Negotiating a Commercial Lease: What Tenants Should Know
| John M. McCormick | Commercial Real Estate, real estate
Quick Answer
When negotiating a commercial lease, a tenant should focus on total occupancy cost (not just base rent), the length of the term and renewal rights, the tenant improvement allowance, the use clause and any exclusive, assignment and subletting rights, repair and ADA responsibilities, insurance and indemnity, an SNDA, default and cure periods, and the scope of any personal guaranty. Commercial leases give tenants far fewer statutory protections than residential leases, so the written lease controls most outcomes. Landlord remedies also differ by state: Virginia allows peaceable self-help 5 days after the tenant receives written notice of rent default, while North Carolina landlords generally proceed through summary ejectment.
This article is part of our Legal Guide to Commercial Real Estate in Virginia and North Carolina.
For many businesses, a commercial lease is the largest contract they will sign. It often runs for years, comes with a personal guaranty, and is drafted by the landlord’s attorney with the landlord’s interests in mind. Unlike residential tenants, commercial tenants have few statutory protections. In Virginia, the statutes governing nonresidential tenancies fill gaps, but the lease controls (Va. Code § 55.1-1400). In North Carolina, too, the lease terms drive most outcomes.
The good news is that most lease terms are negotiable, especially before you sign a letter of intent. This guide walks through the clauses that matter most to tenants and how landlords usually respond.
How Is Rent Structured: Gross, Modified Gross, or NNN?
Under a gross lease, the tenant pays a single rent and the landlord pays taxes, insurance, and operating costs. Under a triple net (NNN) lease, the tenant pays base rent plus its share of property taxes, insurance, and common area maintenance (CAM). A modified gross lease falls in between, often with a base year or expense stop so the tenant pays only increases above a set amount.
The label matters less than the definitions. Compare offers on total occupancy cost, and read what counts as an operating expense, whether capital expenditures are excluded, whether controllable expenses are capped, and whether you have audit rights. Our article on CAM charges and triple net leases covers these issues in detail, and our earlier post on key points tenants must know about triple net leases offers a quick overview.
What Term and Renewal Options Should a Tenant Seek?
Landlords often prefer longer terms; tenants want flexibility. A common middle ground is a shorter initial term with one or more renewal options at the tenant’s election. Make sure the option states how renewal rent is set (a fixed increase, a percentage of market, or a formula), the notice window to exercise it, and that a minor or cured default does not wipe it out. Calendar the notice deadline. Missing it can mean losing the location.
How Should You Negotiate the Tenant Improvement Allowance?
A tenant improvement (TI) allowance is the landlord’s contribution toward building out the space. Key points are the dollar amount, what it may be spent on (hard costs only, or also design, permits, cabling, and furniture), how and when it is paid, and what happens if the landlord fails to pay. Tenants often ask for the right to offset unpaid allowance against rent. Also clarify who manages construction, whether the landlord charges a supervision fee, and whether improvements must be removed at the end of the term.
Why Do the Use Clause and Exclusives Matter?
A narrow use clause can block you from adding services, pivoting your business, or assigning the lease to a buyer. Ask for a broad use clause, such as any lawful use consistent with the character of the property. Confirm separately that zoning allows your use; the lease does not make an unpermitted use legal. Our article on zoning and land use due diligence explains how.
In retail and medical settings, an exclusive use clause can prevent the landlord from leasing nearby space to a competitor. Define the protected use clearly and spell out the remedy if the landlord breaches, such as reduced rent or a right to terminate.
Can You Assign or Sublet the Space?
Most leases require landlord consent to assign or sublet. Tenants should ask that consent not be unreasonably withheld, conditioned, or delayed, and that certain transfers be permitted without consent, such as transfers to affiliates or to a buyer of the business. This matters if you might sell your company later. Check whether a change in ownership of the tenant entity counts as an assignment, and whether the original tenant and guarantor stay liable after an approved assignment. For more on business sales, see our legal guide to buying or selling a business.
Who Handles Repairs, Maintenance, and ADA Compliance?
Many leases make the tenant responsible for the interior and building systems serving its space, while the landlord keeps the roof, structure, and common areas. In single-tenant NNN leases, the tenant may be responsible for nearly everything. Watch for HVAC replacement, roof replacement, and parking lot resurfacing being shifted to the tenant, and ask that capital replacements be the landlord’s cost or amortized over their useful life.
ADA accessibility deserves its own clause. Under federal regulations, both the landlord and the tenant of a place of public accommodation are responsible for ADA Title III compliance, and they may allocate responsibility between themselves in the lease (28 CFR 36.201(b)). That allocation governs who pays as between landlord and tenant, but it does not change what the law requires as to customers and other third parties. Tenants often ask the landlord to deliver common areas and the building’s path of travel in compliance.
What Should Tenants Know About Insurance, Indemnity, and the SNDA?
Leases typically require the tenant to carry commercial general liability and property insurance on its own improvements and contents, and to name the landlord as an additional insured. Ask for mutual waivers of subrogation, so each party’s property insurer cannot sue the other for a covered loss, and for indemnity that runs both ways and excludes the landlord’s own negligence.
An SNDA (subordination, non-disturbance and attornment agreement) addresses what happens if the landlord’s lender forecloses. The tenant agrees its lease is subordinate to the mortgage and to recognize a new owner, and in return the lender agrees not to disturb the tenant’s possession as long as the tenant is not in default. Without non-disturbance protection, a foreclosure could put the lease at risk. Ask for an SNDA from existing and future lenders.
How Do Default, Cure Periods, and Guaranties Work?
Negotiate written notice and a reasonable cure period before a default can be declared, longer for non-monetary defaults that take time to fix. Watch for cross-defaults, acceleration of all future rent, and attorney’s fee provisions that run only one way.
Many landlords ask small business tenants for a personal guaranty. A guaranty must be in a signed writing in both states (Va. Code § 11-2; G.S. 22-1). Tenants can often negotiate a cap, a burn-off after a period of timely payment, or a good-guy guaranty. See Personal Guaranties in Commercial Leases: Limiting Your Exposure.
| Lease Clause | Tenant Goal | Landlord’s Usual Position |
|---|---|---|
| Rent and operating expenses | Clear definitions, caps on controllable costs, audit rights | Broad pass-throughs with limited caps |
| Term and renewal | Shorter initial term with renewal options | Longer committed term |
| TI allowance | Higher allowance, broad eligible costs, offset right | Fixed amount, hard costs only, paid after completion |
| Use and exclusives | Broad use clause and an exclusive with remedies | Narrow use, limited or no exclusive |
| Assignment and subletting | Consent not unreasonably withheld; permitted transfers | Sole discretion; recapture rights |
| Repairs and ADA | Landlord keeps roof, structure, capital items, and common area compliance | Shift repairs and compliance to tenant |
| SNDA | Non-disturbance from all lenders | Subordination without non-disturbance |
| Default and cure | Notice and cure periods; no acceleration | Short cure periods; full remedies |
| Personal guaranty | Cap, burn-off, or good-guy structure | Full, unlimited guaranty |
Should You Record a Memorandum of Lease?
A memorandum of lease is a short recorded document that gives public notice of the lease, its term, and key rights such as renewal options, purchase options, or rights of first refusal, without disclosing rent. Recording can protect the tenant if the property is sold or financed. In North Carolina, leases of more than three years are not valid against purchasers for value and lien creditors until recorded (G.S. 47-18), so a memorandum is common practice for longer leases. In Virginia, an unrecorded lease is not effective against a later purchaser for value without notice or a lien creditor (Va. Code § 55.1-407), and the tenant’s possession alone does not count as notice under that statute. Virginia expressly allows recording a memorandum of lease signed by both landlord and tenant instead of the full lease (Va. Code § 55.1-1601). Ask for a signed memorandum in recordable form as a lease exhibit.
How Do Virginia and North Carolina Landlord Remedies Differ?
Virginia
If a commercial tenant remains in rent default 5 days after receiving written notice, the landlord may retake possession without further legal process, as long as it does not cause a breach of the peace (Va. Code § 55.1-1415). Because the lease controls and the statute fills gaps (§ 55.1-1400), the lease may add notice or cure requirements, and a lockout that goes wrong can expose the landlord to claims, so many landlords proceed through the courts instead. Virginia also recognizes landlord’s lien and distress remedies against a tenant’s property (Va. Code § 8.01-130.1 et seq.), and landlords may file an unlawful detainer in general district or circuit court (§§ 8.01-124, 8.01-126). The statute of frauds requires a signed writing for a lease of more than one year (§ 11-2).
North Carolina
North Carolina landlords typically use summary ejectment (G.S. 42-26) for holdover, breach of a lease condition that ends the lease under its terms, or a tenant who deserts the premises while behind on rent. Nonpayment more often supports ejectment through the lease’s own termination clause or G.S. 42-3, which implies forfeiture when the tenant fails to pay all past-due rent within 10 days after the landlord’s demand. North Carolina case law allows only peaceable self-help re-entry against commercial tenants, never against the tenant’s will or with a breach of the peace, so landlords are wise to go to court. Unlike Virginia, North Carolina’s statutory landlord’s lien is limited to agricultural tenancies, so commercial landlords typically rely on deposits, guaranties, and contractual security interests. Some leases start from NC REALTORS and NCBA forms 592-T (single tenant) and 593-T (multiple tenant), which should be reviewed and tailored like any other lease. A signed writing is required for leases exceeding three years (G.S. 22-2).
Attorney Insight
I tell tenants that the best time to negotiate is before the letter of intent is signed, not after the landlord’s 60-page lease arrives. Once business terms are agreed, every change looks like a retrade. I also urge clients to sign through their business entity, not personally, and to treat the guaranty as its own negotiation.
Frequently Asked Questions
Is a commercial lease negotiable?
Usually, yes. The degree depends on the market, the space, and the tenant’s credit, but most business terms and many legal terms can be negotiated.
Should my business or I sign the lease?
Generally, the business entity should be the tenant. The landlord may still ask for a personal guaranty, which you can try to limit. Our article on holding commercial real estate in an LLC discusses entity structure.
Can a Virginia landlord lock me out?
For a commercial tenant in rent default, Virginia permits peaceable self-help 5 days after the tenant receives written notice, without a breach of the peace (Va. Code § 55.1-1415). The lease may add notice or cure requirements, so review it and get advice promptly if you receive a default notice.
Are the NC REALTORS lease forms enough?
Forms 592-T and 593-T are a starting point. They should be reviewed and tailored to the space, the use, and the parties’ deal.
Related Articles in This Guide
- The Legal Guide to Commercial Real Estate in Virginia and North Carolina
- Commercial Real Estate Letters of Intent: What to Negotiate Before the Contract
- Key Terms in a Commercial Real Estate Purchase Agreement
- Commercial Real Estate Due Diligence Checklist
- Title Insurance and ALTA Surveys in Commercial Real Estate
- Zoning and Land Use Due Diligence for Commercial Property
- CAM Charges and Triple Net Leases: How Operating Expenses Really Work
- Personal Guaranties in Commercial Leases: Limiting Your Exposure
- Should You Hold Commercial Real Estate in an LLC?
- 1031 Exchanges: Legal Issues, Deadlines, and Common Mistakes
- Buying or Selling Commercial Real Estate in Virginia
- Buying or Selling Commercial Real Estate in North Carolina
Have Your Commercial Lease Reviewed Before You Sign
McCormick Law & Consulting represents buyers, sellers, landlords, tenants, investors, and lenders in commercial real estate matters in Virginia and North Carolina. Because we also form and advise businesses every day (roughly a thousand new entities formed and hundreds of businesses currently represented), we look at a property deal from the operating side as well as the legal side. Every transaction is different, and past results do not predict the outcome of yours.
We review and negotiate letters of intent, leases, and guaranties for tenants and landlords, with an eye on how the lease fits your business plan. Learn more about our contracts practice.
This article provides general information only. It is not legal, tax, or financial advice and does not create an attorney-client relationship. Laws differ by state and change over time. Our attorneys are licensed in Virginia and North Carolina. We assist clients with business transactions involving multiple states. For matters involving the law of a state where we are not licensed, we associate with appropriately licensed counsel or otherwise proceed only as permitted by applicable law.