A commercial lease is a type of contract that is used for when a commercial tenant rents space from a landlord. Similar to all leases, a commercial lease gives a commercial tenant the right to occupy the space and conduct business activities for a certain amount of time in exchange for making monthly rent payments to the landlord. The lease also serves as a guide for both parties regarding their legal rights and responsibilities.
For instance, a commercial tenant will form a commercial lease with a landlord when they rent business property, such as office space, a restaurant, or a retail store located in a mall. Depending on the type of commercial lease the parties enter into, it will provide instructions like which party is responsible for making repairs, who is liable for paying real property taxes on the space, and so forth.
The terms and conditions of a commercial lease are governed by a specific area of real estate law known as, “commercial lease law.” Commercial lease law dictates the rights and duties of both parties, as well tells them what needs to be included in the final commercial lease agreement. Commercial lease law is a fairly complex field of law, so you may want to consult a local real estate lawyer before you sign any commercial leases.
How are Commercial Leases Different From Residential Leases?
Although there are many differences between a commercial lease agreement and a residential lease agreement, the most glaring dissimilarity between the two is the nature of the property being rented. For instance, the terms of a commercial lease agreement are intentionally focused on the requirements of operating and maintaining a business on the premises.
In contrast, a residential lease is specifically drafted to ensure that a tenant will live in habitable conditions and can enjoy their personal time and space while living on that particular property. In other words, residential lease terms are created for the purposes of dwelling, whereas commercial lease terms are geared towards the goal of running a successful business on the property.
While both types of leases do have some elements in common, such as the covenant to pay rent, commercial leases afford less rights to business tenants and are much more complex. Some other differences between the two include the following:
- Commercial leases tend to have longer rental periods than residential leases. For example, residential leases are usually created for one-year or less, whereas commercial leases are typically entered into for several years. This is so that the business does not have to interrupt its operations and move to a new location every year.
- As mentioned, business tenants have less rights than residential tenants. This is because the law considers businesses to be savvier than general residents. Thus, commercial leases offer a lot more flexibility and opportunities for negotiations.
- For example, conditions, such as rent payment amounts, security deposit amounts, the length of the lease, accessibility, etc., can all be negotiated. Residential leases, on the other hand, typically use boilerplate language.
- Also, since residential tenants enjoy many more rights and protections under the law than commercial tenants do, it is a lot easier to evict a commercial tenant.
- Finally, it is much harder to break or amend the terms of a commercial lease in comparison to a residential one. Commercial leases also tend to involve higher rental installments.
What are the Basics of a Commercial Lease?
The basics of a commercial lease will vary by jurisdiction, the type of commercial lease used in the transaction, and the specific terms agreed to by the parties. However, because of commercial lease laws, there are some basic elements that every commercial lease agreement must contain. These include:
- A covenant to pay rent: A commercial lease should state how much rent is, when the rent is due, and whether the business tenant will be subject to rent increases. In the event there are rent increases, the tenant may want to negotiate a limit on the percentage of them.
- The duration of the lease: The duration of the lease, or the lease term, must be included in the lease. This provision should say when the lease begins, when it ends, and whether there are options to renew the lease.
- The security deposit amount: How much the tenant has to put down for a security deposit, the date of return, and any conditions that need to occur before the tenant gets their security deposit back.
- The property: Both the type of property being rented and the address of the property being rented should be included in the terms of the lease.
Some other items that a commercial lease may identify include which party is responsible for repairs and/or maintenance (e.g., tenant versus landlord), whether or not the tenant is allowed to assign or sublet the rental property, and/or whether the landlord or tenant will be liable for things like property taxes and insurance.
What Should the Lease Say About the Commercial Property?
As discussed above, all commercial properties must describe and identify the commercial property in question. This means that the lease must contain a clear description of the rental property, the address of the property, the dimension or size of the property, and any other items that would make it obvious (e.g., in the event of a dispute) what property the parties are discussing.
The lease should also specify what method the landlord uses to measure the area, what types of rooms are included on the property (e.g., bathroom, kitchen, etc.), whether a parking lot is attached, and so forth.
In addition, the parties may want to include information about improvements, modifications, and/or fixtures on the property, such as whether they are allowed, who owns them after the tenant moves or the lease expires, and how one can go about making them (e.g., is the landlord or tenant responsible for costs).
Does the Commercial Lease Plan For the Future?
Whether a commercial lease plans for the future or not will depend on the terms negotiated in the lease. For instance, there may be provisions that address how a commercial property may be used in the future. Some future provisions that a commercial lease may contain include:
- The option to sublet: Whether the commercial property can be sublet or assigned to another business should be addressed in the commercial agreement. This optional term is usually referred to as “assigning the commercial lease.”
- Lease termination: If a business tenant chooses to end their lease early, the parties should discuss how this can be done and whether there are any penalties for doing so.
- Non-compete clauses: Such clauses forbid a commercial landlord from renting space either within the same building or near the rental property to potential competitors of the business.
- Dispute resolution: A commercial lease should also discuss what happens when there is a dispute over the lease agreement. For example, do the parties have to attend court to resolve their issues, or can they mediate or arbitrate the matter?
What Happens When a Business is Unable to Pay Rent?
If a business tenant is unable to pay rent, then they should first try to speak to their landlord about renegotiating the amount of rental payments. Some landlords may agree to decrease the rent for a certain period of time until the business is able to pay the amount agreed to in the commercial lease. If the parties do not have a good relationship or a landlord refuses to decrease the amount of rent, then the landlord may evict the business tenant.
It should be noted that each state has its own laws regarding commercial lease termination notices and the general procedures that a landlord must follow to evict a commercial tenant. Thus, it is important for both parties to review the requirements of a commercial eviction that are provided in the laws of their particular state.
In the event of an eviction, a commercial tenant should also review the laws of their jurisdiction and their lease agreement to find out whether there are any defenses that they might be able to raise. Some standard defenses that commercial tenants may be able to raise against an eviction include:
- Lack of proper notice;
- Retaliatory eviction;
- Landlord breach;
- Improper eviction; and/or
- Landlord discrimination.
How Much Do Lawyers Charge to Review a Commercial Lease?
There are two main factors in particular that will typically affect how much a lawyer costs. The first is the complexity involved in the commercial lease agreement. The second is what type of fee structure the attorney employs (e.g., does the attorney charge by the hour, or do they use a flat fee arrangement?).
For example, the attorney fees for commercial lease review will be much lower for a simple commercial agreement that does not involve a lot of negotiating between the parties. Attorney fees to review a lease also tend to be lower when an attorney uses a flat fee as opposed to an hourly one.
Some other factors that could increase the cost to review a lease agreement include how much experience an attorney has, the jurisdiction of where the lawyer practices, and whether any legal disputes arise over the lease agreement or during the negotiation process.
Do I Need a Lawyer for Assistance with Commercial Lease Issues?
Commercial lease issues are governed by a very specific and complex area of real estate law. Oftentimes, such issues require the assistance of a lawyer. This is especially true when it is a commercial tenant who needs help because commercial tenants receive almost no legal rights or protections.
Thus, if you have any questions or concerns regarding commercial leases or are involved in a dispute over a commercial lease, then it may be in your best interest to contact a local real estate lawyer for further guidance.
An experienced real estate lawyer can inform of your rights and obligations under the terms of the commercial lease. Your lawyer can also determine whether any conditions of the lease will work in your favor. In addition, if you are in a dispute with your commercial landlord, your lawyer can represent you during negotiations or in court.
Alternatively, if you need assistance with a commercial lease, a real estate lawyer will also be able to help you draft, edit, and review the terms of your lease, as well as can make sure that its terms are best suited to the needs of your business.
