require renegotiation, which could lead to higher rent in future. Make sure to negotiate renewal options that provide flexibility for your business's growth or exit strategy.

2. Rent and Additional Costs

Rent is often the most obvious cost associated with leasing commercial space, but there can be several additional expenses. Apart from the base rent, you may be responsible for operational costs like utilities, maintenance, insurance, and property taxes.

Check if your lease is a “gross lease,” where all costs are included in the rent, or a “net lease,” where you may be responsible for specific operating expenses. It’s essential to understand the full financial commitment you’re signing up for to ensure you won’t be caught off guard by unexpected costs. Negotiating favourable terms on rent increases (for example, annual limits) is another key consideration.

3. Repair and Maintenance Obligations

Who takes care of repairs and maintenance? Commercial leases will clearly outline the responsibilities of both the tenant and the landlord in this regard.

In some leases, the tenant is responsible for maintaining the interior of the space, including fixtures, heating, air conditioning, and plumbing. Other leases may require the tenant to contribute to common area maintenance (CAM) fees, which cover things like cleaning, landscaping, and general upkeep of shared areas.

Before signing, review the maintenance terms to determine what you’re liable for and budget accordingly. Make sure the lease specifies which party handles major repairs, such as roof replacement or structural issues.

4. Tenant Improvements and Alterations

Depending on your business needs, you may want to make alterations or improvements to the space, such as adding partitions, custom lighting, or signage. Most commercial leases allow for tenant improvements, but they often require landlord approval.

Ensure that your lease outlines the process for requesting and making improvements, including who will pay for them. Some landlords may offer tenant improvement allowances to offset some of the costs. Additionally, confirm whether you’ll need to restore the space to its original condition at the end of the lease term.

5. Exit Clauses and Early Termination

Understanding the conditions under which you can break the lease is crucial. Many commercial leases include strict exit clauses, and breaking the lease early can lead to significant penalties.

If you anticipate that your business may change direction or move locations, negotiate for an early termination clause. Some landlords may offer a "break clause" that allows you to end the lease early under specific conditions, such as giving sufficient notice or paying a fee.