Commercial Lease Negotiation for Texas Tenants: What to Fight For
Updated: 4 hours ago
By Trenton Roberts and Natalie Voels
Circular 230 / general information notice. This article is general information only. It is not tax, legal, or accounting advice. Reading it does not create an attorney-client relationship. Tax results depend on your facts and on law that can change. Consult your own attorney and CPA before taking any action. This article was not written to be used, and cannot be used, to avoid tax penalties.
Commercial lease negotiation for Texas tenants starts with more than base rent. A commercial lease is one of the most expensive long-term contracts a growing business signs. Operating expenses, maintenance, assignment rights, restoration obligations, and default remedies often matter more over a five- or ten-year term. We read landlord forms from the tenant side, which makes us less impressed by "standard landlord form" as an answer. Tax timing on rent, tenant improvement allowances, and leasehold improvements can change the real cost of a deal that looks identical on a rent schedule.
Start commercial lease negotiation with use, term, and occupancy
Before markup, confirm:
Permitted use language broad enough for what you actually do (and may do in two years)
Initial term and renewal options (who holds the option, notice windows, how renewal rent is set)
Delivery date, landlord work, tenant improvement allowance, and what "delivery" means
Early access for fixturing
Certificate of occupancy and permit risk allocation
Red flag: permitted use so narrow that a minor service-line change needs landlord consent, with consent "in landlord's sole discretion."
Rent, operating expenses, and audit rights
Base rent is visible. Triple-net or modified gross structures shift taxes, insurance, and common area maintenance to the tenant. We read:
What is included in operating expenses
Cap on controllable expenses, if any
Base year mechanics for gross-up leases
Capital expenditure pass-throughs (roof, HVAC replacement) and amortization
Audit rights with a cost-shift if the landlord overcharged beyond a threshold
Sample tenant push: controllable operating expenses capped at a fixed annual percentage increase, with uncapped taxes and insurance called out separately; audit right once per year with landlord paying tenant's audit cost if overcharge exceeds 3% to 5%.
A worked occupancy-cost model matters as much as the legal markup. Suppose base rent is $8,000 per month and estimated operating expenses are $4.50 per square foot on 3,000 square feet ($13,500 a year). If controllable expenses rise 8% a year with no cap, year-five charges are far above year one. A 4% cap does not freeze taxes or insurance, but it keeps the variable piece from running away. Ask for the last two or three years of expense reconciliations before you sign.
Section 467 and uneven or deferred rent
Section 467 of the Internal Revenue Code can change when a tenant deducts rent and when a landlord includes it. It applies to a rental agreement for the use of tangible property if total consideration exceeds $250,000 and either rent increases during the term or an amount allocable to a calendar year is payable after the close of the following calendar year. Decreasing rent is covered by comparable rules. A five-year lease at $4,000 per month totals $240,000 and stays under the threshold. The same term at $5,000 per month totals $300,000. If year one is $3,000 per month and years two through five are $5,500, the agreement has increasing rent above $250,000 and is a section 467 rental agreement.
Most ordinary commercial leases that allocate rent in the agreement still accrue rent under that allocation. Deferred unpaid amounts can also produce interest computed at 110% of the applicable Federal rate in effect when the agreement is entered into. Constant rental accrual, which flattens the schedule to a present-value constant amount, applies only to a disqualified leaseback or long-term agreement (a term longer than 75% of the property's statutory recovery period) where a principal purpose of the uneven rent is tax avoidance, and only if the Commissioner determines that constant rental accrual should apply.
Treas. Reg. § 1.467-3 provides an uneven-rent safe harbor. Allocated rent for each calendar year must stay within 10% of the average annual rent, or within 15% if the agreement is a long-term agreement and at least 90% of the property, by fair market value, is real property. A short, commercially reasonable rent holiday can be disregarded in that test if it meets the regulation's limits, including a period of three months or less at the beginning of the term, or, in some real-property cases, a holiday that does not exceed the lesser of 24 months or 10% of the term. Annual bumps that stay inside the band are easier to defend than a steep back-loaded ramp written without an allocation clause and without tax-advisor review.
Tenant improvement allowances and section 110
The lease should say how much the allowance is, when it is funded, what work it may cover, what happens if costs run short or long, and whether unused amounts become a rent credit or stay with the landlord. Conditions precedent should be listed so funding cannot be withheld for unstated reasons. Clawback language if the tenant defaults early should be limited and amortized, not a full recapture in month eleven.
Tax treatment of the allowance is a separate question. Section 110 can exclude a lessor-paid construction allowance, or an equivalent rent reduction, from the lessee's gross income, but only if several statutory tests are met. The lease must be a short-term lease of retail space, meaning a term of 15 years or less determined under section 168(i)(3). The allowance must be for constructing or improving qualified long-term real property for use in the lessee's trade or business at that space, and the lease should say so expressly. The property must be nonresidential real property present at the retail space that reverts to the lessor at the end of the lease. The exclusion cannot exceed what the lessee actually spends on that qualified property. "Retail space" under section 110 means real property used in a trade or business of selling tangible personal property or services to the general public. That is broader than a conventional storefront, but an office lease, a warehouse, or a term above 15 years does not get there on hope.
A numerical example shows the gap. A landlord funds an $80,000 allowance. The tenant spends $65,000 on interior real-property work that will revert to the landlord and $20,000 on trade fixtures that will not. Even if the other section 110 tests are met, only $65,000 can be excluded. The remaining $15,000 of the allowance is not excluded by section 110 and is generally income. If the tests are not met at all, the full allowance can be income, with a corresponding basis in whatever property the tenant is treated as owning. When section 110 does apply, the statute treats the qualified property as the lessor's nonresidential real property, so the tenant does not depreciate that work.
Leasehold improvements, QIP, and bonus depreciation after OBBBA
Improvements the tenant is treated as owning are depreciated by the tenant. Qualified improvement property under section 168(e)(6) is, in general, an improvement to an interior portion of a nonresidential building, placed in service after the building was first placed in service. It does not include an enlargement of the building, an elevator or escalator, or the internal structural framework. QIP is 15-year property. Under the One Big Beautiful Bill Act, Public Law 119-21, signed July 4, 2025, and IRS Notice 2026-11 (IR-2026-06, January 14, 2026), eligible qualified property acquired after January 19, 2025, is generally eligible for a permanent 100% additional first-year depreciation deduction, subject to the usual qualified-property rules and any election out. A tenant that spends $100,000 of its own funds on interior lighting, flooring, and non-enlarging buildout that meets the QIP definition, and that acquires that property after January 19, 2025, may be able to deduct the cost in the year the property is placed in service rather than spreading it over 15 years. If the same work is treated as the landlord's property under section 110, the tenant has no depreciation in that work.
Coordinate the lease language, the construction contract, and the depreciation decision with your CPA before the allowance is funded. Ownership, reversion, and the date of acquisition are facts, not after-the-fact labels.
Maintenance, HVAC, and who fixes what
Leases bury maintenance obligations. HVAC alone can destroy a year's rent budget if a full replacement lands on the tenant in year two. Negotiate: landlord responsibility for structural elements, roof, and major HVAC replacement; tenant responsibility for routine maintenance; clarity on age of HVAC at delivery; and service-contract requirements that match reality.
Assignment, subletting, and change of control
Growing companies get acquired, raise capital, or reorganize. Assignment clauses that treat any equity transfer as a default create M&A friction. We push for:
Consent not to be unreasonably withheld for assignments to affiliates or purchasers of substantially all assets or equity
Carve-outs for internal reorganizations
Clear rules on whether the original tenant remains liable after assignment
Recapture rights stated expressly if the landlord insists on them
Alterations, signage, and restoration
Tenant improvement work needs approval mechanics with timelines (landlord deemed approval if silent after a stated number of days is a useful push). Signage rights should match branding needs. Restoration obligations at surrender should exclude ordinary wear and tear and, where negotiated, exclude landlord-required or landlord-approved improvements the landlord wants to keep.
Red flag: restore to "broom clean original condition" with no carve-out for approved alterations, plus landlord keep fixtures without credit.
Default, remedies, and security deposit
Cure periods for monetary and non-monetary defaults should be explicit. Landlord remedies (lockout, acceleration, reletting) should be read against Texas landlord-tenant practice and the specific lease. Security deposits and letters of credit need return mechanics and conditions.
Insurance and indemnity
Confirm required liability limits are available and affordable. Mutual waiver of subrogation is common and useful when paired with proper property insurance. Indemnity should not make the tenant responsible for landlord's negligence in areas the landlord controls.
Exclusive use and co-tenancy (retail and experience-based spaces)
Retail and experience-based tenants sometimes need exclusive-use protection so the landlord cannot lease next door to a direct competitor. Landlords resist broad exclusives. Narrow them to a defined primary use and carve out incidental sales. Co-tenancy clauses (rent relief if an anchor goes dark) are harder to win in small deals but worth asking about when the center's traffic depends on named tenants.
SNDA and landlord financing
If the landlord has a lender, the tenant may be asked to sign a subordination, non-disturbance, and attornment agreement (SNDA). Non-disturbance is the piece tenants care about: if the landlord defaults to its lender, the tenant wants the right to stay as long as the tenant is not in default. Do not sign a pure subordination without non-disturbance unless you accept that risk consciously.
Personal guaranties on small-business leases
Landlords often demand owner guaranties for early-stage tenants. Guaranties can be limited by amount, time (burn-off after a stated number of months of clean payment history), or a "good guy" structure tied to surrender of the premises. Unlimited open-ended guaranties deserve pushback. Model guaranty exposure the same way you model rent.
Parking, delivery delays, and rent commencement
For destination businesses, parking and operating-hour rules are not footnotes. Confirm reserved spaces if promised in the letter of intent, after-hours HVAC charges, and rules that would block evening or weekend use. A use right that looks fine in the granting clause can be gutted by building rules in an exhibit nobody read. Tenant improvement projects also slip. The lease should say when rent starts if landlord work is late, whether the term extends, and what remedies exist for prolonged delay, including a termination right after a stated number of days or per-diem credits. Without that, tenants pay for space they cannot use. Calendar renewal-option notice dates the day you sign, and keep the letter-of-intent points you won in the final lease.
How we can help
We review and negotiate commercial leases for tenants, with an eye toward operating cost, assignment flexibility, and exit. Office: 1921 Greenville Avenue, Suite 200, Dallas, TX 75206.
Assignment and change of control provisions deserve a closer look in a sale or equity deal. We cover those clauses in lease assignment and change of control in M&A.
FAQ
Is a letter of intent for a lease binding?
Often it is non-binding on most business terms but can include binding pieces such as exclusivity or confidentiality. Read it. Do not assume "LOI" means nothing is binding.
Next step
Questions about how this applies to your company? Email info@robertsandwillie.com or call (469) 910-4017. Sending a message does not create an attorney-client relationship.
Disclaimer. This article is for general information only and is not tax, legal, or accounting advice. It does not create an attorney-client relationship. Tax law changes and depends on your specific facts. Do not act on this article without consulting your own attorney and CPA. This article is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or other applicable law. Attorney Advertising. Roberts & Willie, PLLC, Dallas, Texas; Trenton Roberts, responsible attorney.
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