Commercial Real Estate Lease Terms You Should Know

Commercial leases can be complicated and full of legalese. A tenant rep broker can offer guidance, but it is always helpful to have a basic understanding of some common lease terms.

Lessor (Landlord)

The person/company granting the lease and assuming legal responsibility for the property. It is usually the building owner or a leasing management company. May also be referred to as the Landlord.

In the context of commercial real estate, the lessor is the entity that owns the commercial property and rents it out to businesses or other organizations. The lessor sets the terms of the lease agreement, including rent price, duration of the lease, and conditions for maintenance and repairs, thereby establishing the legal framework within which the tenant must operate.

Lessee (Tenant)

The person/company leasing the space. May also be referred to as the Tenant.

The Lessee is the business or organization that enters into a lease agreement to rent the office space, retail space, or other types of property. The Lessee is responsible for abiding by the terms and conditions outlined in the lease contract, which often include payment of rent, maintenance responsibilities, and any other stipulations set forth by the Lessor.

Lease Term

The length (in years and months) of your lease.

In the realm of commercial real estate, the Lease Term specifies the duration for which the Lessee is legally obligated to rent the property from the Lessor. This term is crucial for both parties, as it impacts various other factors like rent escalation, options for renewal, and conditions under which the lease may be terminated or extended.

Lease Commencement Date

This is the date your lease begins and you can occupy the space.

The Lease Commencement Date serves as the starting point for various lease obligations and timelines, such as the initiation of rent payments, the delivery of security deposits, or the ticking clock on any rent-free periods that might be part of the agreement. It’s a crucial date that both the Lessor and the Lessee use as a reference for legal and financial responsibilities tied to the commercial property.

Rent Commencement Date

This is the date your rent starts. This will most likely be the same as your Lease Commencement Date unless you have negotiated free rent.

The Rent Commencement Date marks the beginning of your financial obligations under the lease agreement, specifically the point from which the Lessee is required to start making rent payments to the Lessor. While often aligned with the Lease Commencement Date, it can differ if there are special provisions like rent abatements or free rent periods negotiated in the lease.

Base Rent

The agreed-upon rental rate for the entire Lease Term. Will also show escalations if applicable. Renewal rental rates may also appear here.

Base Rent is the foundational cost of leasing the commercial space and does not include additional charges like utilities, maintenance, or potential Common Area Maintenance (CAM) fees. It is a fixed amount usually agreed upon during lease negotiations and is subject to periodic escalations as laid out in the lease agreement.

Renewal Option

Rights that the Lessee has that will extend the term of the lease when it expires. In some cases, there may be multiple options. Rates may have already been negotiated before the initial Lease Term or they may be determined by current market rates at the time of lease renewal.

A Renewal Option provides the Tenant with the opportunity to continue occupying the commercial space beyond the original lease term under specified conditions. This can offer benefits for both parties; for Lessees, it provides the option of business continuity without the hassle of relocating, and for Lessors, it offers the possibility of an ongoing, stable income stream.

Early Termination

The right of Lessee to vacate the premises before the end of their Lease Term. Most often there will be a monetary penalty for this.

Early Termination clauses are often included in commercial lease agreements to specify the conditions and penalties involved if the Tenant decides to vacate the space before the agreed-upon Lease Term concludes. This is a safeguard for Lessors to recoup some costs and provides a structured exit strategy for Tenants who may need to adjust their business operations before the Lease Term ends.

Security Deposit

The amount of money the Lessor requires when you sign the lease. Is typically one month’s rent—but is ultimately determined by the Lessor.

Subletting

The right to sublease all or a portion of your space during your Lease Term. The Landlord typically needs to be notified of your intent and will need to approve them. Also known as the Subtenant.

Subletting allows the original Tenant, or the “Sublessor,” to rent out their leased space to a third party known as the “Subtenant.” This arrangement is usually subject to the approval of the Landlord and is often governed by specific terms and conditions outlined in the original lease agreement.

Tenant Improvement Allowance

The amount of money the Lessor agrees to contribute to the construction/improvement of your space. This could be as simple as painting and carpeting or as extensive as building out walls or upgrading tech.

Tenant Improvement Allowance provides financial assistance from the Lessor for making modifications to the leased space so it better suits the Lessee’s business needs. The scope and amount of this allowance are typically negotiated during lease discussions and can be critical for businesses that require specialized facilities or configurations.

Common Area Maintenance (CAM)

The cost of maintaining building areas that are shared by all Tenants. It can include lobbies, elevators, restrooms, landscaping, etc. It is a cost per square foot expense so Lessee’s pay a proportionate share.

Common Area Maintenance charges are additional fees that Tenants are usually required to pay on top of their base rent. These charges help cover the costs incurred by the Landlord for upkeep and improvement of common areas, and they are often calculated based on the Tenant’s proportionate share of the total leased square footage in the building.

Holding Over

If you don’t leave at the end of your Lease Term, the Lessor will begin charging inflated lease rates. It is typical for it to be 1.5 times your old lease rate.

Holding Over refers to the practice where a Tenant remains in the leased premises beyond the expiration of the agreed-upon Lease Term without formally renewing the lease. This situation usually triggers a penalty in the form of inflated lease rates, as specified in the original lease agreement, to discourage Tenants from unlawfully occupying the property.

Substitute Premises

This means the Lessor has the right to move you to a similar space within the building if they have another use for your current space. This could happen if they have a Tenant that wants to expand into your space. The Landlord would typically absorb the costs to do this.

Substitute Premises clauses give the Lessor flexibility to optimize building space while still fulfilling their obligation to provide a space for the Tenant. This provision, often outlined in the lease agreement, generally includes details about the conditions under which the Tenant can be moved, such as the quality and size of the alternative space, as well as who bears the costs associated with the move.

Brian Smith, SIOR, CCIM, owns Regent Commercial Real Estate and represents tenants in the Charlotte area.