Horizons Homes & Hustle

Navigating Commercial Leases: Key Considerations for Business Owners

Whether you’re opening your first storefront or relocating your growing business, signing a commercial lease is a major commitment. It can have a lasting impact on your operations and bottom line. Unlike residential leases, commercial leases are typically more complex and negotiable, with fewer consumer protections. That’s why it’s crucial to approach them with care, knowledge, and confidence.

Here are some key considerations every business owner should understand before signing on the dotted line:

1. Lease Type Matters

Commercial leases come in various forms, and knowing which type you’re dealing with is the first step:

• Gross Lease: The landlord covers most property expenses (taxes, insurance, maintenance).
• Net Lease: You, the tenant, pay a part or all of those extra costs. Variants include single, double, and triple net (NNN) leases.
• Modified Gross Lease: A middle-ground choice with shared responsibilities.

Understanding which type you’re signing helps you plan for costs beyond rent.

2. Rent Structure and Escalations

Don’t assume the rent will stay the same for the duration of the lease. Many leases include annual rent escalations based on a fixed percentage or tied to inflation (e.g., CPI adjustments). Be sure to ask:

• How is rent calculated?
• When and how does it increase?
• Are there any “free rent” periods or incentives?

3. Lease Term and Renewal Options

The length of the lease can affect your flexibility and growth. Consider:

• Is the initial term too short or too long for your needs?
• Are renewal options clearly spelled out?
• What are the terms for renewing or ending the lease early?

Shorter terms offer flexibility, but longer terms might come with rent discounts.

4. Tenant Improvements (TIs)

Will you need to renovate the space? Find out:

• Who pays for build-outs or customizations?
• Is there a tenant improvement allowance?
• Are there restrictions on what you can do?

Negotiating TIs upfront can save you thousands.

5. Maintenance and Repairs

Commercial leases often shift maintenance responsibilities to the tenant. Know your obligations:

• Are you responsible for HVAC, plumbing, and structural repairs?
• Who maintains common areas?
• Is there a CAM (Common Area Maintenance) charge? If so, what’s included?

Unexpected maintenance can blow up your budget if not clearly defined.

6. Use Clause and Exclusivity

The use clause defines what you can and cannot do in the space. The exclusivity clause can protect you from competitors moving in next door.

• Does the lease limit how you operate?
• Can you change your business model later?
• Are you guaranteed to be the only business of your kind in the complex?

Clarity here prevents conflicts down the road.

7. Personal Guarantees and Liability

Landlords often ask business owners to personally guarantee the lease, putting your personal assets at risk if the business fails.

• Can you negotiate to limit or remove the guarantee?
• Are there “good guy” clauses that allow you to exit early without penalty?

Don’t overlook the long-term financial implications.

8. Exit Strategy

Always have an escape route. Understand:

• What happens if you need to sublease or assign the lease?
• Are there penalties for breaking the lease?
• Can you negotiate an early termination clause?

Being trapped in a lease can be devastating during tough times.

Final Thoughts

A commercial lease isn’t just a document—it’s a business decision. Take the time to:

• Read every clause
• Consult a real estate attorney or broker
• Compare other properties and landlords

By staying informed and negotiating wisely, you can secure a lease that supports your vision rather than limiting it.

Michael Taylor, AB Permian Real Estate