Glossary of Commercial Leasing Terms

By Ziva Law

Learn the language of commercial leasing

Welcome to Ziva Law’s Glossary of Commercial Leasing Terms. Here, you can browse our online glossary of commercial leasing terms to help you learn the language of commercial leasing so you can better understand your lease.

A


Additional Rent

Charges to a tenant not included in the base rent, such as after-hours services, common area maintenance (CAM) fees, etc.

Agent

A person authorized to act for or in place of another. In commercial leasing, a real estate agent represents a landlord or tenant in the lease of real property. A real estate agent can be a broker or a salesperson. A licensed attorney can also serve as an agent.

Alterations

A substantial change to real estate, especially to the premises and usually not involving an addition to or removal of the exterior of the building’s structure.

Anchor Tenant

A large retail tenant that draws traffic to the shopping center or project.

Arbitration

A non-judicial dispute resolution process that involves a hearing and determination of a disputed issue by one or more neutral third parties whose decision is binding.

Assessments

The imposition of a tax, fine or other amount levied against a property, commonly by the government

Assignment

A transfer of an interest in real property. With commercial lease assignments, it is the transfer of the leasehold interest.

B


Base Rent

Minimum rent due under a lease. Additional rent may be required.

Base Year

Usually the first year of a lease to which future operating expenses are compared for the purpose of calculating expense increases.

Build-Out

Work required to make the premises ready to operate and open for business.

Building Class

Office buildings are usually classified into Class A, Class B, or Class C, although there is no definitive formula. Standards vary by market to describe the overall quality of the building. Generally, Class A represents the newest and highest quality buildings in their market, with convenient locations and are professionally managed. Class B are a little older, but still have good management and tenants. Class C is the lowest classification. These buildings are usually older, located in less desirable areas, and may need renovation.

C


Certificate of Occupancy

A legal notice indicating that a building complies with zoning and building ordinances. It is sometimes used to set the commencement date for rent or occupancy in a lease.

Common Area

Areas of the project available for use by all tenants on a non-exclusive basis, such as hallways, lobby areas, parking lots, etc.

Common Area Maintenance (CAM)

The CAM expense is an amount charged on top of base rent as additional rent and mainly includes maintenance fees for work performed to maintain the common areas of the project.

Common Area Maintenance Cap

The maximum amount the tenant pays for its share of Common Area Maintenance expenses.

Condemnation

The taking of private property by a public agency through the right of eminent domain for a public purpose upon the payment of just compensation by the government agency to the property owner.

Consideration

Anything of value given or promised by one party to induce another to enter into a contract. Consideration can come in the form of money, personal property, or a promise to do or not do something.

D


Demised Premises

The term “demise” means to transfer or convey. In the commercial leasing context, the landlord conveys the premises to the tenant, thereby creating a leasehold estate, or the demised premises.

Doing Business As (“DBA”)

A name used by a business in its operations that differs from the registered legal name of the business.

Due Diligence

The process of examining and investigating a property by or for the potential tenant, lender or purchaser. Failure to exercise due diligence may sometimes result in unanticipated costs or liabilities.

E


Exclusivity

A commercial lease provision that prohibits the landlord from leasing space to others that would engage in the same line of business as the tenant.

Execution

In the context of commercial leasing, “execution” is sometimes used to refer to the act of signing a legal document (e.g., “execution of the lease agreement”). Also, the act or process of performing any duties or obligations under a signed lease.

Expense Stop

The maximum amount a landlord will pay for certain operating expenses.

F


Fair Market Value

The price a buyer is willing to pay, and a seller is willing to accept in the open market in an unrelated, arms-length transaction. In the commercial leasing context, the term is sometimes used in connection with describing the method for determining the value of rent (i.e., fair market rent).

Floor Plan

A drawing that shows the design of a building or room from above.

G


Gross Lease

A type of rent structure under which the tenant pays rent that is all-inclusive. The landlord covers all other occupancy expenses such as utilities, taxes, insurance, and maintenance.

Guaranty

An assurance by one party that another party will perform under a contract.

H


Hazardous Waste (also “Hazardous Material” or “Hazardous Substance”)

Dangerous substances that because of its physical or chemical composition, quantity, or concentration may cause harm to human health or the environment.

Heating, Ventilation, and Air Conditioning (HVAC)

The system that is used to provide heating and cooling services to buildings.

Holding Over

When a tenant continues occupying premises after the expiration of the original lease term.

I


Indemnity (also Indemnification)

The right of an injured party to claim reimbursement for its loss, damage or liability from a person has a legal obligation to indemnify them. Commercial leases often contain indemnity clauses to allocate risk between landlord and tenant.

K


Kick-Out Clause

A lease clause that allows a tenant or landlord to cancel the lease after a certain time has passed, or certain conditions have or have not been met.

L


Landlord

A person or entity that owns real property and leases it to a tenant.

Lease

A legally binding contract under which an owner of real property grants to another the right to use the real property in exchange for rent or other consideration. The lease also contains the terms governing the agreement to lease the real property.

Leasehold Estate

Ownership by a tenant of a temporary right to occupy and use a property for the duration of a lease in exchange for rent.

Lessee

Another term for a tenant.

Lessor

Another term for a landlord.

Letter of Credit

A letter issued by a bank to another bank to serve as a guaranty for payments made to a specified person or entity under specified conditions.

Letter of Intent (LOI)

In the commercial leasing context, a document outlining certain agreements between parties (usually the business terms of the deal) before the agreements are finalized in a formal, comprehensive lease agreement.

Lien

A monetary encumbrance on a specific property (real or personal) making the property security for the satisfaction of a debt, or the performance of an obligation.

Liquidated Damages

A clause in a contract which stipulates a set dollar amount of damages or a calculation for determining such damages, to be collected by one party upon a breach of contract by the other party.

Load Factor

Usually found in an office building lease, load factor means the percentage of non-rentable space (e.g., lobby, restrooms, corridors, etc.) charged pro-rata to each tenant on the basis of square footage rented.

M


Mechanic’s Lien

A statutory lien that secures payment for labor or materials supplied in repairing or improving real property. Related terms: “construction lien” (for labor) and “materialmen’s lien” (for materials).

Mediation

A non-judicial dispute resolution process where a neutral third party assists disputing parties in reaching a mutually agreeable solution.

Merchant’s Association

In retail or shopping centers, an association of merchant-tenants formed by the developer or owner, to finance the promotion of the center as a whole.

Minimum Rent (also referred to as “Base Rent”)

In the commercial lease context, the base, fixed rent applicable for a certain period. Can be subject to adjustment periodically, based on negotiated terms.

Mortgage

A legal instrument that makes specific real property security for the payment of a loan, or the performance of an obligation.

Multi-Tenant

A property occupied by, or leased to, more than one tenant.

N


Net Lease

A lease in which the tenant is responsible for direct payment of property expenses such as taxes, insurance, and maintenance costs in addition to rent.

Non-Competition Clause

A clause either prohibiting a landlord from leasing space to another tenant engaged in the same or similar business as the tenant signing the lease or prohibiting a tenant from operating competitive locations within a specified geographic area or distance from the demised premises.

O


Occupancy Cost

The total cost of leasing space, including minimum rent, percentage rent, taxes, insurance, maintenance, parking fees, advertising fees, merchant association fees, and any other charges assessed on a periodic basis.

Option

A right given in exchange for consideration (i.e., something of value) by a landlord to a tenant to buy or lease property under specific terms and conditions for a specific period, without obligating the tenant to exercise that right.

Ordinances

Laws passed by local governments (either cities or counties).

P


Partial Taking

The condemnation of only a portion of an entire property by a government agency for public use and just compensation. For example, condemnation of a strip of land abutting a parking lot for road widening purposes.

Percentage Rent

Typically, in retail leases, the rent charged to a tenant based a percentage of gross sales.

Permitted Uses

Uses of a specified property that complies with local zoning ordinances.

Possession

In the commercial leasing context, giving or taking of occupancy of the premises. This can occur before, at the same time, or after the commencement date of the lease or the commencement of rent.

Premises

The actual space in a building leased to a tenant for its exclusive use.

Prime Lease (also referred to as “Master Lease”)

Arises in subleasing situations and refers to the original lease of the subject premises to distinguish it from the sublease.

Pro-rata Share

The proportion of costs allocated to a tenant in a multi-tenant property. The Pro-rata Share is typically used to allocate taxes, insurance, and common area maintenance expenses and is usually equal to the percentage that a tenant’s rentable square footage bears to the total rentable square footage of the property.

Property

Land, and any improvements constructed on it, are considered “real” property. Everything else is considered “personal” property.

Q


Quiet Enjoyment

The right of a property owner, or a tenant, to use the property without interference from another party, so long as they comply with all the terms and conditions of their agreement.

R


Recapture

In the commercial leasing context, the right of a landlord to take back space from a tenant who does not meet performance standards specified in the lease for sales volume, rent, or other reasons.

Recordation

Filing or recording a legal document with the appropriate recording office to make it of public record, which is said to give notice to interested parties of the existence of an encumbrance affecting the subject property.

Relocation

In a commercial lease, the negotiated right of the landlord to move a tenant from one location to another within a building or project.

Rent

Consideration paid for the use and occupancy of property.

Rent Abatement

A release of tenant’s obligation to pay rent for a period under certain specified situations such as a casualty event or act of God.

Rent Concession

A period of free rent given to the tenant by the landlord.

Rentable Area

The square footage of the property for which the landlord charges rent. Compare with “Usable Area.”

Right of First Refusal

In the commercial leasing context, the negotiated right of a tenant to match any bona fide offer received by a landlord to lease the demised or other premises; or, if negotiated, the right to match an offer to purchase the property.

Rules and Regulations

Often an exhibit to a lease or a document incorporated by reference in the lease describing important operational aspects of the building or complex, such as hours of operation, noise control, parking regulations, delivery procedures, trash removal, etc.

S


Short-Form Lease (also referred to as “Memorandum of Lease”)

A short document prepared to be recorded in a public registry, which memorializes the existence of an unrecorded lease. Commonly contains party names, addresses, commencement date, and the expiration of the lease term.

Single-Tenant

A property leased to only one tenant.

Square Feet

The unit of measurement used to calculate the floor area of a space. For example, if a space is 50 feet wide and 70 feet deep, it would have an area of 3,500 square feet (50 ft x 70 ft = 3,500 sf).

Structural Elements

The parts of a building constituting its “shell,” including the foundation, floor, walls, roof structure, and roof, sewer lines, water mains, and utility systems from the street to the building.

Sublease

A lease where the original tenant sublets all or a portion of the leasehold interest to another tenant (referred to as the “subtenant”) while still retaining a leasehold interest in the property. This arrangement is sometimes loosely referred to as a “sandwich lease” because the original tenant is sandwiched between the landlord and the subtenant.

Subordination

The act of moving something, such as a right or a claim, to a lower position of priority. Example: We are subordinating the first mortgage lien to a second mortgage lien.

Subrogation

The substitution of one party for another concerning a right or claim. In the commercial leasing context, this term arises in insurance clauses in reference to the concept under which an insurer pays a loss under an insurance policy and is entitled to all the rights and remedies of the insured against a third party concerning any covered loss.

T


Tenant

A person or entity that occupies and holds the right to possess real property owned by another.

Tenant Improvement Allowance

An amount, negotiated in a lease, that a landlord is willing to give to a tenant to make improvements to the premises. Landlords typically recover the Tenant Improvement Allowance from the tenant through the rent over the lease term.

Tenant Improvements

Modifications to the leased property to accommodate the specific needs of the tenant, such as interior walls, flooring, light fixtures, doors, window treatments, etc. Can be inside or outside of the premises and can be paid for by the tenant, landlord, or both. The costs of these are typically negotiated in the lease.

Term

The length of time during which the lease is in effect.

Termination

Ending or canceling a lease for any reason.

Trade Fixtures

Personal property items that are affixed to real property by a tenant, which are needed to conduct its business, and are removable by the tenant at the end of the lease.

Triple Net Lease

When a tenant pays rent plus all property expenses (e.g., property taxes, insurance, and maintenance), leaving the landlord with an amount “net” of such property expense costs.

U


UCC-1

Uniform Commercial Code, Form 1. This is a standardized form financing statement document that is recorded to provide notice of personal property pledged as security.

Usable Area

The actual square footage available for tenant’s use. Compare with “Rentable Area.”

Use Permit

A permit obtained from the planning department of the city or county in which the property is located, which allows an owner or tenant to use a property for a purpose not permitted under the zoning ordinance. Generally issued for a relatively shorter period of time with periodic renewal.

V


Valuation

The process of determining the value or estimated value of something.

Variance

A more permanent exemption from the zoning ordinance for a specific feature that is obtained from the planning department of the city or county in which the property is located (e.g., a height limitation variance, a parking variance, etc.).

W


Waiver

Giving up or relinquishing the privilege to enforce a right.

Z


Zoning

The mechanism for local governments to regulate the use of privately-owned real property. Land use classifications determine whether a property is commercial, residential, industrial, or agricultural, and can be very specific as to the property’s use.