Commercial Lease Review: Hidden Costs Every Small Business Should Know

Signing a commercial lease is one of the biggest financial commitments a small business owner will make. Unlike residential leases, commercial leases are largely unregulated, meaning there are far fewer consumer protections. The landlord's standard lease is written to protect the landlord, and negotiation is not just expected but essential. Yet many first-time business owners sign without fully understanding the costs hiding in the fine print.

Understanding Your Lease Type

Commercial leases come in several structures, and understanding which type you are signing is critical. A gross lease means you pay a flat monthly rent and the landlord covers operating expenses. A net lease means you pay base rent plus some or all of the property's operating costs. A triple net (NNN) lease means you pay base rent plus property taxes, insurance, and maintenance. Each type shifts different amounts of risk and cost to you as the tenant.

CAM Charges: The Biggest Hidden Cost

Common Area Maintenance (CAM) charges cover the landlord's costs for maintaining shared spaces like lobbies, parking lots, landscaping, and elevators. These charges can be substantial, sometimes adding 30% or more to your base rent. The problem is that many leases give the landlord broad discretion over what counts as a CAM expense.

Look for a CAM cap that limits how much these charges can increase each year. Without a cap, your costs could rise unpredictably. Also check whether the landlord includes capital improvements in CAM charges. Replacing a roof benefits the landlord's property value, but tenants should not be paying for it through maintenance fees.

Rent Escalation Clauses

Most commercial leases include annual rent increases. These can be structured as a fixed percentage (typically 2% to 5% per year), tied to the Consumer Price Index (CPI), or based on the landlord's operating cost increases. A 3% annual escalation on a $5,000 per month lease means you will be paying nearly $5,800 per month by year five. Make sure you can project your total lease cost over the full term, not just the first year.

Personal Guarantees

Many landlords require small business owners to personally guarantee the lease. This means if your business fails and cannot pay rent, you are personally liable for the remaining lease payments. On a five-year lease at $4,000 per month, that could be over $200,000 in personal liability.

Try to negotiate a limited personal guarantee, sometimes called a "good guy guarantee," that caps your personal exposure or releases you after a certain period of on-time payments.

Build-Out and Restoration Costs

If you need to modify the space for your business, understand who pays for the build-out and who owns the improvements. Some landlords offer a tenant improvement allowance, but the terms vary widely. More importantly, many leases include a "restoration clause" that requires you to return the space to its original condition when the lease ends. This can cost tens of thousands of dollars in demolition and construction work.

Assignment and Subletting Restrictions

If your business needs change, you might want to sublet part of your space or assign the lease to a new tenant. Many commercial leases require the landlord's written consent for any assignment or sublease, and some include a "recapture clause" that lets the landlord take back the space instead of allowing you to sublet it. Understand these restrictions before you sign, especially if your business is in a growth or transition phase.

Exclusive Use and Co-Tenancy Clauses

If you are leasing space in a shopping center or multi-tenant building, an exclusive use clause can prevent the landlord from renting to a direct competitor. Without this protection, the landlord could lease the space next door to a business that sells exactly what you sell. Similarly, a co-tenancy clause protects you if an anchor tenant leaves, potentially allowing you to reduce rent or terminate the lease.

Protecting Your Business

Commercial lease negotiation is where having professional help pays for itself many times over. At minimum, understand your total occupancy cost (base rent plus all additional charges), your exposure under personal guarantees, and your exit options if the business does not work out.

Tools like Fine Print Fighters can help you quickly identify the riskiest clauses in your commercial lease. For more on spotting hidden costs in contracts, check out our article on rental lease red flags.

Disclaimer: This article is for educational purposes only and does not constitute legal advice. For questions about your specific situation, consult a qualified attorney or commercial real estate professional in your jurisdiction.