Commercial lease: what it must contain, what security applies and how to protect the goodwill?

For anyone running a business, the business premises (goodwill) are part of the business: it is where customers find the shop, where the brand takes root, where foot traffic is built up over the years. And almost always those premises are in a rented property. That is why the commercial lease is not a bureaucratic detail — it is one of the company's most important documents.

A well-drafted lease protects the goodwill, balances the responsibilities and avoids surprises; a generic lease, copied off the internet, can leave the business unprotected precisely when it has grown the most. In this guide, you will see what a commercial lease must contain, what security the law allows, what term makes sense and how to protect the goodwill — with a practical example.

What must a commercial lease contain?

A non-residential lease, governed by Tenancy Act 8.245/1991 (the Tenancy Act), must set out, at a minimum:

• Parties and property: identification of the landlord and the tenant and a precise description of the property.

• Amount and adjustment: the rent and the annual adjustment index (IGP-M, IPCA or another agreed index).

• Term: preferably for a fixed period and in writing (with a decisive effect on protecting the goodwill, as we will see).

• Security: only one form (we will see which ones).

• Designated use: the activity to be carried out on the property.

• Charges and improvements: who pays property tax (IPTU) and condominium fees, and the treatment of improvements and of the return of the property.

Clauses on termination, penalties and continued effect in case of sale of the property round out a good lease. Each of these provisions prevents a future conflict — and the absence of any of them usually comes at a high cost.

What is the difference between a commercial and a residential lease?

Both are governed by the same law, but the commercial (non-residential) lease has its own rules. The most important is the right to a commercial lease renewal action: the business owner may, once the legal requirements are met, compulsorily renew the lease and protect the goodwill (business premises) they have built — something that does not exist in residential leases.

On the other hand, once the term ends and there is no right to renewal, recovering the property by the landlord tends to be simpler in commercial leases (by terminating the open-ended lease). This balance — protection of the goodwill on one side, flexibility to recover the property on the other — is what makes the design of the term and the clauses so strategic in a commercial lease.

How many forms of security can the landlord require?

Only one — and this is one of the most common mistakes. Tenancy Act 8.245/1991 (art. 37) provides for four forms of security:

• Cash deposit (caução) (in cash, movable or immovable property);

• Guarantor (fiança) (with a guarantor);

• Rent-guarantee insurance;

• Fiduciary assignment of investment-fund quotas.

The sole paragraph of art. 37 prohibits, on pain of nullity, requiring more than one form in the same lease. In other words: asking for a guarantor and a cash deposit at the same time is irregular (and art. 43 treats this as a misdemeanour). In addition, the cash deposit cannot exceed three months' rent (art. 38), and must be placed in a savings account. Knowing these rules prevents the tenant from accepting an improper requirement — and the landlord from imposing a void clause.

What is the ideal term and how do you protect the goodwill?

The term is not just a matter of convenience — it has a strategic legal effect. To be entitled to the commercial lease renewal action (which protects the goodwill), the lease must meet the requirements of art. 51 of Tenancy Act 8.245/1991:

• A lease in writing and for a fixed term;

• A minimum term of five years (continuous or by adding up successive contracts);

• Carrying out the same activity for at least three years.

For this reason, many business owners prefer five-year leases: that is what opens the door to compulsory renewal and protects the investment made in the goodwill. A verbal lease, one for an open-ended term or a very short one, can leave the goodwill unprotected — and the business at the mercy of recovery of the property at the end of the term. Pay attention, too, to the deadline to file the renewal action: between one year and six months before the end of the lease (it is a deadline that, once missed, does not come back).

Practical example: Sérgio's Bakery

Sérgio opened a bakery in a busy spot in São Paulo. In the early years, he signed short, 12-month leases, renewed informally — "it was going well, why complicate things?". The bakery prospered and became a neighbourhood landmark. When the lease expired, however, the owner, seeing the success, did not want to renew and demanded that the premises be vacated so as to rent to a competitor for a higher amount.

The problem: because the leases were short and added up to less than five years on a continuous and documented basis, Sérgio had difficulty bringing a renewal action and protecting the goodwill that he himself had built up. If, from the outset, he had entered into a written five-year lease, with the activity documented, he would have had the right to compulsorily renew and remain on the premises. The lesson: the commercial lease must be drafted with protection of the goodwill in mind from day one — not when the problem arises.

The most common (and costly) mistakes

• A short or verbal lease. Without a fixed 5-year term in writing, the goodwill is unprotected (no renewal action).

• Accepting more than one form of security. Requiring a guarantor and a cash deposit together is void (art. 37, sole paragraph).

• Forgetting the clause on continued effect in case of sale. Without it (and without recording), the buyer of the property may demand that it be vacated.

• Not setting out the adjustment and charges. Silence on the index, property tax (IPTU) and condominium fees gives rise to disputes.

• Using a generic template. Every business has its particularities; a standard lease rarely protects the goodwill adequately.

Checklist: for a good commercial lease

• Set a fixed term (ideally 5 years) and in writing, with an eye on the renewal action.

• Stipulate only one form of security (art. 37) and respect the limit on the cash deposit (3 months).

• Set the amount, the adjustment index and the charges (property tax (IPTU), condominium fees).

• Define the designated use (activity) and the treatment of improvements and return.

• Include a clause on continued effect in case of sale and record the lease on the title record.

• Review the lease with a business law lawyer before signing.

Frequently asked questions about commercial leases

What must a commercial lease contain?

The essential elements are: the identification of the parties and of the property; the rent amount and the annual adjustment index; the term (preferably for a fixed period and in writing); the security (only one, among a cash deposit (caução), a guarantor (fiança), rent-guarantee insurance or fiduciary assignment); the designated use (the activity to be carried out); and the responsibilities for charges (property tax (IPTU), condominium fees), improvements and return. Clauses on termination, penalties and continued effect if the property is sold are also important. All of this is governed by Tenancy Act 8.245/1991.

What is the difference between a commercial and a residential lease?

Both are governed by the Tenancy Act (Law 8.245/1991), but the commercial (non-residential) lease has its own rules — in particular, the right to a commercial lease renewal action, which allows the business owner to compulsorily renew the lease and protect the goodwill, provided the requirements of art. 51 are met. On the other hand, once the term ends, terminating the lease to recover the property tends to be simpler in commercial leases. For this reason, the commercial lease must be drafted with attention to the term and to protecting the goodwill.

How many forms of security can the landlord require in the lease?

Only one. Tenancy Act 8.245/1991 (art. 37) provides for four forms of security — a cash deposit (caução), a guarantor (fiança), rent-guarantee insurance and fiduciary assignment of investment-fund quotas — but the sole paragraph prohibits, on pain of nullity, requiring more than one form in the same lease. Requiring, for example, a guarantor and a cash deposit at the same time is irregular. A cash deposit, moreover, cannot exceed the equivalent of three months' rent (art. 38).

What is the ideal term for a commercial lease?

It depends on the business, but the term has an important legal effect: to be entitled to the commercial lease renewal action — which protects the goodwill —, the lease must be in writing, for a fixed term, with a minimum term of five years (continuous or by adding up contracts), in addition to carrying out the same activity for at least three years (art. 51 of Tenancy Act 8.245/1991). For this reason, many business owners prefer five-year leases. A short term can leave the goodwill unprotected.

Do I need to register the commercial lease at a registry office in São Paulo?

Registration is not required for the lease to be valid between the parties, but it is highly advisable to record the lease on the property's title record when there is a clause on continued effect in case of sale — that way, if the property is sold, the new owner is required to respect the lease until the end of the term (art. 8 of Tenancy Act 8.245/1991). In São Paulo, this recording is done at the real estate registry office for the location of the property. Without it, the buyer may demand that the property be vacated.

When should I seek a lawyer for a commercial lease?

Ideally before signing — both the landlord and the tenant benefit. For the business-owner tenant, a good lease protects the goodwill (making the future renewal action viable), avoids improper security and balances the responsibilities. For the landlord, it ensures payment security and clear rules for recovering the property. Because the commercial lease usually involves significant amounts and terms, and the goodwill may be worth a great deal, it is worth drafting it with a lawyer rather than using a generic template.

A good lease protects what you have built

The commercial lease is the document that protects — or fails to protect — the premises where your business has grown. Drafting it with attention to the term, the security and protection of the goodwill is what gives security to both the business-owner tenant and the landlord, preventing years of investment from being left at the mercy of a last-minute negotiation.

The golden rule is to think about the long term from the start: the five-year written term, the correct security, the continued-effect clause. These are simple provisions that, at the right moment, make all the difference — above all when it comes to bringing the renewal action and keeping the premises.

At Falchet e Marques Sociedade de Advogados, a firm in São Paulo (Av. Paulista), we work on commercial leases and business law — drafting and reviewing contracts for landlords and tenants, with a focus on protecting the goodwill and balancing the obligations. If you are going to rent (or rent out) a commercial property, it is worth drawing up the lease with proper support.

Talk to our team on WhatsApp: +55 11 95901-1854 — and protect your premises with a well-drafted lease.