Which Commercial Lease Terms Should You Negotiate Before Signing?

The landlord’s form lease is a starting position, not a take-it-or-leave-it document, and the commercial lease terms that matter most are rarely the base rent. They are the escalation clause, the renewal option, who pays for the build-out, whether you can assign the lease when you sell the business, and what happens if you need out early. Review these before you sign the letter of intent, because the LOI usually fixes the deal points the landlord will refuse to reopen later. Our note on whether a letter of intent binds you explains that sequence.

Rent, escalations, and operating expenses

Base rent is the headline, but three other numbers set the real cost. The annual escalation can be a fixed percentage or tied to an index; a fixed rate is predictable, an index can run away in an inflationary year, and a cap on either protects you. Free rent during build-out and the first months of operation is common and should be stated in months, not left to a side letter. The expense structure, meaning whether taxes, insurance, and common area maintenance pass through to you, determines how much the rent can rise outside your control. Our comparison of triple net and gross leases covers the pass-through language in detail, including caps on controllable expenses and audit rights.

Term, renewal options, and expansion rights

A longer term buys a lower rent and a larger improvement allowance; a shorter term buys flexibility. Renewal options bridge the two, but only if they are drafted to be usable. Insist on a defined rent for the option period (a stated figure, a fixed increase, or fair market value with a neutral mechanism to determine it) and a notice window long enough that you will not miss it. A right of first offer on adjacent space is worth asking for if growth is plausible. If you need an exit, negotiate an early termination option with a defined fee rather than hoping the landlord will agree later. Our leasing and acquisitions practice treats these option mechanics as the core of the lease, because they are the terms you will actually exercise years from now.

Delivery condition and tenant improvements

The lease should say exactly what condition the landlord delivers the premises in and who pays to make it usable. A tenant improvement allowance is the landlord’s contribution to your build-out; the lease should state the amount, what it can be spent on, when it is paid, and what happens to any unused balance. If the landlord performs the work, attach a work letter with plans, a delivery date, and consequences if delivery is late, such as a day-for-day rent abatement and a termination right after an outside date. Rent commencement should be tied to delivery and permits, not to a calendar date that assumes everything goes to plan.

Use, exclusives, and operating covenants

A narrow permitted-use clause can block a pivot in your business or an assignment to a buyer in a different line of work, so draft it broadly. Retail tenants should ask for an exclusive use clause preventing the landlord from leasing nearby space to a direct competitor, and should resist continuous-operation covenants that force the store to stay open during a bad year. Signage, hours, and parking rights belong in the lease, not in a conversation with the leasing agent.

Assignment, subletting, and the right to leave

The assignment clause decides whether you can sell your business. The landlord’s form usually prohibits assignment without consent; the tenant’s edits should add that consent will not be unreasonably withheld, that transfers to affiliates or to a buyer of substantially all of the business are permitted without consent, and that the landlord’s recapture right (taking the space back when you ask to assign) is limited or deleted. Watch for profit-sharing clauses that give the landlord a share of any sublease rent above your own.

Default, guaranty, and the landlord’s remedies

Finally, read the default section as if you will someday be in it. The tenant should have written notice and a cure period before a monetary default becomes an event of default, a longer cure period for non-monetary defaults, and no acceleration of all future rent without a credit for the landlord’s reletting. A personal guaranty is the landlord’s usual request from a new business, and its scope is negotiable; our note on personal guaranties in commercial leases describes the caps and burn-off provisions landlords accept. Two more items deserve a look before signing:

• a subordination, non-disturbance, and attornment agreement from the landlord’s lender, so a foreclosure does not terminate your lease;
• a relocation clause that, if it cannot be deleted, limits moves to comparable space at the landlord’s cost and with meaningful notice.

Holdover rent, security deposit terms, and the landlord’s right to enter round out the list. Each of these is routine for the landlord’s counsel and expensive for a tenant who signed without reading. Our real estate contract and negotiation team marks up the landlord’s form against this list before the LOI is final, while the landlord still expects to negotiate.

If you have received a form lease or a letter of intent for commercial space, a consultation with Capitol Law Partners can identify which terms to push on before you commit. Schedule a consultation.

This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by this communication.

Attorney Cagatay Ersoy. Practical strategy for founders, investors, and growing companies.

Need help with this topic? See our property acquisitions, leasing, and development page or schedule a consultation.