13 Common Commercial Real Estate Lease Clauses 

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A commercial lease is one of the most consequential and far-reaching contracts that any business can enter.

A company’s rent is a huge factor in delineating profitability and failure, and a commercial lease often runs up to 10 years or more. Because commercial leases often can’t be terminated in the middle of the term — even if the company goes out of business — they represent a significant financial commitment that could easily outlive the business itself. (Although we should note that commercial leases can, under some circumstances, be terminated in bankruptcy court, similar to a standard bank loan for a real estate investment.)

For that reason, a tenant should carefully consider before they sign their commercial lease — and make sure they read all the fine print and understand all the industry jargon.

Here are 13 of the most common and vital clauses you’ll find in a commercial real estate lease, and what they mean. 

Term

This clause defines the duration of the lease and when exactly the clauses apply. The term clause may also address whether the tenant is still responsible for the lease if the business closes.

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Description of Premises

This clause defines, in detail and with precision, the exact space the tenant is leasing. The description of premises clause can be very important since some tenant charges (which we’ll go into in more detail below) are based on the exact square footage that the tenant occupies. 

Rent Escalation 

A standard commercial lease will include a rent escalation clause that defines when your rent can increase and by how much it can increase. For example, it may state that your rent can go up when and if the landlord’s operating costs go up, it may lay out a specific annual or biannual timetable for defined rent increases, or it may tie rent increases to an inflationary index like the CPI.

Rent Incentives or Reimbursements

Many landlords will entice tenants into their properties by offering incentives like free or reduced rent, sometimes in exchange for improvements to the property. Tenants should closely review their rent incentive clause to understand what terms and conditions they have to meet to claim their incentives and how much those incentives are.

Revenue-Based Rent

A very common clause in retail leases is revenue-based rent, also called turnover rent or percentage rent. This is when a tenant’s rent is a percentage of their gross sales. This clause often gives the landlord the explicit right to review the tenant’s books to ensure they’re paying the appropriate amount in rent. 

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Operating Expenses

Many commercial tenants have to pay a share of the property’s operating expenses — things like common area maintenance, property taxes, landscaping, security, accounting, insurance, etc. This share is typically calculated based on the percentage of the building’s square footage that the tenant is leasing. For example, if the tenant’s space is 15% of the property’s total square footage, that tenant will pay 15% of the building’s operating expenses. 

This clause is usually closely negotiated between tenant and landlord, as each party may have a different idea of what should be included as an operating expense.

Audit Rights

Both revenue-based rent and operating expenses rely on accurate bookkeeping to ensure each party is paying no more or less than they ought to be. In the event of a disagreement, an audit rights clause gives each side the right to examine the other side’s accounting to ensure they’re not being overcharged. This clause will typically define how much time each party has to respond to a request from the other party, how long they have to perform the audit, and who covers the cost of the audit.

Subleasing

This clause gives a tenant the right to sublease their space (or a portion of their space) to another tenant. While landlords may object to a sublease clause, since it forces them to relinquish some degree of control of their space, the ability to sublease protects the tenant in the event that their business shrinks or shuts down.

A fabric sign that says 'Yes, We're Open'

Use and Exclusive Use

A use clause lays out rules governing how tenants can and can’t use the space. The use clause may restrict operating hours, the types or amounts of commercial signage that can be displayed, and even what kind of businesses are permitted or prohibited in the space. Always review the use clause in a commercial lease, as violating its terms can have serious consequences.

While the use clause protects the landlord, the exclusive use clause protects the tenant from competitors. The exclusive use clause prevents your landlord from putting a business in your same industry on the property, so you don’t have to deal with a competitor siphoning off your foot traffic.

Improvements and Alterations

The improvements clause will specify what improvements and customizations the landlord is required to make before you occupy the space. This clause is especially important for businesses that have specific requirements for things like power or internet access. The improvements clause specifies what improvements need to be made and how those costs are split between tenant and landlord. This clause also helps the landlord keep accurate records of the specs and value of the property in case they want to sell it or use it to acquire an asset-based loan.

The alterations clause lays out the tenant’s right to make alterations to the space. This clause may also specify a process to have alterations approved by the landlord.

Kitchen under renovation.

Casualty/Damage and Destruction

This clause covers what happens in the event that the property is damaged by a natural disaster like fire, flooding, or an earthquake. The casualty clause will specify whether the tenant (or landlord) can terminate the lease in the event of a natural disaster, and if the landlord is obligated to rebuild within a certain amount of time. 

It may also tie the tenant’s potential remedies to the amount of property damage, i.e., if the property is completely destroyed, the tenant escapes all financial responsibility. In contrast, if it’s only slightly damaged, their financial obligation is reduced proportionally.

Insurance

This clause will specify what kind of insurance the tenant is required to carry, such as leasehold, rental interruption, or property and liability insurance. 

Renewal

This clause details how the tenant proceeds with renewing the lease. The renewal clause often lays out timelines and dates regarding the tenant notifying the landlord whether or not they intend to renew the lease or vacate the property.


Headshot of blog author Ben Mizes

Ben Mizes is the Co-Founder and CEO at Clever Real Estate, the nation’s leading real estate education platform for home buyers, sellers, and investors.

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