Commercial Lease Agreement: What Each Section Means

A commercial lease agreement rarely reads in the order a tenant thinks. The most important numbers are often on a summary page at the front, sometimes called the basic lease information or data sheet, while the rules that give those numbers meaning are scattered through later articles and exhibits.

Begin with that summary page. Confirm the legal names of the parties, the suite, the square footage, the dates, the rent and the deposit. If the business deal in your letter of intent is not reflected there, you have found your first comment before reading anything else.

Leases differ by landlord, property type and state, so the section names below will not match every document. Use this as a map of what to look for, not a statement of what your lease says. Your attorney should review the actual wording, and the state whose law governs the lease matters.

• Premises. Identifies the space and usually attaches a floor plan. Check how the area was measured. BOMA publishes a widely used office measurement standard whose primary purpose is calculating rentable area, and your share of building costs often follows that number.
• Term. States when the lease begins and ends and how those dates get fixed. If the space is being built out, the start date may float, so read this together with the work letter.
• Base rent. Shows the rent schedule and any scheduled increases. Look for the abatement language here too, because free rent may cover base rent only while other charges still apply.
• Additional rent. Covers operating expenses, taxes and insurance passed through to the tenant. Leases may be gross, net or a hybrid, and landlords often pass costs through by pro rata share. Look at what is included, the base year if there is one, and your audit and notice rights.
• Security deposit. Sets the amount, form and any conditions for reducing or returning it.
• Permitted use. Says what you may do in the space. A narrow definition can limit a future pivot, a subtenant or a buyer of your business, so describe your use broadly enough to cover where the company is going.

• Work letter or tenant improvements. Often an exhibit, this covers the condition of the space at delivery, who builds what, who pays and what happens if work runs late. Ballard Spahr calls the condition of the premises at delivery one of the most important parts of a lease negotiation.
• Services and utilities. Lists what the landlord provides and when, such as HVAC hours, elevators, janitorial and electricity. Check what happens, and what it costs, outside standard building hours.
• Maintenance and repairs. Divides responsibility between landlord and tenant. In a net or single-tenant lease, this section can put large systems on the tenant, so read it next to the rent section.
• Alterations. Sets when you need landlord approval to change the space, and whether you must remove the changes when you leave.
• Access. Covers when the landlord may enter and how much notice it gives, which matters if you have secure rooms or client records.

• Assignment and subletting. An assignment transfers your whole interest, and a sublease transfers less. Landlord forms commonly bar both without consent. A.Y. Strauss points out that leases may also add recapture rights, profit sharing and continuing liability after a transfer, and that a change of control of a company can be treated as an assignment.
• Renewal, expansion and termination options. If you negotiated these, they may sit in a rider near the back. Note every notice window, because an option can be lost by missing a date.
• Casualty and condemnation. Addresses fire, flood and government taking. Silberman Law Firm advises tenants to focus on rent abatement, termination rights and how proceeds are allocated.
• Surrender and holdover. States the condition in which you return the space and what you owe if you stay past expiration.

Options and exit rights often appear far from the term section. Search the whole document, including riders, before you conclude that a right is missing or present.

• Insurance and indemnity. Lists the coverage you must carry and who bears which losses. Have your insurance broker read this section against your current policies.
• Default and remedies. Silberman Law Firm describes these clauses as setting each party’s remedies for breach and says the parties should get notice and a defined period to cure before remedies apply. Check whether your cure periods are workable. Remedies vary by state, and New York firm Adam Leitman Bailey calls the default clause the most important in a commercial lease, noting that New York courts have enforced harsh lease terms.
• Subordination, SNDA and estoppel. Holland & Hart explains that a subordination agreement ties your lease to the landlord’s loan, and that non-disturbance is the part that protects the tenant. Estoppel language requires you to certify lease facts when asked, usually for a sale or financing.
• Guaranty. If an owner or parent is guaranteeing the lease, the guaranty is a separate contract and may be an exhibit. Holland & Knight describes a range of forms, from full to limited and good guy versions, so read the scope and not just the label.
• Notices and miscellaneous. The boilerplate at the end decides how a notice must be delivered and to whom. A renewal notice sent to the wrong address or by the wrong method can cause trouble, so check these terms and keep them current.

A first read does not need to catch every issue. The goal is to confirm that the deal you agreed to is on the page and to separate business questions from legal ones. Tenant Advisory Group represents tenants and buyers, and on a lease draft we compare the business terms against the signed letter of intent while your attorney handles the legal review.

• ✓Do the names, suite, area, dates, rent and deposit on the summary page match the letter of intent?
• ✓Does the rent section say which charges are abated during any free rent period?
• ✓Which costs can the landlord pass through, and do we have audit rights?
• ✓Does the permitted use cover what we do now and what we plan to do?
• ✓Who is responsible for HVAC and other major systems?
• ✓What triggers the start of the term and rent, and what happens if delivery is late?
• ✓What rights do we have to assign, sublet, sell the company or leave early?
• ✓What notice and cure periods apply before a default?
• ✓Does anyone personally or as a parent guarantee the lease, and how long does that last?
• ✓What must we remove or restore when we leave?
• ✓Has our attorney reviewed the final draft and has our insurance broker reviewed the insurance section?

Keep your list of comments in one place and sort it by importance. A short list of items that affect cost, flexibility or risk gets more attention from a landlord than a long list that treats every sentence as equal. Once the lease is signed, summarize the dates and obligations in a lease abstract so the people running the business can find them.