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Negotiating a commercial lease for a retail store

On Behalf of | Jun 14, 2023 | Commercial Real Estate

Commercial leases in California and around the country are far more complex than residential leases. Residential tenants rarely have to worry about real estate taxes, maintenance or repairs, but commercial tenants are often expected to pay these costs. Commercial tenants may also opt for leases that have lower rents but require them to pay their landlords a percentage of their gross business sales. Things can get especially complicated when the commercial premises being rented is a retail store because these properties require a lot of upkeep, generate significant revenues and are heavily taxed.

Gross and net leases

Gross leases, which are also called full-service leases, include all of the expenses related to operating a commercial property in the tenant’s rent. These costs may include real estate taxes, insurance, utilities and maintenance. About 30% of retail stores have gross leases. Net leases have much lower rents than gross leases, but commercial tenants are expected to pay some property running costs. Single net leases include property tax, double net leases include property tax and insurance and triple net leases include property tax, insurance and maintenance. Net leases do not include utilities.

Modified and percentage leases

Modified gross or net leases are negotiated between commercial real estate landlords and tenants seeking more flexible terms. Most modified leases include real estate taxes and insurance and some other operating costs. About 28% or retail stores have modified gross or net leases. Percentage leases have much lower rents than other types of commercial lease, but they require tenants to pay a percentage of their monthly or annual sales revenues. Most percentage leases include a provision that requires revenues to be shared only after an established breakeven point has been reached.

Negotiating a commercial lease

If you ever negotiate a commercial lease for a retail store, you should read the fine print carefully to make sure that you clearly understand your responsibilities and obligations. You should pay especially close attention to the penalty clause as it explains how much you will have to pay if you break the lease early, and you may wish to include a provision that prevents the landlord from renting space in the same building to one of your direct competitors.