Commercial lease agreement template

Gross, net and the pass-throughs that follow

Lease structures sit on a spectrum. In a gross lease the tenant pays one rent and the landlord absorbs taxes, insurance and maintenance. In a triple net lease the tenant pays a lower base rent plus its proportionate share of property taxes, building insurance and common area maintenance. Modified gross sits somewhere between, usually with a base year above which increases are passed through.

A triple net rent quoted at $22 per square foot can easily cost more all-in than a gross rent quoted at $30, because the pass-throughs are open-ended. So the only meaningful comparison between two spaces is the estimated total annual cost per square foot, including every additional charge, projected across the term.

Then look at how the pass-throughs are controlled. Two asks are standard and often granted: a cap on annual increases in controllable operating expenses — typically 4% to 5%, cumulative or non-cumulative — and an exclusions list. The exclusions matter enormously. Capital improvements, leasing commissions, tenant improvement allowances for other tenants, landlord's financing and ground lease payments, and costs of enforcing other tenants' leases are commonly excluded, and frequently are not. Ask for an audit right too.

• Compare total annual cost per square foot, not base rent
• Cap annual increases in controllable operating expenses
• Exclude capital improvements, leasing commissions and financing costs
• Negotiate an audit right over the landlord's expense statement

Who pays when the roof goes

The maintenance and repair clause decides who absorbs capital expenditure, and on a building of any age that is where the surprise costs live. The conventional allocation gives the tenant the interior non-structural elements — fixtures, finishes, interior plumbing and electrical within the premises — and leaves the landlord with the roof, foundation, exterior walls and structural elements.

Aggressive landlord forms shift some or all of that. A lease making the tenant responsible for roof replacement or for a full HVAC system is transferring a cost that can exceed a year's rent, on an asset the tenant will never own.

Where the landlord will not move on HVAC, a reasonable compromise is a cap: the tenant covers routine maintenance and repairs up to a dollar threshold, and anything above it is either the landlord's or amortized over the equipment's useful life with the tenant paying only the portion falling within the lease term. Ask for the age and condition of major systems before signing, and for a warranty period at the start.

The clause that outlives the business

Landlords routinely require the business owner to personally guarantee the lease, particularly for a young company. As drafted on most standard forms, that guarantee is unlimited in amount and lasts the full term plus extensions — meaning the owner's personal assets stand behind every dollar of rent for ten years, even if the business fails in year two.

That is the starting position, not the only one available. Three alternatives are commonly negotiated. A capped guarantee limits exposure to a stated figure, often six to twelve months' rent. A burn-off guarantee falls away entirely after a period of timely payment — say, after twenty-four months without default. A good guy guarantee, increasingly common, limits liability to rent accrued up to the date the tenant actually vacates and hands back the keys in good condition, which caps the downside at an orderly exit rather than the whole term.

If a guarantee is unavoidable, negotiate the scope before you negotiate the rent. A landlord who will not reduce rent will often accept a burn-off, and the value of that concession over a ten-year term usually exceeds anything you would have won on the rate.

Assignment, subletting and restoration

Businesses change, and a lease signed for the company you are today has to accommodate the company you become. Three provisions determine whether that is possible.

Assignment and subletting rights let you transfer the space if you outgrow it or contract. An absolute prohibition is a serious constraint; the standard ask is that consent shall not be unreasonably withheld, conditioned or delayed, with a carve-out permitting transfer to an affiliate or in connection with a sale of the business without consent. Watch for a recapture right, which lets the landlord terminate rather than consent, and for profit-sharing on any sublease rent above your own.

Restoration is the cost nobody budgets. Many leases require the tenant to remove its alterations and return the space to base building condition at the end of the term. For a fitted-out office or a specialised industrial space that can be a substantial bill arriving at the least convenient moment. Negotiate for the landlord to identify at the time of approval which alterations must be removed, rather than leaving it to their discretion a decade later.

Finally, check the default and remedies clause for an acceleration provision making all remaining rent immediately due. Where the state does not impose a duty to mitigate, ask for one in the lease.