Commercial Leases: Negotiating Terms Before You Sign

Lease Element	What To Push For	What To Watch Out For
Base Rent	Fair market rate, clear escalations	Steep annual increases, vague “market” resets
Operating Costs (CAM)	Caps on increases, audit rights	Uncapped pass-throughs, vague expense categories
Term & Renewal	Shorter initial term + clear renewal options	Long fixed term with no renewal flexibility
Tenant Improvements	Allowance, free rent during build-out	Paying out-of-pocket for permanent upgrades
Personal Guarantee	Limited duration and amount	Unlimited personal liability for full term
Use & Exclusivity	Broad use clause, non-compete where needed	Overly narrow use clause, no protection from direct rivals
Exit Options	Sublease rights, early termination clause	No flexibility if sales tank or you outgrow space

Commercial leases are not like renting an apartment. They are longer, heavier, and they lean toward the landlord by default. The first draft you get is almost never neutral. So if you just “sign where they tell you,” you lock in years of costs and risk that you could have avoided with a few conversations and some careful edits. The numbers in that table are not just line items. They set the floor for your profit margin, your stress level, and how fast you can grow or pivot your business when things change.

If you do not negotiate your commercial lease, you are quietly giving away cash, control, and options every single month.

Why your commercial lease matters more than your business plan

Most business owners pour weeks into a business plan and treat the lease like a form. That is backwards.

Your lease controls three things that your business plan cannot fix:

1. Your real fixed costs
2. Your ability to change course
3. Your downside if things go wrong

You can adjust marketing. You can refine your offer. But once you sign a 5 or 10 year lease, that payment structure is stuck.

If the rent is too high, your break-even point jumps. That means more days each month before you start earning actual profit. If your use clause is narrow, you cannot easily add a new service or product. If you do not have exit options, hard years turn into sleepless nights and debt.

Your lease is a quiet partner in your business. It will either support your growth or smother it.

Understand the basic commercial lease types before you negotiate

Gross vs net vs “everything in between”

Landlords like jargon. A lot of confusion comes from not knowing what kind of lease you are signing. The label they use in the brochure is not enough. You need to see how money actually flows.

Here are the big categories you will see:

Full service or gross lease

On paper, you pay one fixed rent number and the landlord covers taxes, insurance, and operating costs.

This is common in office buildings.

It sounds simple. It kind of is. Still, buried in the lease, you will see:

– A base year for expenses
– The right for the landlord to pass on increases over that base year

So you might pay “all in” for year one, then begin sharing increases in years two and beyond. You want clarity on that.

Net leases (single, double, triple)

With net leases, you pay base rent plus your share of expenses. The more “nets,” the more you pay.

– Single net: rent + property tax
– Double net: rent + property tax + building insurance
– Triple net (NNN): rent + property tax + building insurance + common area and operating costs

Retail and industrial leases are often triple net.

Here is where many tenants get surprised. The base rent looks fine. Then NNN charges add 20 to 40 percent on top, sometimes more. Over time, those NNN numbers creep up.

Always ask, in writing: “What was the total average monthly cost per square foot to existing tenants in this building last year, including all pass-throughs?”

Modified gross or hybrid

This is everything that does not fit neatly in the labels above. The landlord might pay some costs and pass others through to you. Do not rely on the title. Read the expense section line by line.

The lesson: you are not negotiating just “rent.” You are negotiating the whole cost structure.

Key money terms to negotiate before you sign

Base rent and rent escalations

Most tenants focus on the first year rent and ignore the built-in increases.

You want to look at:

– Starting rent per square foot
– Length of term
– How rent changes each year

Landlords like automatic escalations. Common patterns:

– 3 percent increase per year
– A fixed dollar increase per year
– Increases tied to inflation indexes

A 3 percent raise each year can look small. Over 10 years it compounds. If your revenue does not climb at least as fast, your margin shrinks.

You can negotiate:

– A lower start with higher escalations
– A higher start with smaller escalations
– Flat rent for the first 2 years, then escalations

There is no single “right” answer. It depends on your cash flow forecast and how confident you are in growth. Many new businesses push hard for the lowest possible first-year rent, even if it catches up later. They want breathing room while they get customers in the door.

Term length and renewal options

Landlords like longer terms. It gives them stability and helps their financing. You want enough time to justify your build-out and move, but not a long prison sentence.

Common patterns:

– 3 to 5 years for small office or service space
– 5 to 10 years for retail or restaurant

For a new business, shorter can be safer. But you can mix structure and security.

For example:

– Initial term: 3 years
– Two renewal options: 3 years each, at set or formula-based rent

Now you are not locked in for 9 years, but you have the right to stay that long if things go well. The renewal clause should spell out:

– How rent is set at renewal (fixed schedule or clear “market” adjustment method)
– When you have to give notice to exercise the option
– Whether any defaults kill your option

Do not leave “market rate” undefined. You want either a formula (for example inflation-based) or a process (for example if you and landlord cannot agree, each side gets an appraisal, and a neutral third party picks one or averages them).

Operating costs, CAM, and expense caps

What is CAM and why it matters

CAM is “common area maintenance.” In practice, this often includes:

– Lobby and hallway cleaning
– Landscaping
– Parking lot maintenance
– Security
– Management fees
– Sometimes random extras that have nothing to do with you

In many leases, CAM plus taxes plus insurance is where your real cost lives. If you ignore this, your “cheap” rent turns out not so cheap.

You want:

– A clear definition of what counts as CAM
– A right to review or audit annual CAM statements
– Exclusions for certain big-ticket landlord costs

Ask the landlord to exclude:

– Capital improvements that extend the building’s life (like a new roof)
– Structural repairs
– Costs from other tenants defaulting
– Landlord legal fees that do not involve you

Landlords will push back, but you often can carve some of this out or at least limit what gets passed on.

Expense caps

If you cannot get all the exclusions you want, push for a cap on how fast controllable expenses can grow each year.

For example:

– “Controllable CAM will not increase by more than 5 percent per year on a cumulative, non-compounded basis.”

You might not get the exact number you ask for, but even a negotiated cap puts a ceiling on risk.

Be aware: landlords often exclude things like taxes, insurance, and utilities from the cap. Those can still jump. Still, a cap on the controllable part helps protect your cash flow.

Audit and information rights

You should have the right to:

– Receive an annual CAM and expense statement
– Review supporting documents during normal business hours
– Object within a set time if you find errors

Landlords do not love this. Many still agree, because reasonable tenants do not use it often. But the clause gives you leverage if charges spike.

If you do not have audit rights, you are trusting the landlord to do math in your favor. That is not how business works.

Tenant improvements, free rent, and who pays for what

Who pays to build out the space

Most spaces need at least some work before you can operate.

That might be:

– Walls and doors
– Flooring
– Lighting
– Plumbing or kitchen
– Signage
– Technology wiring

These fall under “tenant improvements” or “build-out.”

You want to answer two core questions:

1. Who pays?
2. Who owns the improvements after you leave?

Common structures:

– Tenant improvement allowance: landlord pays up to a set dollar amount per square foot for build-out. You design the space and manage costs.
– Turnkey build-out: landlord pays to build a space following a plan you both agree to before signing.
– Tenant pays: you pay for changes, landlord might give free rent while work is done.

Most landlords factor some level of allowance into their numbers. If they say “no allowance,” they may have already baked a discount into rent. You can still ask. Sometimes you trade a bit of rent for more help up front.

Free rent and early access

If you have to build, you also need time. Paying full rent while your space is under construction is rough.

Ask for:

– Free rent period during build-out (for example 1 to 3 months)
– Early access to the space before the lease begins for planning, measurements, and contractor visits
– A clear definition of when rent starts (for example upon opening for business or upon certificate of occupancy, with a calendar backstop)

Free rent is often easier for landlords to grant than cutting long-term rent. Use that.

Ownership and removal at the end

Strange problem: you invest in improvements, and at the end the landlord can tell you to remove them at your own cost.

You want the lease to:

– Spell out what counts as permanent (stays) and what is personal property (you can remove)
– Clarify if you must return the space to “original condition” or something more limited

Try to limit your restoration duty. For example:

– “Tenant shall remove only trade fixtures and data cabling and repair any material damage from removal.”

That one sentence can save you serious money later.

Use clause, exclusivity, and competition

Use clause and your growth

A narrow use clause can choke your business.

For example:

– “Tenant may use the premises only as a coffee shop.”

At first, that sounds fine. But what if you want to:

– Add co-working desks
– Host small events
– Sell branded merchandise
– Add a small wine bar in the evenings

A tight clause can give the landlord grounds to push back or declare a default.

You want a broader clause, like:

– “Use as a cafe, coffee shop, and for the sale of related food, beverage, merchandise, and ancillary services reasonably related to such use.”

Add the flexibility you can imagine needing. Better to ask now than beg later.

Exclusivity rights

If you are in a multi-tenant building or shopping center, you do not want the landlord to lease the next door space to your direct rival.

Exclusivity clauses help. For example:

– “Landlord shall not lease any other premises in the center for the primary use as a boutique fitness studio offering [your core services].”

You define:

– What you want to be exclusive for
– How long it lasts
– What happens if the landlord violates it

Landlords resist broad exclusive rights, especially if they limit leasing options. You probably cannot block every type of competitor. Focus on what would really hurt your revenue.

Co-tenancy and anchor tenants

If your success partly depends on a big anchor tenant drawing traffic (for example a major grocery store or a large retailer), ask about a co-tenancy clause.

In simple terms, this means:

– If that anchor leaves or a certain percentage of the center sits vacant, you get rights, such as:
– Reduced rent
– The right to terminate after a period

Not every landlord will agree, but even a limited clause can protect you in a declining center.

Personal guarantees and protecting your personal life

What is a personal guarantee

Landlords know that many new entities have no credit history. So they ask for a personal guarantee from the owner.

That means if the business fails, they can come after your personal assets to satisfy the lease.

This is serious.

You cannot always avoid a guarantee, especially if you are small or new. But you can limit it.

Ways to limit a personal guarantee

You can negotiate:

– “Burn-off” guarantee: the guarantee reduces or disappears after you pay rent on time for a set period (for example after 3 years).
– Cap the amount: limit your personal liability to a number, such as 6 to 12 months of rent.
– Good guy guarantee: common in some areas. You personally guarantee rent up to the date you vacate, if you give proper notice and leave the space in good condition. You are not liable for the full remaining term.

These do not remove risk, but they contain it. With a cap or burn-off, a tough year does not have to destroy your personal finances.

You can rebuild a business. Rebuilding personal credit and savings after a full guarantee meltdown is slower and much more painful.

Assignment, sublease, and your exit strategy

Why you need assignment and sublease rights

Your lease is an asset. Under the right conditions, it can help you sell your business or at least lower your losses if you need to close.

Assignment means you transfer the lease to a new tenant. Sublease means you bring in another tenant for part or all of the space while you remain on the hook with the landlord.

Most leases require landlord consent for either. The draft often gives the landlord absolute discretion. That traps you.

You want:

– Consent “not to be unreasonably withheld, conditioned, or delayed”
– Clear timelines for the landlord to respond to your request
– The right to assign to an affiliated entity, successor, or buyer of your business with fewer restrictions

You might not get everything, but you want enough flexibility to:

– Sell your business
– Downsize or restructure
– Avoid paying for empty space if you must move out

Landlord approval and recapture rights

Some leases include a “recapture” clause. It says that if you ask to assign or sublease, the landlord can take back the space instead, ending your lease.

This can kill your ability to sell your business, because a buyer might need that space.

If you cannot remove recapture rights, try to limit them. For example:

– Recapture does not apply if you are selling substantially all assets of the business as a going concern.
– Landlord must decide within a strict timeframe, or the right disappears for that request.

These details change how much control you really hold.

Maintenance, repairs, and who handles what

Inside vs outside the walls

Most leases split duties like this:

– Tenant: interior of the space, non-structural items, fixtures you use daily.
– Landlord: structure, roof, exterior walls, common areas.

That sounds clear, but real life gets tricky.

You want the lease to specify:

– HVAC responsibility (who pays for repairs, replacement, and maintenance contracts)
– Plumbing lines and electrical systems (who handles items outside your suite but serving it)
– Glass, doors, and storefront

HVAC is the big one. Replacing a unit can cost many thousands. If the landlord pushes that cost onto you, you should at least try to:

– Limit your duty to routine maintenance and minor repairs
– Require landlord to handle or share big replacements
– Have the landlord warrant the system for a certain period, especially if it is older

Standard of maintenance

You are judged against a “standard” that can be vague.

Landlords may write:

– “Tenant shall maintain the premises in good order and condition.”

What does that mean? You do not want to face claims of default because your wear and tear looks different from the landlord’s taste.

You can add language like:

– “Ordinary wear and tear excepted.”
– “Consistent with comparable buildings in the area.”

Nothing is perfect, but adding this narrows the gap.

Default, remedies, and late payments

Grace periods and cure rights

Even strong businesses have hiccups. A week of cash timing problems should not trigger a formal default.

Look for:

– Grace period for late rent (for example 5 to 10 days before late fees or default rights kick in).
– Cure period for non-monetary defaults (for example 20 to 30 days after notice, longer if the fix reasonably takes more time and you start promptly).

Without these, one missed email or mail delay can lead to late fees or worse.

Landlord remedies

If you default, the landlord usually can:

– Terminate the lease and sue for damages.
– Lock you out and keep your property (subject to local law).
– Accelerate rent for the rest of the term.

You cannot totally avoid this, but you can negotiate:

– The right for the landlord to mitigate damages by trying to re-lease the space (and crediting that against what you owe).
– Limits on accelerated rent (for example discount future amounts to present value, and subtract rent from any replacement tenant).

It is legal detail, but it shapes your downside if things go badly.

Negotiation mindset: how to talk with landlords

Think like a partner, not a customer

Landlords are not selling a product once. They are entering a relationship. They care about:

– Steady income
– Low vacancy
– Stable property value
– Predictable expenses

When you negotiate, you are not asking for “favors.” You are shaping a trade:

– You offer stability and long-term rent.
– They offer space and terms that let you succeed.

If your business thrives, they win. If your business fails, they lose rent, pay leasing commissions, and face downtime.

So frame your asks in that light. For example:

– “These escalations are a bit steep for our projected revenue curve. If we can keep them lower, we are far more likely to be healthy tenants for the full term.”
– “An allowance for improvements helps us open faster and build traffic to the center, which benefits the property overall.”

Prepare your numbers

Walk into negotiation knowing:

– Your max monthly occupancy budget
– How much you can spend upfront on deposits and improvements
– Your break-even sales at different rent levels
– How long you can survive at slow initial revenue

This helps you decide:

– What to push hardest on
– Where you can compromise
– When to walk away

If you do not know your numbers, it is easy to say “yes” emotionally to a space that looks perfect and turns into a silent drain.

Use timing and leverage, gently

Landlords have pressure too:

– Vacant space is pure loss.
– Loan covenants might require certain occupancy.
– Their listing has probably been sitting for some time.

You do not need to bully anyone. But you can:

– Ask how long the space has been vacant.
– Ask what kind of tenants they are hoping for.
– Share proof you are serious (business plan, track record, financials).

Then, when you negotiate, you can say:

– “We like this space and want to make it work, but the current NNN structure takes us beyond our budget. If we could get a cap on controllable CAM and a small improvement allowance, we can move forward quickly.”

This is calm, clear, and still firm.

Working with professionals without losing control

Commercial broker

A good tenant rep broker can:

– Show you alternative spaces to give you leverage.
– Explain local norms on rent, NNN, and allowances.
– Bridge awkward conversations with the landlord.

Their commission is usually paid by the landlord, baked into the economics. Still, you want someone who actually works with tenants regularly, not just landlords.

You remain the decision maker. Use them for local knowledge and negotiation structure.

Real estate attorney

Commercial leases are long. Often 30, 40, or more pages. Hidden in those pages is where the real risk lives.

A lawyer who routinely handles commercial leases can:

– Spot one-sided clauses quickly.
– Suggest realistic edits that landlords will accept.
– Translate legal language into business risk.

Show them:

– Your business model.
– Your growth plans.
– Your main concerns.

Ask them to focus on:

– Personal liability
– Exit options
– Expense pass-throughs
– Default and remedies

You do not need a law lecture. You need “If X happens, you are on the hook for Y; here is how we reduce that.”

Still read every line yourself

Even with pros, read the lease slowly.

Ask yourself:

– “If my revenue drops by 40 percent next year, what happens under this lease?”
– “If I need to move or sell, what are my options?”
– “If the landlord sells the building, does anything change for me?”
– “If taxes spike, do I share that and how much?”
– “If the HVAC dies in winter, who pays, and how fast does it get fixed?”

If you cannot answer those questions from the document, push for clarity.

The time you spend understanding your lease is not legal overhead. It is business planning.

Practical negotiation checklist before you sign

Here is a simple way to structure your final pass before you commit.

1. Money and term

– Is the total monthly cost clear, including NNN or other expenses?
– Are rent increases written out year by year, with numbers, not just formulas?
– Is the term length right for your risk and growth plans?
– Do you have renewal options, with clear rent-setting methods?

2. Expenses and protections

– Is CAM defined with examples and exclusions?
– Do you have a cap on controllable expense increases?
– Do you have rights to see and challenge expense statements?

3. Build-out and timing

– Do you get a tenant improvement allowance or turnkey build?
– How much free rent and early access do you have?
– When exactly does rent start?

4. Use, growth, and competition

– Is your use clause broad enough for your future plans?
– Do you have any exclusivity protection if direct rivals would hurt you?
– Are there co-tenancy protections if key anchors leave (where relevant)?

5. Personal and exit risk

– Is there a personal guarantee, and can you cap or burn it off?
– Do you have fair rights to assign or sublease, with consent not unreasonably withheld?
– Are recapture rights limited so you can still sell the business?
– Are default, grace periods, and cure rights clear and workable?

Negotiate these core pieces with calm persistence. You do not need to win every point. You do need to understand each trade you make and what it will mean for your business three, five, or seven years from now.

Your lease will not feel urgent once you move in. Rent will just be another payment. But it will keep shaping your profit, options, and stress quietly in the background. Getting the terms right before you sign is one of the most practical ways to give your business and your life more room to grow.