A Simple Guide to U.S. Commercial Lease Agreements
Basics to get you started

One of the challenging parts of running a beauty supply business is when you need to sign a new lease, move to a new location, extend your lease, or buy or sell your business. Even if you rely on a lawyer or real estate agent to handle the entire process, if you don’t understand the process and terminology, you could make a mistake when it comes time to make an important decision or regret it later when you realize that your contract does not reflect what you want. In this issue, we’re breaking down complex and often intimidating commercial real estate terms to make them easier to understand. There may be some differences from state to state, so familiarize yourself with the basics, but seek legal help for specifics.

1. Letter of Intent (LOI)

One of the challenging parts of running a beauty supply business is when you need to sign a new lease, move to a new location, extend your lease, or buy or sell your business. Even if you rely on a lawyer or real estate agent to handle the entire process, if you don’t understand the process and terminology, you could make a mistake when it comes time to make an important decision or regret it later when you realize that your contract does not reflect what you want. In this issue, we’re breaking down complex and often intimidating commercial real estate terms to make them easier to understand. There may be some differences from state to state, so familiarize yourself with the basics, but seek legal help for specifics.

2. CAM charges

Common Area Maintenance (CAM) charges are fees charged to maintain common areas in a commercial building or shopping mall. In addition to the monthly rent, tenants pay a predetermined share of the total CAM cost. It typically includes upkeep for common areas such as parking lots, landscaping, and sidewalks. If you share restrooms with other tenants, the CAM charges also include the cost of regular cleaning and supplies of the restrooms, and if your building has an elevator, the cost of maintaining it is also included. In addition, lighting in the parking lot, water in the restrooms, and heating in the hallways can be included.

3. Net lease

Lease agreements for commercial real estate in the U.S. are mainly divided into two types: gross leases and net leases. Landlords, who own buildings and lease them to tenants, choose one of the two contractual arrangements depending on whether they want to include real estate taxes, insurance, and maintenance fees for common areas in the rent. Net leasing is a contractual arrangement where the tenant pays these fees separately from the rent. If the tenant is only responsible for property taxes, it’s called a net lease; if they are responsible for both taxes and insurance, it’s called a net-net lease (NN); and for property taxes, insurance, and management fees, it’s called a triple net lease (NNN).

4. Gross lease

A gross lease is the simplest lease agreement for tenants, where they pay a set rent for the duration of the lease. This is often the most favorable arrangement for tenants, as the landlord is responsible for all building-related costs, including property taxes, insurance, and building maintenance. However, gross leases tend to have a higher base rent than net leases because the landlord takes into account expected operating costs when setting the rent. Also, because the landlord has the authority to make decisions about building maintenance, upkeep, and improvements, tenants have limited control over these issues.

5. Assignment

Assignment is a transfer of legal right to another. When a tenant leasing a space in a shopping center transfers the lease rights to another person, an assignee, often with the consent of the landlord, it is called an assignment. In this process, the assignee takes over the existing terms of the previous tenant’s contract, and the new tenant (assignee) pays rent to the landlord directly. However, if the new tenant fails to pay the rent, the original tenant (assignor) may be responsible for the unpaid rent. When the economy is bad, many business owners are looking to sell their business quickly, and a contract with an assignment clause often dictates that if the buyer can’t pay the rent, the seller must. This is why it’s important to pay close attention to the assignment clause before signing contracts.

Exclusive use clauses are common in commercial leases, especially in large shopping centers with multiple tenants. This clause serves to allow certain tenants to use the building for certain purposes (e.g., restaurants, clothing stores, etc.) while restricting other tenants from engaging in the same or similar business activities. The most important thing to remember is that even if you include an exclusive use clause, the choice of words in the clauses may allow tenants with competing business goals. For example, a tenant who runs a cafe and wants to prevent a similar business from moving in through an exclusive use clause could lose a lot of money if a franchise like Dunkin’ Donuts moves into the same building. Therefore, it’s important to add a clear language to block competitors’ entry as much as possible.

7. Commencement date

When it comes to the dates, it is important not to confuse the Lease Commencement Date with the Rent Commencement Date. The lease commencement date is the date when the landlord and tenant sign the lease agreement, while the rent commencement date is the date when the tenant begins paying rent. For example, August 1st may be the rent commencement date, or the day that you start paying rent, but the tenant can start moving equipment and doing interior work on July 1st to prepare for their business if July 1st is the lease commencement date. When a new tenant signs a lease and needs time to work on the interior, for example, these two dates need to be clearly stated and understood.

8. Tenant Improvement Allowance

The Tenant Improvement Allowance is also known as the TI or TIA for short. It is a pre-negotiated amount that the landlord provides to a tenant for improvements to a commercial space, covering some or all of the construction costs. For example, if the new building lacks essentials for your business, such as electricity, heating, cooling, plumbing, sprinklers, and so on, then you may be reimbursed for your cost related to them as TIA. It’s important to keep in mind that signing a contract without being fully aware of these costs can cause problems.

9. Lease renewal option

When signing a lease, it is very important to review provisions for extending or renewing the lease after it expires. If the initial lease agreement includes a lease renewal option, the tenant has the right to extend the lease at the end of the contract, giving them the peace of mind that their business can continue to operate. If you have an option to extend your lease, the lease is automatically extended when you exercise the option within the time period specified in the provision. Conversely, if you don’t want to extend your lease, you can simply not exercise the option. It’s also important to know what the rent will be after the lease is extended, so it’s important to spell this out in the contract.

Commercial leases often provide a period of time in which a tenant is not responsible for paying rent. It is commonly called “Free Rent”, but it is often written in contracts as “rent abatement”. If there are CAM or other charges in addition to the rent, a tenant is often responsible for them even during the free rent period, so make sure you read the contract carefully. Situations that trigger rent abatement include tenant’s renovations, or when a building is damaged by flood, storm, or fire and can no longer be used. However, most rent abatement provisions do not apply to damages caused by the tenant.