How Do Commercial Leases Differ From Residential Leases?

If you are starting a business and leasing a commercial property, you should understand that renting commercial space is a big responsibility. The terms of your lease could mean the difference between the success or the failure of your business. Most people have a vague understanding of a residential lease, but do you understand the differences within a commercial lease?

November 11, 2021

Before you approach a landlord, you should understand how commercial leases differ from the more common residential variety. Commercial leases usually apply to commercially zoned properties and contain more details about how the property can be used. While residential leases are intended to provide property rights for daily living, commercial leasing is intended for business use and usually outlines the specific business types that may be conducted. Commercial leases also contain fewer protections for the tenant and must be negotiated carefully.Before you sign anything, make sure you fully understand and agree with the basic terms of the
lease. These terms will likely include such things as the amount of rent, the length of the lease and the configuration of the physical space.

About the Lease

When it comes to lease terms, commercial leases actually differ greatly from their residential counterparts. There are a wider variety of lease types that cover everything from profit contingencies to variations in lease terms. Tenants in residential properties can rely on the landlord to take care of maintenance and repairs while commercial property tenants tend to pay for their own, either as a monthly addition to rent or by contracting out the services themselves.

Commercial tenants are typically businesses with their own clients and will want more control over the day-to-day appearance and upkeep of the property to ensure proper branding is a priority.

Key Differences Between Commercial and Residential Leases

You may have signed a residential lease in the past, but a commercial lease is very different.

Below are some of the key differences you should know about to make an informed rental decision.

Intended Use (Warranty of Habitability)

When renting a residential property, there is an implied warranty of habitability. This warranty guarantees that tenants will be provided with a reasonably clean, safe and comfortable place to live. Commercial leasing, however, is not set up to accommodate this type of use. Even if a commercial location comes equipped with a kitchen and a place where someone might sleep, this is not the primary use of property leased for commercial use. In fact, some commercial lease contracts will specifically prohibit its use for this purpose.

Length of the Contract

Residential lease contracts tend to be for one year, followed by the option to continue the lease on a month-to-month basis. Commercial leases are generally for longer, typically a minimum of 3-5 years. A commercial lease is a legally binding contract, and cannot be easily broken or changed. A significant amount of money is usually at stake to ensure the contract remains intact.

Fewer Consumer Protection Laws

Tenants who enter into a residential lease enjoy several legal protections that commercial tenants do not. Perhaps the assumption is that commercial tenants have more resources and experience with negotiations so both parties in a commercial lease contract are entering the deal on equal footing. In addition, residential tenants are relying on shelter as a basic human need, so more protection needs to be in place.

Whatever the reason, commercial leases are not subject to most consumer protection laws that govern residential leases. For example, there is no limit on security deposits or rules protecting a tenant's privacy. Residential tenants usually are better protected from eviction and rent increases than commercial lessees.

Since the commercial lease is usually written by the landlord or his legal team, it most often favors the landlord. Be aware of clauses or covenants that address:

- Restrictive clauses that dictate business hours and how the property can be used
- Responsibility for repairs and maintenance, including repairs due to natural disasters and building age
- Responsibility for costs due to insurance, maintenance and new construction
- Rent increases
- Early termination conditions and commercial subleasing

When considering a commercial lease, it is wise to have it reviewed by a commercial real estate broker or a lawyer familiar with commercial real estate law.

No Standard Forms

Many commercial leases are not based on a standard form or agreement; each commercial lease is customized to the landlord's needs. Usually, the terms of each lease are different depending on the negotiations undertaken between you and the landlord. It is why you need to examine every lease agreement offered to you carefully.

Commercial leases are more complex than residential leases and more binding. Because the landlord often invests capital in preparing the property, a stronger lease commitment is necessary. Lease terms are usually longer and offer fewer legal protections for the tenant.

Responsibility for Maintenance and Repairs

One of the most important differences between commercial and residential leases is assigning the responsibilities for maintenance and repairs. These responsibilities vary greatly based on negotiations between the landlord and tenant.

Residential tenants are ordinarily responsible for very little maintenance and repairs to the premises. If something breaks or needs to be replaced, the tenant only needs to notify the landlord, who is required by law to take action within a reasonable amount of time. In commercial leases, however, the tenant is often responsible for much more. In many cases, the landlord will only be responsible for maintaining the physical building, while the tenant manages the rest. The specific breakdown of which party is responsible for what will be outlined in the commercial lease.

Check your lease for clauses that dictate who pays these expenses:

- Repair and maintenance of common areas
- Maintenance of heat, water, elevator, air conditioning, and other services
- Structural repairs including plumbing, electrical wiring, equipment and machinery on the premises
- Pest control and remediation for damage and infestation caused by pests
- Ordinary maintenance and repairs of the premises
- Repairs from natural disasters, fire and other disasters
- Responsibility for payment of insurance, taxes and other expenses

Rent Control Laws

In some areas, residential properties may be rent-controlled. These restrictions do not apply to commercial leases. Once the lease ends, a commercial landlord can raise the rent. The only limitations are those provided in the lease agreement. Therefore, it is desirable to consider conditions for lease renewal and put them in the agreement. If your landlord decides to drastically increase the rent at the end of the lease, it could result in you needing to uproot your business and move to a new location.

Negotiability and Flexibility

Commercial leases are generally subject to much more negotiation between the business owners and the landlord, since businesses often need special features in their spaces, and landlords are often eager for tenants and willing to extend special offers. You cannot easily alter the terms of your commercial lease. Also, they are legally binding contracts with a substantial amount of money at stake. However, you can negotiate your lease terms with your landlord, such as your ability to make modifications to the premises.

The Lease Should Fit Your Business’ Needs

Commercial leases are complicated but many of the terms are negotiable. Signing the lease as it is first offered is not usually in your best interests. An experienced real estate negotiator can help you easily get favorable terms and possibly a better price. Having a third party handle the negotiation may allow you to have a good relationship with your landlord, which may favor your business in the future.

Your lease terms will affect your business for years to come, so negotiate carefully to get the best terms. Don’t be afraid to ask for help when you need it. A good lease agreement can be the foundation for a successful business.

Final Thoughts

It is imperative for both tenants and landlords to have an in-depth understanding of the rights and responsibilities of each party. They must consider what it means for their rental agreement. This can help both parties to avoid breaking the covenant. It’ll also help ensure that they are protected from legal action.

No matter the type of property you own, you can count on the experts at Evanco Realty Advisors for the very best in full-service commercial administration. We provide everything you need to minimize your ownership workload and maximize the return on investment for each of your commercial properties. We provide peace of mind to owners; implement excellent property management services that enhance value for landlords.

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