Common Terms in Commercial Real Estate Leases

May, 19th, 2022

Common Terms in a Commercial Real Estate Lease – Summit Properties

Entrepreneurs and seasoned businesspeople often encounter unfamiliar language that real estate professionals view as common terms in commercial leases. Often, commercial real estate lease terms can be somewhat difficult to understand – but our experts are here to help! Before signing a contract that defines both parties’ rights and responsibilities, it’s crucial to understand the common terms seen in commercial real estate leases. 

Type of Lease

It’s important to recognize that not every commercial lease agreement is the same. While they cover similar ground, landlords structure the contracts to provide financial security and insulate them from liability. These are the primary types routinely used by property owners in Ontario.

Gross Lease

Also referred to as a full-service lease, tenants usually cover all the operating expenses involved in the property. The cost of taxes, maintenance, and utilities, among others, are rolled into the agreement. Although the base rents appear high on the surface, tenants prefer not having day-to-day property management distractions.

Percentage Lease

These agreements are structured so that tenants pay a base amount plus a percentage of overall sales. It’s not uncommon for landlords to request seven percent, and they are prevalent in settings such as shopping malls.

Net Lease Agreements

This type of commercial lease provides a lower base rental cost. But other fixed operating expenses may be included. Depending on those expenses, the term for the specific lease also changes to the following. 

  • Single Net Lease: Business tenants usually pay rent plus a portion of the property taxes. 
  • Double Net Leases: The tenant usually pays rent, property taxes, and a portion of the building’s insurance. 
  • Triple Net Lease: This includes taxes, insurance, maintenance, as well as rent. The triple net lease encompasses property taxes, insurance, and common area maintenance. The tenant pays for some or all of the cost of these three things on top of their base rent. 
  • Absolute Triple Net Lease: Perhaps the most comprehensive in terms of cost, tenants pay all of the costs plus rent. When selecting a commercial property to operate your business, early discussions about the type of lease and what may be included are crucial. 

Lease Term

A lease term for a commercial property refers to how many months the agreement lasts. Expect the lease term to be defined by an effective date and end date. 

Common Areas

In a commercial building or complex, there may be areas that are shared with other businesses or used by the general public. Courtyards, parking lots, and break rooms generally fall into the common area category.

Use of Premises

When a company leases a commercial space, the type of anticipated activity and those prohibited may be outlined in the agreement. There are two key reasons why property owners include a use of premises clause. Municipalities regulate business activities through zoning regulations, and some activities may negatively affect them.

Utilities

The utilities referred to in a lease agreement generally involve items such as electricity, water, and heat. They usually mirror those homeowners routinely incur. Who pays for these expenses will typically be defined within the utilities clause in the commercial lease agreement.

Other Common Terms in a Commercial Lease

Business leaders have an opportunity to negotiate rights and obligations before entering a legally binding agreement. For example, the security deposit is money tenants give property owners to cover any potential damage. Signage can be a critical term that defines how and where a tenant promotes the location. This ranks among the more essential terms for detail businesses, as is the ability to “sublet” portions or the entire space. The ability to re-lease can provide security for renters if they outgrow the location or experience financial setbacks.

Looking for the Perfect Commercial Space?

As an industry-leading organization, Summit Properties works diligently to ensure all parties clearly understand their rights and obligations when entering a commercial lease agreement. If you are considering renting commercial space, contact Summit Properties today.

+