How to Read a Commercial Lease Before You Sign

Commercial leases are among the most consequential documents a small business owner will sign — and they're frequently signed without the scrutiny they deserve. Unlike residential leases, which are often standardized and heavily regulated by tenant-protection law, commercial leases are largely governed by what the parties agree to. The language in that document is what you have.

Here's what to pay attention to before your signature binds you for three to ten years.

Understand the Lease Structure First

Commercial leases come in several fundamental structures, and which one you have determines how much financial risk you're carrying.

Gross lease: You pay a stated monthly rent; the landlord handles property taxes, insurance, and maintenance. Simple and predictable.

Net lease (N, NN, NNN): In addition to base rent, you pay some or all of property taxes (N), property taxes and insurance (NN), or property taxes, insurance, and maintenance (NNN). Triple-net leases are common in retail and some office settings — the tenant becomes responsible for costs that fluctuate, sometimes significantly. Know what you're responsible for and get historical expense figures before signing.

Modified gross lease: A hybrid where some operating costs are shared or divided. Read the specific language carefully — "modified gross" is not a defined term.

The structure is usually identified early in the lease but the specifics are in the operating expense and maintenance sections, which require careful reading.

Rent Escalation

Every multi-year commercial lease should be examined for how rent changes over time. Common structures:

Fixed escalation: Rent increases by a stated percentage each year or at defined intervals. Simple and plannable.

CPI-tied escalation: Rent increases by some multiple of CPI (consumer price index). During high-inflation periods, this can significantly exceed what you budgeted. A "CPI cap" limits increases to a maximum percentage even if CPI exceeds it — negotiate for one.

Market rent resets: The lease requires the rent to be reset to "fair market value" at renewal or at specified intervals. This is predictability-destroying — you can't know what rent will be at year five when you're negotiating at year one.

Landlord discretion: Some leases allow rent increases at the landlord's discretion within certain limits. This is the least favorable version.

Get the maximum annual increase in writing, get a cap if CPI-tied, and run the numbers for the full lease term before signing.

Operating Expenses and CAM

In NNN and many gross leases, "common area maintenance" (CAM) charges are an additional cost on top of base rent. These cover maintenance of shared areas — parking lots, lobbies, landscaping, and similar items. CAM charges can be substantial and can increase.

Key questions:

• What's included in CAM (and what's excluded)?
• Are CAM increases capped?
• Is there an audit right — can you verify the landlord's CAM calculations?
• What year's actual CAM costs are used to set the initial estimate?

Get historical CAM figures for the property, not just the landlord's projections.

The Lease Term and Options

Initial term: Commercial leases are typically 3, 5, 7, or 10 years. Longer terms provide rent certainty and may give you leverage for TI (tenant improvement) allowances; they also extend your obligation if the business underperforms.

Renewal options: Options to renew give you the right to continue the tenancy at defined terms after the initial term expires. Options are valuable — the right to renew is yours; the obligation is not. Key details: how much notice is required to exercise the option, what the rental rate will be at renewal (fixed, CPI, or market), and whether you can only exercise if you're in compliance with the lease.

Early termination: Most commercial leases don't include termination rights in favor of the tenant. If your business fails or needs to relocate, you remain obligated for the remaining term unless you can sublet or the landlord agrees to a buyout. If an early termination right exists, understand the price.

Holdover provisions: What happens if you stay past the lease expiration without renewing? Many leases convert to month-to-month at a significantly higher rate (sometimes 150% or 200% of the last month's rent) with the landlord's right to terminate on short notice. Know this before you approach an expiration date.

Permitted Use

The lease specifies what your business is permitted to do in the space. This language matters more than many tenants realize:

• Is your entire actual business described, or just part of it?
• If your business evolves, does the permitted use clause accommodate the change?
• Are there exclusivity provisions (the landlord agrees not to lease to your direct competitors)?
• Are there use restrictions that could limit your operations — hours, noise, odors, hazardous materials?

If you anticipate expanding your product or service offering, verify that your permitted use clause is written broadly enough to accommodate it.

Tenant Improvement Allowance

When you build out or renovate leased space, the landlord may contribute a tenant improvement (TI) allowance — a per-square-foot credit against your build-out costs. Key details:

• Is the TI allowance a credit against rent, a direct payment, or a reimbursement of documented expenses?
• When and how is it paid?
• What happens to improvements at lease end — do you leave them or remove them?
• Who owns the improvements during the lease?

TI allowances are negotiable and are often where landlords make concessions in lieu of lowering stated rent. A larger TI allowance may offset a higher stated rent, depending on your build-out needs.

Assignment and Subletting

If you need to exit the space before your lease expires — through a business sale, relocation, or financial difficulty — assignment and subletting are your options. Most commercial leases allow this only with landlord consent, which the landlord may condition on various requirements.

Key provisions:

• Can the landlord withhold consent unreasonably, or is "reasonable" consent the standard?
• Does the landlord have a right of recapture (the right to take the space back rather than allow a sublease)?
• If you're selling your business and the lease transfers to the buyer, what approval process applies?

If you plan to eventually sell your business and the business depends on the leased location, the assignment provisions in the lease directly affect your business's transferability and value.

Getting Help Before You Sign

Commercial lease review by an attorney with commercial real estate experience is worth the cost for any lease over a year. Even a few hours of attorney time on a 5-year lease — where a single unfavorable clause could cost far more than the legal fee over the term — is sound economics.

At a minimum, have the lease reviewed by someone who has read many commercial leases, not just your business attorney who handles contracts and employment matters. Commercial real estate leases have specific conventions and traps that general practitioners may not catch.

The broker representing the landlord is not your advocate. The "standard form" is what the landlord drafted.

This article is educational and does not constitute legal advice. Specific questions about lease terms should be reviewed with a qualified commercial real estate attorney in your jurisdiction.