Minnesota Commercial Lease Agreement

Overview

A Minnesota commercial lease agreement is a written contract outlining the lease of commercial property for business use. It establishes the terms and conditions negotiated between the landlord and the business entity renting the space, including information about the lease duration, rent amount, security deposit, subleasing rights, exclusivity provisions, lease renewal options, and expense allocation.

Unlike residential leases, commercial leases in Minnesota have fewer statutory protections, giving parties greater freedom to negotiate terms. The written agreement becomes the primary governing document. ^[1]

Key terms typically addressed include:

Lease term (duration of the contract)

Base rent and any percentage rent provisions

Expense allocation (Triple Net, Gross, or Modified Gross)

Security deposit requirements

Permitted uses of the premises

Insurance requirements

Assignment and subletting restrictions

Renewal and termination options

Common Area Maintenance (CAM) charges

Personal guarantee requirements (if applicable)

Required Disclosures

Minnesota law requires certain disclosures in connection with commercial property transactions:

Outstanding Inspection Order Disclosure

*(Required) *Under Minnesota Statutes, landlords must provide tenants with copies of all outstanding inspection orders for which a citation has been issued that specify code violations threatening the health or safety of the tenant. This disclosure must be provided:

Within 72 hours after issuance of the citation (to current tenants)

Before signing a lease or paying rent/security deposit (to new tenants)

Prior to new ownership transfer

If an inspection order does not involve health or safety violations, the landlord must post a summary in a conspicuous place and make the full order available upon request. ^[2]

Agency Relationship Disclosure

Well Disclosure

*(Required for Property Sales) *Under the Minnesota Ground Water Protection Act, sellers must disclose the location and status of all wells on the property, including drinking water, irrigation, commercial, industrial, and monitoring wells. While primarily applicable to sales, commercial tenants should be aware of well locations for environmental due diligence purposes. ^[4]

Expense Structure Types

Commercial leases typically use one of three expense allocation structures:

Triple Net Lease (Nnn)

In a Triple Net lease, the tenant pays base rent plus all operating expenses directly. The three "nets" include:

Property taxes

Property insurance

Common Area Maintenance (CAM)

This structure is common in retail and single-tenant properties. The landlord receives a predictable net income while the tenant assumes most property-related risks. ^[5]

Gross Lease (full Service)

In a Gross lease, the landlord pays all operating expenses. The tenant pays a single, all-inclusive rent amount. Landlords typically set higher base rent to cover anticipated expenses. This structure is common in multi-tenant office buildings.

Modified Gross Lease

In a Modified Gross lease, the landlord and tenant share operating expenses as negotiated. The lease should clearly specify which party is responsible for each expense category. Common variations include:

Base Year Stop: Tenant pays expenses exceeding a base year amount

Expense Stop: Landlord pays up to a specified dollar amount

Specific Allocation: Parties divide specific expense categories

Key Agreement Sections

A comprehensive Minnesota commercial lease should include:

the Parties

Identifies the landlord and tenant by legal name and mailing address. If the tenant is a business entity (LLC, corporation), the legal entity name and state of formation should be specified.

Description of Leased Premises

Includes the street address, square footage, type of space (retail, office, industrial), and any specific suite or unit numbers. May also reference attached floor plans or exhibits.

Use of Leased Premises

Specifies permitted uses:

All purposes legal under law, or

Only specifically enumerated purposes (e.g., "retail sale of clothing")

Any change in use typically requires prior written landlord consent. Exclusive use provisions may grant the tenant the sole right to conduct certain business activities in the property or shopping center.

Term of Lease

Specifies the lease duration with clear commencement and expiration dates. May include:

Initial term (primary lease period)

Renewal options (tenant's right to extend)

Early termination provisions

Holdover provisions (what happens if tenant stays past expiration)

Security Deposits

Key differences from residential deposits:

No statutory limit on amount

No required interest payment to tenant

No statutory deadline for return (governed by lease terms)

Conditions for retention determined by lease agreement

Best Practice: Commercial leases should specify:

Deposit amount and payment timing

Whether held in a separate escrow account

Conditions under which landlord may retain the deposit

Timeline and procedures for return

Whether deposit can be applied to last month's rent

Rent and Payment Terms

Base Rent

The lease should specify the monthly rent amount, due date, and acceptable payment methods. Common structures include:

Flat rate: Fixed monthly amount throughout the lease

Escalating rent: Predetermined increases (e.g., 3% annual increase)

CPI adjustments: Tied to Consumer Price Index changes

Percentage Rent

Common in retail leases, percentage rent requires the tenant to pay a percentage of gross or net sales in addition to base rent. The lease should define:

Percentage rate

Definition of sales (gross vs. net, exclusions)

Breakpoint calculation (natural vs. artificial)

Reporting requirements and audit rights

Payment frequency (monthly, quarterly, annually)

Late Fees

The lease may specify late fee provisions:

Grace period (e.g., rent due on 1st, late after 5th)

Flat fee per occurrence

Interest-based penalty (daily or annual rate)

Application of payments (late fees paid before principal)

Eviction Procedures (2024 Updates)

Grounds for Eviction

Under Minnesota Statutes Section 504B.285, a landlord may recover possession when the tenant:

Holds over after lease termination or expiration

Violates lease covenants or conditions

Fails to pay rent when due

Holds over after proper notice to quit (tenancy at will)

New Complaint Requirements (2024)

Commercial eviction complaints must now include: ^[7]

Attachment of the current lease (or most recent lease) and relevant addenda

For nonpayment claims: A detailed, itemized accounting of outstanding charges

For breach claims: Identification of the relevant lease clause, nature and date of breach, and the clause providing the right to evict

New Summons Requirements (2024)

The summons must include:

Full name of the person against whom the complaint is brought

Statement of the tenant's right to seek legal help

Statement of the right to request reasonable accommodations from the court

Termination and Holdover

Termination of Tenancy at Will

Under Minnesota Statutes Section 504B.135, a tenancy at will may be terminated by either party with proper notice. The notice period typically matches the rent payment period. ^[8]

Holdover Provisions

When a tenant remains after lease expiration without landlord consent:

Landlord may evict or accept tenant as month-to-month

Many commercial leases impose holdover rent penalties (typically 150-200% of base rent)

Holdover tenants may be liable for consequential damages

Pro-rata rent calculation applies for partial month holdover

Assignment and Subletting

Without lease restrictions, assignment and subletting are generally permitted. However, most commercial leases include restrictions:

Prior written landlord consent required

Consent not to be unreasonably withheld (if stated)

Original tenant remains liable unless expressly released

Landlord may recapture space instead of consenting

Landlord may share in any profit from assignment/sublease

Tip: Tenants should negotiate for clear consent criteria, reasonable response timeframes, and defined conditions under which consent will be granted.

Ada Compliance Requirements

Commercial properties in Minnesota must comply with accessibility requirements under both federal and state law. ^[9]

Applicable Standards

Federal: 2010 ADA Standards for Accessible Design

State: Minnesota Building Code (more stringent than federal ADA)

All new construction must comply with accessibility standards

Renovations trigger accessibility requirements in remodeled areas

Barrier Removal Requirements

Existing facilities must remove architectural barriers when "readily achievable" (easily accomplishable without much difficulty or expense). Examples include:

Providing accessible routes from parking to entrance

Installing entrance ramps

Widening doorways

Installing accessible door hardware

Repositioning furniture and displays

Tax Incentives

Businesses may be eligible for tax benefits:

IRS Section 44 (Disabled Access Credit): For businesses with 30 or fewer employees or $1M or less revenue

IRS Section 190: Tax deduction up to $15,000/year for architectural barrier removal

Environmental Considerations

Commercial tenants should conduct appropriate environmental due diligence:

Phase I Environmental Site Assessment

While not required by Minnesota law, Phase I ESAs are commonly required by lenders and recommended for due diligence:

Must follow ASTM Standard E 1527-13

Must be conducted by a qualified environmental professional licensed in Minnesota

Reports typically valid for one year

Reviews historical property use, environmental records, and site conditions

Known Environmental Hazards

Tenants should inquire about:

Asbestos-containing materials

Lead paint (in older buildings)

Radon levels

Mold issues

Soil or groundwater contamination

Underground storage tanks

Personal Guarantees

Landlords often require personal guarantees, especially for:

Small businesses

New businesses without credit history

Businesses with limited assets

Entity tenants (LLCs, corporations)

Types of Guarantees

Full Guarantee: Guarantor liable for all lease obligations

Limited Guarantee: Capped at specific dollar amount or time period (e.g., first 12 months)

Burning Off Guarantee: Liability decreases over time based on payment history

Good Guy Guarantee: Liability ends when tenant vacates and pays through vacation date

Negotiating Personal Guarantees

Tenants may negotiate:

Guarantee caps or limits

Burn-off provisions tied to payment history

Larger security deposit in lieu of guarantee

Release upon assignment to qualified assignee

Landlord's duty to mitigate damages

Insurance Requirements

Commercial leases typically require comprehensive insurance coverage:

Tenant Insurance Requirements

Commercial General Liability (CGL): Typically $1-2 million per occurrence

Property Insurance: Covering tenant's business personal property and improvements

Business Interruption Insurance: Covering lost income during closures

Workers' Compensation: Required if tenant has employees

Additional Landlord Requirements

Landlord named as additional insured

Waiver of subrogation rights

Certificate of insurance provided before occupancy

30-day notice of cancellation to landlord

Specific insurance carrier rating requirements (e.g., A.M. Best A-rated)