Your Lease Is a Contract, Not a Formality: What to Negotiate Before You Sign Commercial Space

A commercial lease can be one of the largest and longest financial commitments a growing business makes. The monthly rent is only part of the picture. A lease may also allocate property taxes, insurance, common-area maintenance, repairs, build-out costs, renewal rights, default remedies, and personal liability. That is why a landlord’s form lease should be treated as a proposed business arrangement—not a formality.

Before signing, a business owner can identify the provisions that drive total occupancy cost, operational flexibility, and risk if the business changes course.

The letter of intent can set the deal’s direction

The letter of intent, or LOI, often identifies the key business terms: rent, lease term, tenant-improvement allowance, free-rent period, renewal options, and exclusivity. An LOI may say that it is nonbinding, but that label does not mean its economic terms will be easy to reopen later. Review the LOI carefully, identify any provisions intended to be binding, and carry the agreed business terms into the lease accurately.

A lease review before signature is generally more useful than a dispute after the space is occupied. The negotiating leverage, the facts, and the available alternatives are usually different before the parties commit.

Terms to address before you sign

1. Base rent, escalations, and total occupancy cost

Confirm how base rent changes over the term. A fixed annual increase may be easier to model than an increase tied to a formula, market rent, or an index. Ask for a written year-by-year rent schedule and calculate expected occupancy cost—not just first-year base rent.

2. NNN charges, CAM, and operating costs

Many commercial leases require the tenant to pay some share of property taxes, insurance, utilities, and common-area maintenance (CAM) or other operating costs. The lease should identify the allocation method, reporting process, payment timing, and categories included or excluded. A tenant may ask the landlord to consider:

• a cap on increases in specified controllable operating costs;
• exclusions for items such as the landlord’s financing costs, leasing commissions, or costs attributable to the landlord’s breach, to the extent commercially agreed;
• an annual statement with sufficient detail to understand charges; and
• a reasonable audit or review right, including timing and confidentiality terms.

Do not assume the label “NNN” answers these questions. The actual lease language and the building’s expense history matter.

3. Tenant improvements and delivery condition

If the space needs construction or installation work, document the condition in which the landlord must deliver the premises; the tenant-improvement allowance, if any; who manages the work; approval and permitting responsibilities; construction deadlines; and who pays for cost overruns. Also address whether rent begins before the space is usable for the agreed business purpose and whether the tenant must remove improvements at the end of the term.

4. Assignment and subleasing

A business may need to sublease unused space, reorganize, bring in an investor, sell assets, or be acquired. Review the assignment and subleasing clause with those possibilities in mind. Depending on bargaining position, a tenant may request that consent not be unreasonably withheld, conditioned, or delayed and may seek negotiated treatment for transfers to affiliates, successors, or a change-of-control transaction. The result depends on the lease and the parties’ agreement. A consent standard does not eliminate every condition a landlord may seek, so the exceptions, recapture rights, profit-sharing provisions, and financial tests should be reviewed together.

5. Permitted use, exclusivity, and co-tenancy

The permitted-use clause should allow the business activities the tenant expects to conduct and enough flexibility for reasonable evolution of the business. Retail and restaurant tenants may also evaluate whether an exclusivity provision is commercially important and whether any co-tenancy condition is appropriate for the location and business model.

6. Default, cure periods, and remedies

Read the definition of default and the cure periods closely. The lease should distinguish payment defaults from other defaults and should state how notices must be given. A tenant can request commercially reasonable notice-and-cure periods, subject to customary exceptions for repeated defaults or urgent safety issues. Also review the landlord’s remedies, including acceleration, termination, reletting, late charges, interest, attorneys’ fees, and any waiver of defenses. A remedy clause can affect exposure well beyond the unpaid rent for a single month.

7. Holdover

A holdover clause addresses what happens if the tenant remains after the lease expires. The parties may negotiate the holdover rent, any notice requirements, and whether the tenant is responsible for a specific category of landlord damages caused by the delay. Do not assume a move-out can be extended informally; obtain any extension in writing.

8. Relocation and lender protections

A relocation clause may permit the landlord to move the tenant during the term. A tenant may request to remove the clause or limit it with objective requirements—for example, comparable space, continuity of operations, landlord-paid moving costs, and protections for tenant improvements and signage. A tenant can also ask whether the landlord’s lender will provide a subordination, non-disturbance, and attornment agreement (SNDA). A non-disturbance commitment may be important if a lender forecloses, but it is effective only if the appropriate lender signs the agreement and its terms are acceptable.

9. Renewal and growth rights

If the location is strategic, consider whether to seek a renewal option, expansion right, right of first offer, or right of first refusal. Each right needs objective terms: the applicable space, deadlines, price or price-setting method, notice process, and any conditions to exercise.

Personal guarantees deserve separate attention

A landlord may ask an owner or other individual to guarantee the tenant’s obligations. A personal guarantee can create exposure separate from the business entity’s obligations, so it should be reviewed as its own contract—not treated as a signature-page formality.

Depending on the transaction, a tenant may ask the landlord to consider one or more limits:

• a stated dollar cap or a cap tied to a defined number of months of rent;
• a negotiated release after a specified period of compliant performance;
• a release or replacement guarantee after a qualifying assignment; or
• a negotiated surrender-based limitation sometimes described as a “good-guy” guarantee.

These terms are not automatic. A so-called good-guy guarantee varies by its wording and may require specified notice, payment through a surrender date, delivery of possession, restoration, or other conditions. Read the actual guarantee and confirm exactly whose obligations and which damages it covers.

State-specific considerations for Arizona, California, and Texas

Arizona: commercial lease rights are primarily shaped by the lease and general law

Arizona’s Residential Landlord and Tenant Act applies to a rental agreement for a dwelling unit, not a typical commercial lease. A.R.S. § 33-1307. That does not mean a commercial tenant has no legal protections. It means that the written lease, general contract principles, other applicable statutes, and the specific facts can carry substantial weight. For example, Arizona recognizes the implied covenant of good faith and fair dealing in contracts, and Arizona courts have addressed commercial-lease remedies through contract and equitable principles. In Foundation Development Corp. v. Loehmann’s, Inc., 163 Ariz. 438, 788 P.2d 1189 (1990), the Arizona Supreme Court held that an inequitable forfeiture for a trivial or immaterial commercial-lease breach should not be enforced.

Practical takeaway: negotiate clear written provisions on default, notice, cure, repairs, operating expenses, use, assignment, and remedies. Do not rely on a general impression that commercial terms will be supplied or corrected later.

California: SB 1103 protections may apply to qualified commercial tenants

California’s SB 1103, enacted as Chapter 1015, made several changes affecting a qualified commercial tenant beginning January 1, 2025. Official California SB 1103 text. The statute’s definition is technical. In general, the tenant must be a qualifying microenterprise, a restaurant with fewer than 10 employees, or a qualifying nonprofit organization with fewer than 20 employees, and provide the landlord written notice that the tenant is a qualified commercial tenant plus a self-attestation regarding employee count. For many leases, the notice and attestation are required before or when the lease is signed and annually afterward. Eligibility and timing should be confirmed from the statute and the tenant’s actual facts.

For a qualified commercial tenant, the enacted changes include protections that may apply to:

• notice of rent increases for certain periodic commercial tenancies: generally 30 days for an increase of 10% or less during the prior 12 months and 90 days for an increase above 10%;
• specified building-operating-cost disclosures, documentation, and allocation requirements under Civil Code § 1950.9;
• translations for certain agreements negotiated primarily in Spanish, Chinese, Tagalog, Vietnamese, or Korean; and
• specified termination-notice rules for certain no-fixed-term commercial tenancies.

These are statutory rules with defined terms, effective-date provisions, exceptions, and differing application depending on the tenancy and lease. They should not be reduced to a generic “small-business lease” label. If a business may qualify, raise the issue early and preserve the written notices and attestations the statute requires.

Texas: review commercial lockout and remedy language closely

Texas Property Code § 93.002 generally prohibits a commercial landlord from intentionally excluding a tenant except by judicial process, but it includes limited exceptions. One exception allows changing the door locks of a tenant who is delinquent in paying at least part of the rent. The statute also addresses utility interruptions, removal of specified premises items, repairs, emergencies, and abandonment. Tex. Prop. Code § 93.002. That is not a reason to assume a lockout is automatically proper or that every remedy clause is enforceable as drafted. The lease, the actual default, the statute, notice provisions, and the circumstances can all matter. A Texas tenant should review lockout, access, abandonment, property-removal, default, cure, and remedy provisions before signing—and act promptly if a dispute arises.

Before you sign: a practical commercial-lease checklist

• Put key business terms—rent, term, improvement allowance, delivery condition, options, and concessions—in the LOI and confirm them in the lease.
• Model total occupancy cost, including base rent and every recurring pass-through.
• Define operating-cost categories, allocation, documentation, and any negotiated cap or review right.
• Confirm the permitted use supports the business plan and reasonable future changes.
• Review default notices, cure periods, remedies, acceleration, holdover, and restoration obligations.
• Make assignment and subleasing provisions workable for a potential reorganization, financing, or exit.
• Treat any personal guarantee as a separate high-priority document.
• Evaluate relocation language and, where appropriate, lender non-disturbance protection.
• In California, assess SB 1103 status and notice/attestation requirements early.
• In Texas, review statutory and contractual lockout and property-access provisions.
• In Arizona, make the written lease terms complete and operational.

Sources

• California SB 1103, Chapter 1015 (official bill text)
• Texas Property Code, Chapter 93 (official text, including § 93.002)
• Arizona Revised Statutes § 33-1307 (official text)
• Foundation Development Corp. v. Loehmann’s, Inc., 163 Ariz. 438, 788 P.2d 1189 (1990) — Arizona commercial-lease forfeiture analysis

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