For many entrepreneurs, one of the first major decisions is finding commercial space to sell or produce your goods. Signing a commercial lease is a huge financial commitment. Upon any default, your landlord could come after you or your business for payment on the lease. It is absolutely critical that you only sign a lease with terms you completely understand. If you are not sure about the legal wording in a commercial leasing agreement it is well worth having an attorney review it with you before you sign anything.
Before you approach a landlord or even start looking at commercial spaces, it is important that you understand some basic characteristics of a commercial lease. Most people are more familiar with residential leases than commercial ones. Practically and legally speaking, however, commercial leases and residential leases are quite different.
Beginning with general definitions, a residential lease is a lease (or rental) of a property designed solely for use by a person, persons or a family to live in on a day-to-day basis. Residential leases are generally for homes, townhouses, condominiums, and apartments. There is no commercial purpose (such as the sale of goods, services, or manufacture of product) with respect to a residential lease. In contrast, a commercial lease pertains to a lease (or rental) of property designed solely for the sale of goods, services or manufacture of product. Premises subject to a commercial lease are not units designed for sleeping or day-to-day living. The premises are typically warehouses, strip malls, office spaces and industrial or commercial buildings. The price is typically based upon amount per square foot occupied by the tenant plus, in some instances, a percentage of the gross received by the tenant. In many commercial leases the tenant is typically a corporation or a limited liability company (an entity created by the owner of the business to protect him or herself from personal liability). If the tenant is an entity, the landlord often requires a personal guarantee by the individual owner on the lease that he will make good on the contract should the tenant entity fail to make the monthly payments.
Below are five main differences between commercial and residential leases:
1. No Standard Form or Agreement for Commercial Leases.
While residential leases tend to use standard forms or agreements, there is no standard form or agreement for commercial leases, thus making them more complicated. In a commercial lease, all the terms are negotiable and vary greatly from lease to lease, since businesses often need special features in their spaces, and landlords are often eager for tenants and willing to extend special offers. As a result, you need to carefully examine every commercial lease agreement offered to you.
2. There Are Fewer Legal Protections for Commercial Leases.
Residential leases are often for properties that are in neighborhoods or other areas where residential codes apply to the maintenance or appearance of the home and property. Commercial leases are for properties in areas that are zoned for commercial use, where typically looser codes apply.
State laws do not protect a commercial tenant in the same manner as a residential tenant. For example, there are no caps on security deposits or rules protecting a tenant’s privacy in commercial leases. State laws provide less consumer protection against deceitful landlord practices because state lawmakers assume that business people are more knowledgeable and the law treats parties to a commercial lease as being equal, sophisticated bargaining partners. Governmental entities have an interest in protecting the rights of individual residential renters from being taken advantage of by an unscrupulous landlord. The rationale is that everyone needs a place to call home where they sleep, eat and live. Additionally, the prevailing thought is that people who enter into residential leases typically do not have the degree of skill, knowledge or sophistication of a commercial tenant (a commercial tenant enters into a lease with a landlord to make a profit in his or her business venture). Therefore, there is a great deal of law in every state protecting the rights of tenants in residential leases, stemming from the landlord’s failure to provide required safe and habitable housing to the landlord’s failure to timely return a former tenant’s security deposit. Commercial tenants are presumed to have the training, experience, knowledge and sophistication to enter into the written commercial lease and have access to skilled third party professionals to assist them in deciding whether to enter into a commercial lease or not. Third party professionals would be contractors, accountants, engineers, attorneys, surveyors and the like.
3. The Duration of the Lease.
Most residential leases are for no longer than a year. Many commercial lease agreements, on the other hand, are often for several years.
4. Length and Specificity of the Lease.
A residential lease is necessarily less detailed because even though the owner wants to be sure that he or she is in compliance with the codes in the area and can maintain the property as livable, it is assumed that the property will be used for the purpose of a single family dwelling. Commercial leases generally go into more specific detail about the permitted uses of the property, because there are many possible uses for most commercial properties. Commercial leases, which are often signed for buildings or areas (as opposed to an individual house or apartment) with multiple tenants and multiple different uses, must be more specific about what exact portion of the premises is being occupied and what is allowed to be done in that portion. This is why the premises clause of a commercial lease exists – to specifically define the property or the portion of the property that is being used by the commercial tenant. Residential leases rarely have a premises clause.
5. Different Types of Clauses and Provisions.
Another major difference between residential and commercial leases is the inclusion of clauses regarding owner improvements versus tenant improvements. Most residential real estate is rented as-is, with the assumption that the owner will fix or maintain the property and that the tenant must ask before making changes. Commercial properties often need to be changed to suit individual tenants, so there may be more shared responsibilities and costs to the parties in a commercial lease.
Christine Wong is a real estate and business attorney practicing in New York City. She often works with small and new businesses, assisting them with commercial leases, business formation, and developing systems to grow and develop. She welcomes any questions and comments. Feel free to contact her at Christine@cwonglaw.com; 646-568-6089; or follow her on twitter @cwonglaw.