In many situations, leasing a commercial space to launch your business can be a smarter and more flexible choice than buying an existing business. If you’ve decided that leasing is the right move—whether you’re looking at office, warehouse, or retail space—there are a few important points to keep in mind as you navigate the process.
Most commercial leases start with an Offer to Lease (sometimes referred to as the OTL). The Offer to Lease allows a tenant to formally express interest in a specific unit and outline the basic terms they’re willing to agree to. Once both parties accept those terms, the process moves toward drafting the binding Lease Agreement, which sets out the full legal rights and responsibilities of both tenant and landlord.
Here are some key terms to include in the Offer to Lease to ensure alignment with the Landlord before moving forward with the Lease Agreement, saving time and money for all parties.
Lease Term
Lease term refers the length of time you want to lease the space for. Lease terms are usually between 3-5 years, but shorter or longer terms are possible depending on the Landlord.
Option to Renew
You’ll often see commercial leases written as “5+5” or “3+3.” This means the initial lease term is 5 years (or 3 years), with an additional 5-year (or 3-year) option to renew. A “5+5+5” lease indicates multiple renewal options—here, two separate 5-year extensions. The renewal term doesn’t have to match the length of the initial term. For example, a lease written as “5+3” or “5+2” means a 5-year initial term with a 3-year or 2-year renewal option.
Renewal rent can either be pre-negotiated upfront or determined later based on market rates at the time the option is exercised, depending on what’s agreed to in the lease.
Tenant Improvements
Tenant Improvements are the renovations, upgrades, or customizations made to the space you are leasing so it can suit your specific business needs. These can include things like adding walls, installing flooring, upgrading lighting, adding signage, or improving plumbing and electrical systems.
Tenant Improvements are usually negotiated as part of the lease since the landlord will want to approve the improvements. If the proposed improvements add value to the property, it may be possible to request a tenant improvement allowance from the landlord to reimburse the improvements. The lease should indicate who pays for what, who manages the construction, and who owns the improvements once they’re complete.
Rent Structure
There are 2 main rent structures in commercial leases: gross rent and triple net rent.
Triple net rent is made up of basic rent and additional rent. Basic rent goes to the landlord, and additional rent (sometimes called operating cost) is used to pay for property tax, common area maintenance, and building insurance. Note that the basic rent is based on the negotiated amount, but additional rent may vary from year to year.
In a gross rent structure, basic and additional rent are combined into one amount. The benefit of a gross rent structure is the rent amount is predictable since it does not change.
Free Rent and Fixturing Period
When you sign a new lease to start your business, you’ll usually need some time to get set up before you can open and generate revenue. Most landlords understand this and are open to offering either a fixturing period or a free rent period to support your launch.
Fixturing period is primarily intended to help tenants carry out improvements and renovations. During fixturing period, the tenant does not pay basic and additional rent. The length of the fixturing period depends on the landlord and the scale of work required.
During free rent period, the tenant pays the additional rent but not the basic rent.
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