GuidesCommercial
Reading a commercial lease before buying
Term, indexation, renewal, charges and termination clauses.
The end date and renewal options
Base rent and its annual indexation
Charges paid by the tenant
Five points to note
- The end date and renewal options
- Base rent and its annual indexation
- Charges paid by the tenant
- Early termination clauses
- Guarantees given by the tenant
Why this matters to the lender
A short lease reduces the income counted. A long signed lease supports the requested amount.
Charges, item by item
A net lease passes charges to the tenant. A gross lease leaves them with the owner.
- Municipal and school taxes
- Building insurance
- Common area maintenance
- Major repairs and equipment replacement
What weakens a lease
- A tenant who can leave on short notice
- A rent reduction clause during work
- A right of first refusal on the sale
- No personal guarantee from the principal
Questions to ask the seller
Ask whether verbal agreements exist. They do not appear in the lease but bind the buyer.
Renewal, the decisive clause
A renewal option protects the property’s future income.
Check whether the renewal rent is set or negotiated at market.
An option with no agreed price offers the lender less certainty.
