Commercial Lease Agreement

A commercial lease agreement is a legal contract that sets the rules to rent commercial spaces for business use and it is valid between the landlord (lessor), who owns the property and the tenant (lessee), who occupies the space. The tenant pays rent to the landlord every month and may also have to pay other expenses, such as property taxes, insurance, and common area maintenance (CAM), depending on what both parties agree to in the lease. Commercial leases usually last from three to five years and give both parties long‑term stability. ^[1]

“Rental Period” It is the part of the lease that says how long the commercial lease will last. It explains whether the lease is for a set time (fixed term) or continues month to month.

Types of Commercial Leases

Main Lease Types

1. Gross Lease – In this type of lease, the tenant only pays the set monthly rent and does not have to cover any property expenses.^[3]

2. Modified Gross Lease: Besides paying a monthly rent, the tenant also pays some property expenses agreed on the lease agreement by the landlord and tenant.^[4]

3. Triple-Net (NNN) Lease: The tenant pays a base monthly rent and, in addition, covers a proportional share of all property costs, that include taxes, insurance, and CAM. ​^[5]

How to Lease Commercial Property

Step 1: Calculate the Space Size

Find the total square footage (SF) by measuring the length and width of the inside area, which is important because commercial rent is usually calculated per square foot.

Step 2: Decide the Price ($/sf)

Step 3: Set Property Costs

Figure out the tenant’s share of property costs, such as insurance, real estate taxes, and common area maintenance (CAM), based on their portion of the space.^[2] Use the prior year’s expense numbers to estimate these amounts when advertising the property.

Step 4: G Real Estate Broker (Optional)

A landlord can choose to hire a commercial real estate broker to list the space and handle lease negotiations. Brokers often charge a commission of about 4–6% for the first five years of the lease and 1–3% for each year after that.^[6] Under federal antitrust law (the Sherman Act), there is no legal “average” commission, because setting a standard rate for the whole industry would be treated as illegal price-fixing.^[7]

Step 5: Review Potential Tenants

Ask each prospective tenant to fill out a Commercial Rental Application and provide supporting documents, including:

Copy of their driver’s license

Business EIN number

Last two years of business taxes (IRS Form 1120-S for S Corporations)

Last two years of personal income taxes (IRS Form 1040)

Run credit checks as well to review the tenant’s financial situation and see how likely they are to pay rent on time.

Step 6: Negotiate Lease Rules

Agree on the main deal points, such as the rent amount, how long the lease will run, which property costs the tenant will pay, any landlord-paid build-outs, and other key terms. After reaching a verbal agreement, sign a Commercial Lease Letter of Intent (LOI). Although this document will not create legal obligation, it will briefly list the main terms and rules you have agreed to.

Step 7: Prepare and Sign the Lease

Have the commercial lease written by the landlord, broker, or preferably an attorney, making sure it includes all terms, duties, and obligations and follows all federal, state, and local laws. Once the lease is complete, both the landlord and the tenant sign the document.

Electronic Signature Validity: Both parties can sign the lease electronically according to the ESIGN Act (15 U.S.C. §§ 7001-7006) and the Uniform Electronic Transactions Act (UETA), adopted by 48 states. ^[8] Requirements: (1) intent to sign, (2) consent to electronic transactions, (3) signature associated with record, and (4) both parties can access and save the document.

Step 8: the Tenant Moves in and the Lease Starts

If parties don't agree on a different date, once the lease is signed, the tenant normally moves in on the first day of the lease term. The tenant may have to get a **Certificate of Occupancy **issued by the local government before opening for business, especially for uses like food service or retail that need inspections. The tenant must then look after the space as required by the lease and pay the rent each month.

Lease Recording Requirements

In at least 17 U.S. states, long-term commercial leases must be recorded with the county land records when the lease term goes over a set number of years, often 1, 3, or 7 years including any renewal options. Recording the lease gives public notice and protects the tenant’s rights in the leased property against later buyers of the property and against creditors who place liens on it.

Examples of State Recording Limits:

• Florida: 1+ years – Not enforceable against creditors or purchasers if unrecorded ^[9]
• Indiana: 3+ years (Ind. Code § 32-31-2-1) – Must record within 45 days of execution ^[10]
• New Hampshire: 7+ years including renewal options (N.H. RSA 477:7) ^[11]

Memorandum of Lease: Since putting the full lease in the public records might reveal private financial terms, the parties usually record a short Memorandum of Lease. This document lists basic items like the parties’ names and addresses, a description of the property, the lease term, any extension options, and purchase rights, but leaves out rent amounts and other confidential business details.

Results of Not Recording: If a lease that should be recorded is never recorded, it can be invalid against later buyers or creditors, and the tenant may lose its rights in the leased property if the property is sold or negotiated in any way.

Essential Lease Clauses

Americans With Disabilities Act (Ada) Requirements

The ADA says that commercial tenants whose businesses are open to the public, such as restaurants, retail shops, and offices that serve walk-in customers, must give people with disabilities access and services equal to what they offer everyone else. These access rules apply to buildings that were newly built or significantly renovated after January 26, 1993.​(30 months after the ADA's July 26, 1990 enactment). ^[13]

Crucial Difference: ADA Title III, which covers public accommodations, depends on the type of business and not on how many employees it has. The 15‑employee minimum only applies to ADA Title I, which deals with employment discrimination, and does not change a business’s duties under Title III to make its premises accessible to the public.^[14]

Hazardous Materials and Environmental Duties

Federal environmental laws like Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), Resource Conservation and Recovery Act (RCRA), and Hazardous Materials Transportation Act, can make property owners, operators, and tenants responsible if hazardous substances are released at the property. ^[15] A hazardous waste clause in the lease requires the tenant to follow all applicable federal, state, and local environmental laws.

Breach, Default, and Termination

Tenant Problems

Common issues include not paying rent, breaking lease terms, filing for bankruptcy, or walking away from the property.

Landlord´s Options to fix:

Notice and Time to Fix: Send written notice that explains the problem and give the tenant time to fix it, usually 10–30 days for missed rent and 30–60 days for other violations.

Expelling Processes: Use the state’s commercial eviction or unlawful detainer procedures according to the law.

Rent Collection Speed Up: If the lease allows it, demand all remaining rent under the lease at once.

Use of Security Deposit: Apply the deposit to unpaid rent and repair costs.

Duty to Reduce Losses: In some states, the landlord must try to re-rent the space to cut down the amount of damages.

Money Damages: If allowed in the lease, sue for unpaid rent, property damage, and attorney’s fees to recover damages.

Landlord Problems

Landlords create problems for the lease when they do not take care of the property, get in the way of the tenant using the space normally, in some states don't keep the place livable, or stop providing basic services.​ ^[16]

Tenant Options to Repair:

Repair and Deduct: If the lease or state law allows, the tenant can make needed repairs and subtract the cost from the rent.​

Rent Reduction: Reduce or stop paying rent when conditions are so bad that the space is not fit to use.

Leave the Property: End the lease and move out if the problems are so serious that the space can’t be used for the business anymore.​

Specific Performance: Ask a court to order the landlord to do what the lease requires, such as making repairs or restoring services.​

Money Damages: Sue the landlord for breach of contract, including claims for lost business income and other losses.​

Assignment and Sublease Basics

Understanding the difference between assignment and subletting really matters in commercial leases. ^[17]

Assignment: The tenant hands over the whole lease to a new tenant (assignee). The first tenant usually still owes the landlord unless the landlord agrees in writing to let them off. (novation)

Sublease: The tenant lets out only part of the space or time to someone else. The first tenant still answers to the landlord, and the subtenant answers to the first tenant.

Default Common Law Rule: If the lease doesn’t say otherwise, a tenant is ALLOWED to assign or sublease without the landlord’s permission. However, most commercial leases add rules that limit assignment/subletting.

Common Lease Language on Transfers

Absolute Ban: The lease says the tenant is not allowed to assign the lease or sublease the space.

Consent Needed: The tenant can assign or sublease only if the landlord previously gives written consent.​

Consent Must Be Hold Back Reasonable: The landlord must not unreasonably refuse consent to an assignment or sublease.​

Reasonable vs. Unreasonable Refusal: Courts say a landlord can fairly refuse consent when the new tenant looks financially weak, plans a use that does not fit the property, or has a poor record or reputation. But a landlord cannot fairly refuse consent just to push for higher rent than the lease allows or simply because they personally dislike the proposed tenant.

**Differences by State **

California: A landlord generally cannot withhold consent in an unreasonable way unless the lease clearly gives the landlord full option to say yes or no.​^[18]

New York: Courts read assignment and subletting clauses narrowly and tend to interpret unclear language in favor of the tenant.​ ^[19]

Texas: Follows the older rule that a landlord can refuse consent for almost any reason, unless the lease itself limits that power. ^[20]

Laws Against Discrimination

In general, the Fair Housing Act (42 U.S.C. § 3601 et seq.) only covers housing and does not apply to purely commercial leases, because it protects people against discrimination in “dwellings” (residential places to live). It can still matter for mixed‑use buildings that include homes and shops, or for commercial properties that also provide housing, like some hotels or extended‑stay facilities. ^[21]

Anti-Discrimination Laws that DO Cover Commercial Leases:

Americans with Disabilities Act (ADA), Title III, which bans disability discrimination and requires access in places open to the public as it was explained in the section above.

Civil Rights Act of 1866, 42 U.S.C. § 1982, which prohibits racial discrimination in all types of property deals, including commercial leases.​^[22]

State and local anti‑discrimination laws, which often add extra protected categories, such as sexual orientation or gender identity, and can reach many types of business properties.