What Small Businesses Should Know Before Signing a Commercial Lease

Key takeaways

• Lease type determines total costs – not just base rent but also cost predictability over time.
• Lease terms affect long-term flexibility, including rent increases, renewal options and early exit provisions.
• Build-out and restoration costs add significant upfront and exit expenses.
• Subletting restrictions limit flexibility if businesses require change.
• Insurance requirements help protect against property damage and customer injury risks.

A commercial lease defines total costs, responsibilities and long-term flexibility – not just base rent. Before signing, small business owners benefit from reviewing lease type, key terms (such as rent increase and termination options), build-out and restoration costs, subletting restrictions and insurance requirements.

Small business owners (the tenant) can focus on these key areas when reviewing a commercial property lease to better understand the division of responsibilities, evaluate risks and make informed decisions before signing.

What are different commercial lease types?

The type of commercial lease determines how costs are divided between the tenant and the landlord and how predictable the tenant’s expenses will be.

Gross leases

With a gross lease, rent typically includes most property-related expenses, such as taxes, insurance and maintenance.

This structure is often the simplest for tenants because they pay a consistent amount each month without needing to manage added property costs.

Benefits:

• Predictable monthly payments.
• Fewer administrative responsibilities.
• Landlord absorbs expense increases.

Trade-offs:

• Slightly higher base rent.
• Less visibility into actual building costs.

 

Net and triple net (NNN) leases

A net lease means the tenant pays base rent plus some or all property-related expenses.

In a triple net lease, tenants are typically responsible for property taxes, building insurance and maintenance and repairs.

Benefits:

• More control over building operations.
• Potentially lower base rent.

 

Trade-offs:

• Variable monthly costs.
• Responsibility for unexpected expenses.
• Need to budget beyond base rent.

Modified gross leases

A modified gross lease splits expenses between the tenant and landlord. The exact breakdown varies by agreement, which makes it important to clearly define responsibilities in writing.

Benefits:

• Predictable monthly payments.
• Fewer administrative responsibilities.
• Landlord absorbs expense increases.

Trade-offs:

• Slightly higher base rent.
• Less visibility into actual building costs.

 

Key commercial lease terms to review carefully

Lease terms define the tenant’s financial commitment and flexibility over time – covering how long they’re locked in, how rent may increase and what options are available to renew or exit early.

Lease length and renewal options

Lease length determines how long the business owner is obligated to stay in the space and how easily the business can adjust as needs evolve.

Lease type	Benefits	Considerations
Shorter leases	Offer flexibility if business needs change.	May come with higher rent or fewer concessions.
Longer leases	Provide more predictable costs over time.	Can make it harder to relocate or renegotiate.

Review carefully:

• Renewal options and timelines.
• Whether renewal terms are pre-set or renegotiated.
• Penalties for not renewing.

Rent increases and escalation clauses

Escalation clauses define how and when rent may increase over the course of a commercial lease.

These increases are typically structured in one of several ways:

• Fixed increases - Set annual percentage increases (e.g., 3% per year).
• Inflation-based adjustments - Increases tied to an index such as the Consumer Price Index (CPI).
• Operating cost pass-throughs - Increases based on property expense changes.

Review carefully:

• Whether increases are predictable or variable.
• How often adjustments occur.
• Whether there is a cap on increases.

What this means in practice:

Consider two leases that both start at $3,000/month:

• Lease A includes a fixed 3% annual increase, meaning rent rises to $3,090 in year two, $3,183 in year three and so on – predictable and easy to budget for.
• Lease B ties increases to operating costs, which could rise 2% one year and 8% the next – less predictable and potentially more expensive over time.

Understanding the escalation structure helps tenants forecast long-term occupancy costs and avoid budget surprises.

Break clauses and early termination options

Break clauses define whether a tenant can exit a commercial lease early and under what conditions. Not all leases include this option, and when they do, they often come with specific requirements and costs.

What to look for:

• Required notice period (often 6-12 months).
• Financial penalties or fees.
• Conditions tied to landlord approval.

Scenario	Outcome for the tenant
Without a break clause	Pay rent for remaining lease term, even after leaving.
With a break clause	Exit early with notice and defined fee.

How to handle lease build‑outs, improvements and space modifications

Build-outs and space modifications are changes tenants make to meet operational needs. These can range from minor updates like painting or shelving to major renovations such as reconfiguring layouts, adding plumbing or upgrading electrical systems.

These modifications often impact both upfront costs and end-of-lease expenses.

Key considerations:

• Who pays for the improvements?
• What happens to those improvements over time?
• Does the space need to be restored when the lease ends?

Preparing and restoring a space can add thousands of dollars beyond base rent. A bakery may need to install ovens, ventilation systems and plumbing. At lease end, the tenant may have to remove that equipment and restore the space, adding time and expense.

Who pays for tenant improvements?

The lease defines who covers modification costs. Understanding the payment structure helps tenants budget accurately and negotiate favorable terms.

Payment structure	Description
Tenant improvement allowance	Landlord provides a set amount per square foot (e.g., $20/sq. ft.) to help cover build-out costs.
Tenant-funded	Tenant pays all improvement costs upfront.
Shared costs	Landlord covers structural changes; tenant pays for business-specific modifications.

Negotiation considerations:

• Request allowances in writing with clear scope definitions.
• Clarify whether unused allowance funds can apply to rent or other expenses.
• Determine ownership of improvements – some become landlord property immediately.

Restoration requirements at lease end

Restoration clauses define the condition tenants must return the space to when the lease ends. These requirements directly affect move-out costs and timelines.

Common restoration obligations:

• Remove all tenant-installed fixtures, equipment and modifications.
• Repair damage to walls, floors and ceilings.
• Restore the space to its original layout and condition.

Negotiation strategies:

• Request that certain improvements (like flooring or lighting) remain in place.
• Clarify which modifications require restoration versus which can stay.
• Get restoration waivers in writing before making improvements.

Subletting and assigning a commercial lease

Subletting and lease assignment determine whether a tenant can transfer all or part of a commercial lease to another party if business needs change. These provisions affect how easily a business can reduce space, relocate or exit a lease without remaining fully responsible for the original terms.

When subletting may be allowed

Subletting allows a tenant to rent part or all their space to another business, usually with landlord approval and subject to lease conditions.

Landlords may require subtenant approval, restrict lease terms or pricing, and prohibit subleasing above the original rent. Leases also define whether consent can be reasonably withheld or granted at the landlord’s discretion.

Approval timelines and potential fees can impact how quickly a tenant can secure and onboard a subtenant, so review these factors early.

Risks and responsibilities for tenants

Subletting does not remove a tenant’s lease obligations. Even if another business occupies the space, the original tenant is still responsible for meeting the terms of the lease.

Tenant responsibilities may include:

• Paying rent if the subtenant defaults.
• Covering property damage caused by the subtenant.
• Ensuring all lease terms are followed.

If issues arise, the landlord can pursue the original tenant for unpaid rent or repairs – creating risk even without direct control of the space.

To help reduce subletting and lease assignment risk, consider:

• Screening subtenants for financial stability and reliability.
• Checking business references.
• Requiring a security deposit or personal guarantee.

Insurance requirements for commercial tenants

Commercial tenants typically need insurance that protects business property, covers liability risks and meets landlord requirements outlined in the lease. These requirements address risks associated with operating in a physical space.

Commercial property insurance considerations

Commercial property insurance helps protect a tenant’s physical assets in a leased space – such as equipment, inventory and furnishings.

What to consider:

• Landlord insurance typically covers the building, not the tenant’s property.
• Coverage limits should match the value of tenant assets.
• Business interruption coverage can help replace lost income after a covered event.

If a covered event like a fire damages the property, this coverage can help reduce out-of-pocket losses.

General liability insurance requirements

General liability insurance helps a business cover the costs if someone is injured or property is damaged during operations. It’s commonly required in commercial leases to address everyday risks in physical spaces.

What to consider:

• Minimum coverage limits required by the lease.
• Whether the landlord must be named as an additional insured.
• What types of incidents the policy covers.

Even routine incidents – like a slip and fall – can lead to medical or legal costs. In fact, office slips and falls are the No. 1 cause of liability claim loss.¹ Appropriate coverage can help manage these expenses.

For small businesses, a business owner’s policy (BOP) combines general liability and property insurance into a single policy, helping simplify coverage for common risks.

Reviewing insurance clauses in a lease

Insurance clauses outline the types and levels of coverage a business owner must carry to comply with the lease.

These requirements are often specific and must be met before occupying the space.

Common requirements may include:

• Minimum coverage limits.
• Specific policy types (e.g., general liability, property).
• Naming the landlord as an additional insured.
• Providing proof of insurance before move-in.

What to consider:

• Whether existing policies meet lease requirements.
• Deadlines for providing documentation.
• Potential penalties for noncompliance.

How to prepare before signing a commercial lease

Identify risks, clarify responsibilities and gather the information needed to make an informed decision.

Key questions to ask before signing

Asking the right questions can help uncover important details and avoid unexpected costs. Start with:

• What costs are included in rent – and what are not?
• How can rent change over time?
• What happens if the business needs to leave early?
• What insurance is required under the lease?
• Who is responsible for repairs and maintenance?

Taking the next step with confidence

Before signing, consider reviewing the lease with a legal or financial professional and confirming that insurance coverage meets lease requirements. Business owners should also plan for future growth, relocation or changes in space needs.

Understanding these details ahead of time and addressing them proactively can help reduce risk throughout the life of the lease.

Talk with an agent to find small business insurance to help support businesses as they lease or expand their

Sources:
¹ Travelers Office Business Class Survey (September 2025)