Commercial Lease Agreements: Key Clauses to Watch Out For
Whether you’re a landlord leasing out a commercial space or a business looking to rent premises, understanding the terms of a commercial lease agreement is crucial. Unlike residential leases, commercial leases offer less statutory protection and are often heavily negotiated. Therefore, being aware of key clauses and their implications can prevent costly disputes in the future.
Here are the essential clauses you should watch out for in any commercial lease agreement.
1. Lease Term and Renewal Options
One of the most fundamental clauses is the duration of the lease. Commercial leases are typically longer than residential leases and can range from 3 to 9 years or more. The agreement should clearly specify:
- Start and end dates
- Lock-in period (if any)
- Options to renew, including terms for rent revision during the renewal
2. Rent, Deposits, and Escalation
The rent clause must go beyond stating the monthly rent. It should specify:
- Base rent and what it includes (e.g., maintenance, common area charges, taxes)
- Security deposit amount and refund conditions
- Rent-free period, if any, for fit-outs
- Rent escalation terms — typically 5-10% annually or every 3 years
Some agreements include a revenue-sharing component, especially in high-footfall retail locations, which should be scrutinized carefully.
3. Maintenance and Operating Costs
These costs are often passed on to the tenant. The lease must clarify:
- Who pays for repairs and maintenance — structural vs. non-structural
- Whether CAM (Common Area Maintenance) charges are fixed or variable
- Provisions for property tax, water, electricity, and insurance
Avoid vague terms like “as per actuals” unless a cap is agreed upon. Always insist on transparency in the calculation and periodic auditing of such charges.
4. Permitted Use and Exclusivity
The lease will define what the premises can be used for — e.g., retail, office, storage. A permitted use clause restricts tenants from using the space for any other purpose.
Tenants should also seek an exclusivity clause, especially in malls or business parks, to prevent the landlord from leasing adjacent spaces to direct competitors.
5. Alterations and Fit-Outs
Most tenants need to customize the space. The agreement should state:
- If the tenant can carry out fit-outs or modifications
- If landlord’s consent is required, and under what conditions
- Who owns the improvements at the end of the lease
It’s important to define whether fixtures and fit-outs will be removed or retained when vacating the property.
6. Exit and Termination Rights
An often-overlooked clause is the termination provision. This includes:
- Lock-in period — during which neither party can terminate
- Termination notice — duration and format (usually 3–6 months written notice)
- Early exit penalties, if any
- Events of default — such as non-payment, illegal activities, or insolvency
Tenants should negotiate a termination clause for business failure or non-performance, especially in new locations.
7. Sub-Leasing and Assignment
This clause determines whether the tenant can sub-lease the property or assign the lease to another party. Startups and growing businesses should retain this flexibility.
Landlords, on the other hand, often restrict sub-leasing to maintain control over who occupies the property. If sub-leasing is allowed, ensure the lease defines:
- Approval process
- Liability of the original tenant
- Sharing of rental income
8. Indemnity and Insurance
The lease should define who is responsible for insuring the premises and what types of insurance are required. Typically, tenants are expected to insure:
- Their contents and equipment
- Third-party liabilities
- Fire and allied perils
Indemnity clauses often impose liability on the tenant for any damage or injury caused in the premises. These should be reviewed and negotiated carefully.
9. Dispute Resolution and Jurisdiction
In case of disputes, it helps to have a dispute resolution mechanism in place. The agreement should specify:
- Whether disputes will be resolved through arbitration or litigation
- Jurisdiction of the courts
- Language and venue for arbitration
Including a well-drafted dispute resolution clause can save both parties time and money.
A commercial lease agreement is more than just a legal formality — it’s a blueprint for your business occupancy. Both landlords and tenants must understand and negotiate the key clauses in their favour. It’s advisable to engage a legal expert to vet the agreement and flag any risks. At RealtyLegal, we specialize in drafting and reviewing commercial leases, ensuring that our clients are protected on every front.
Contact us today to schedule a consultation and ensure your lease agreement aligns with your business goals.
