The 4 Types of Commercial Leases — Know What You're Signing
Gross Lease
Tenant pays flat rent. Landlord pays all operating costs (taxes, insurance, maintenance). Simplest structure.
Net Lease
Tenant pays base rent plus one or two expenses (taxes or insurance). Single net (N) or double net (NN).
Triple Net (NNN)
Tenant pays base rent plus property taxes, insurance, AND maintenance. Common for standalone retail and industrial.
Modified Gross
Negotiated split of operating expenses between landlord and tenant. Most common for office space. Hybrid structure.
Key insight: lower base rent in a NNN lease doesn't mean lower total rent.
A $15/sq ft NNN lease may cost you $22–$26/sq ft all-in once property taxes, insurance, and CAM charges are added. Always compare leases on a fully-loaded basis — base rent plus all additional charges — not just base rent.
The 15 Terms to Negotiate — Every Commercial Lease
1. Rent-Free Concession PeriodAlways Negotiate
A period at the beginning of the lease (typically 1–3 months) during which no rent is owed. Landlords offer this to offset the tenant's build-out period and moving costs. Also called "free rent" or "rent abatement."
Strategy: Ask for 1 month free for every year of lease term as a starting position. On a 3-year lease: ask for 3 months free. In markets with moderate vacancy (5%+), landlords routinely grant 1–3 months. In soft markets (10%+ vacancy), 3–6 months is achievable. Rent-free periods save thousands without changing the stated rent (helpful if you need to show a certain rate to investors or partners).
2. Rent Escalation ClauseAlways Negotiate
How rent increases each year. Common structures: fixed percentage (3%, 4%, 5% per year), CPI-linked (tied to inflation index — unpredictable), fixed dollar amount, or no escalation (flat rent for the entire term). On a $5,000/month lease, the difference between 3% and 5% annual escalation is $12,000+ over 5 years.
Strategy: Cap escalation at 3% per year or CPI with a floor/ceiling (e.g., "CPI but no less than 1% and no more than 3%"). Never agree to open-ended CPI with no cap — inflation can exceed 8% as seen in 2022. If the landlord refuses a cap, accept CPI with a hard ceiling of 3–4%. Get the escalation formula in writing — verbal representations mean nothing.
3. CAM Charges — Common Area MaintenanceAlways Negotiate
CAM charges are your share of the costs to maintain shared areas (parking, landscaping, hallways, elevators, lobby, roof) in multi-tenant buildings. CAM can add $3–$15/sq ft annually to your effective rent — and can increase significantly from year to year. Always request 3 years of actual CAM charge history before signing.
Strategy: (1) Request a cap on CAM increases — "CAM charges shall not increase more than 5% per year." (2) Request an exclusion list for major capital expenditures — large items like roof replacement should not be passed through to tenants in a single year. (3) Request audit rights — the right to audit the landlord's CAM calculations annually. (4) Request a reconciliation clause — if actual CAM is lower than estimated, you receive a credit or refund.
4. Tenant Improvement (TI) AllowanceNegotiate Hard
Money provided by the landlord to build out or renovate the space for your business use. Standard: $10–$100+ per square foot depending on market, space type, and lease term. A 1,500 sq ft restaurant build-out may cost $150–$300/sq ft — a TI allowance of $40–$60/sq ft covers a meaningful portion.
Strategy: Get multiple competing lease proposals from nearby spaces to establish market TI levels. Landlords with high vacancy are more generous. Specify exactly what TI covers in the lease: walls, electrical, plumbing, HVAC, flooring, fixtures, AND soft costs (permits, architectural drawings, project management). TI money not spent on build-out within the first 12–18 months is typically forfeited — use it or lose it.
5. Personal Guarantee — Limit and Burn-DownCritical
A personal guarantee makes you personally liable for the full lease obligation even if your LLC fails. On a 5-year lease at $5,000/month, an unlimited personal guarantee means personal liability of $300,000 if the business closes in month 1.
Strategy: (1) Never sign a guarantee without a cap — limit to 6–12 months of base rent. (2) Negotiate a burn-down: the personal guarantee decreases by 20% for each year of on-time payments. After 3 years, you may owe nothing personally. (3) After 24–36 months of clean payment history, request release of the personal guarantee in exchange for a cash deposit or letter of credit. (4) If LLC has 2+ years of operating history and strong revenue, push back on the personal guarantee entirely — offer a security deposit instead.
6. Option to RenewAlways Negotiate
The right to renew the lease at the end of the initial term, at a predetermined or formulaic rent, without the landlord's ability to refuse. Without an option, the landlord can double your rent or evict you when the lease expires — forcing you to move your business.
Strategy: Get 2 renewal options of 3–5 years each. Specify the renewal rent: ideally fixed at a percentage increase (e.g., "fair market rent but no more than 110% of final year's rent") rather than true fair market value which can spike dramatically. Provide 6–9 months written notice before option exercise — confirm the notice deadline in writing and calendar it immediately.
7. Exclusivity ClauseNegotiate
Prevents the landlord from leasing other spaces in the same building or complex to a direct competitor. Critical for businesses in multi-tenant shopping centers. Without exclusivity, a landlord could lease the space next door to your direct competitor.
Strategy: Define "competitor" narrowly enough to be enforceable but broadly enough to protect your business. Include specific remedy language: if the landlord violates exclusivity, you have the right to terminate the lease or receive rent abatement. Exclusivity is most negotiable when you're a first mover (you're entering a space with no existing competing tenants) — harder to get if similar businesses already exist in the complex.
8. Subletting and Assignment RightsNegotiate
The right to transfer your lease to another business (assignment) or lease part of your space to another tenant (subletting). Critical if your business changes, you need to exit the space early, or you're selling the business. Without these rights, you're trapped in a lease you can't exit.
Strategy: Negotiate "landlord's consent shall not be unreasonably withheld" rather than "landlord may withhold in sole discretion." Define "reasonable" criteria: creditworthy assignee, compatible use, no greater risk than current tenant. For business sales: ensure the lease is assignable in connection with a sale of the business without requiring landlord consent for the new owner to assume the lease.
9. Co-Tenancy ClauseNegotiate
A clause that allows you to reduce rent or terminate the lease if a major anchor tenant leaves the shopping center or building. If your restaurant is in a strip mall anchored by a grocery store and the grocery closes, your foot traffic may drop 60%+ — a co-tenancy clause protects against this.
Strategy: Name the anchor tenant(s) specifically. Define what constitutes a "co-tenancy failure" (anchor vacancy for 60–90+ days). Include a remedy ladder: first, a rent reduction (50% of base rent) during the failure period; second, after 6–12 months of failure, the right to terminate the lease with 30–60 days notice. Co-tenancy provisions are most important in retail spaces dependent on foot traffic from other tenants.
10. Early Termination RightNegotiate
The right to terminate the lease before the end of the term by paying a predetermined termination fee. Without this, you're obligated to pay rent for the full remaining term even if your business closes, relocates, or is sold to a buyer who doesn't want the space.
Strategy: Negotiate a termination right after year 2 or 3 with 6 months written notice and a termination fee of 3–6 months of base rent. This limits your maximum exit cost to the termination fee rather than the full remaining lease obligation. Compare this to an unlimited personal guarantee — a capped termination fee is dramatically better.
11. Permitted Use ClauseAlways Read Carefully
Defines specifically what your business is allowed to do in the space. "Retail sales of apparel" does not allow you to add a coffee bar. "Restaurant" may not allow takeout-only or catering operations. Narrow permitted use clauses prevent you from adapting your business model.
Strategy: Broaden the permitted use to the widest possible description that reflects your business and allows for evolution. "Restaurant and bar operations including dine-in, takeout, catering, private events, and retail sales of food, beverage, and branded merchandise" is far more protective than "restaurant." Include the right to modify permitted use with landlord's consent (not to be unreasonably withheld).
12. Signage RightsNegotiate
What signage you're allowed to install, where, how large, and who controls sign design approval. Some leases prohibit illuminated signs, exterior banners, window graphics, or monument sign access — limiting your visibility significantly.
Strategy: Negotiate specific rights in the lease, not just landlord approval: building exterior signage (size, location, illumination), window signage area (minimum 30% of window area), monument sign inclusion if applicable, and right to install permanent branded lighting. Require landlord approval to be provided within 10–15 business days to prevent indefinite delays.
13. Condition of Premises — Delivery StandardCritical
What state the space will be delivered in when you take possession. "As-is" means you accept everything wrong with the space. "Broom clean" means only basic cleaning. "Warm vanilla shell" includes framed walls, electrical rough-in, plumbing stub-outs, HVAC ducting. Failure to specify delivery condition can result in taking possession of a space that needs $50,000+ in baseline repairs before you can even start your build-out.
Strategy: Walk the space with a licensed contractor before signing. Identify everything wrong — roof leaks, HVAC problems, electrical capacity limitations, plumbing issues, ADA compliance. Get the landlord's delivery obligations specifically listed in the lease: what will be fixed, what will be delivered, and by what date. Include a punch list process — written acknowledgment of delivery condition and timeframe for resolution of known defects.
14. Holdover ProvisionAlways Read
What happens if you stay in the space after your lease expires without signing a renewal. Most leases convert holdover to month-to-month tenancy at 125–200% of the final month's rent. Holdover without a month-to-month clause can bind you to another full lease term in some jurisdictions.
Strategy: Negotiate holdover converted to month-to-month at 110–125% of final rent (not 150–200%). Ensure the holdover clause explicitly limits your obligation to month-to-month — preventing an automatic full-term renewal. Calendar your lease expiration date at signing and set a reminder 9 months before to evaluate renewal vs. relocation.
15. Default Cure Rights and Notice RequirementsAlways Read
How much time you have to cure a default (missed rent payment, lease violation) before the landlord can pursue eviction or accelerate the full remaining lease obligation. Many commercial leases allow only 3–5 days notice before legal action — far less time than residential leases.
Strategy: Negotiate 10–15 business days written notice to cure a monetary default (missed rent) and 30 days for non-monetary defaults. Include a "notice and cure to lender" provision: if you have a loan secured by the lease (common with SBA loans), any default notice must also be sent to your lender, giving them the right to cure on your behalf before eviction proceeds. This protects both you and your lender.
Pre-Signing Checklist
Before You Sign Any Commercial Lease
Walk the space with a licensed contractor — get a written assessment of the space's condition and required work before accepting "as-is" delivery
Request 3 years of actual CAM charge history and operating expense statements — do not rely on landlord's estimates
Verify zoning allows your specific business use — even before negotiating the lease
Confirm parking ratio (spaces per 1,000 sq ft) is adequate for your business type
Verify electrical capacity (amps and voltage) meets your equipment requirements — critical for restaurants, medical offices, manufacturing
Have a commercial real estate attorney review the lease before signing — $500–$1,500 attorney fee vs. 5 years of unknown liability
Request a tenant estoppel certificate confirming no outstanding issues with the property
Confirm ADA compliance status — you may inherit liability for pre-existing ADA violations
Calendar the lease end date, all option exercise deadlines, and all required notice dates at signing
Confirm your personal guarantee limitations are included in the final signed lease — not just promised verbally
Never negotiate a commercial lease without a commercial real estate attorney:
Commercial leases are heavily drafted in favor of landlords. A commercial real estate attorney reviewing your lease typically costs $500–$2,000 — compared to a 5-year lease total obligation of $150,000–$500,000+. Attorneys find provisions you missed, know what's standard in your local market, and can negotiate directly with landlord's counsel on your behalf. This is not optional for any lease over $50,000 in total obligation.
Frequently Asked Questions
- What is a triple net (NNN) lease?
- A triple net (NNN) lease requires the tenant to pay base rent plus three additional expenses: property taxes, building insurance, and maintenance and repairs. The landlord receives "net" rent with no operating expenses. NNN leases are common for standalone retail buildings and industrial spaces. The advantage: lower base rent (landlord discounts for expense transfer). The disadvantage: actual monthly cost varies and can increase significantly. Always request 3 years of historical NNN/CAM expenses before signing — they reveal actual cost patterns.
- What is a tenant improvement allowance (TI allowance)?
- A TI allowance is money provided by the landlord to build out or renovate the leased space for your specific business. Ranges from $10–$100+ per square foot depending on market, property type, lease term, and landlord motivation. A 1,500 sq ft space with $25/sq ft TI provides $37,500 toward construction. TI allowances are always negotiable — landlords in soft markets (higher vacancy) offer more. Specify in the lease: what TI covers (hard costs, soft costs, fixtures), what happens if TI exceeds the allowance (tenant pays the difference), and the deadline to spend it (typically 12–18 months from lease commencement).
- Should I sign a commercial lease personally or through my LLC?
- Always sign through your LLC or corporate entity — not personally — as the primary tenant. However, landlords for small tenants often require a personal guarantee. Negotiate: (1) a cap on the guarantee (6–12 months of base rent, not full remaining obligation), (2) a burn-down provision (guarantee reduces over time as the lease performs), and (3) release of personal guarantee after 24–36 months of clean payment history. After your LLC has 2+ years of operating history and strong revenue, push back on the personal guarantee entirely and offer a security deposit or letter of credit instead.