How Commercial Leases Differ from Residential Leases

If you are starting a business and leasing a commercial property, it is important to understand the difference between a residential lease and a commercial lease. Commercial leases usually apply to commercially zoned properties and contain more details about how the property can be used. 

Residential leases are intended to provide property rights for daily living. Alternately, commercial leasing is intended for business use and usually outlines the specific business types that may be conducted. Commercial leases contain fewer protections for the tenant and must be negotiated carefully.

Legal Protections 

Residential leases offer many legal protections that don’t apply to commercial contracts. They guarantee safe living conditions for residential tenants. Landlords are usually required to maintain the property. Conversely, a commercial tenant may be required to maintain the property unless it is explicitly provided for in the lease agreement. However, commercial leases can be customized to reflect the needs of the business and the landlord. They often dictate responsibility for maintenance of shared areas. 

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.

Lease Terms and Commitment

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. 

Tenants with a full-service lease or gross lease pay a monthly rental payment that includes all expenses for the leased property. On the other hand, net leases require that the tenant reimburse the landlord for maintenance and repair costs or pay these expenses directly, as negotiated in the lease. Between these two extremes, there are other ways of determining who pays for these expenses. For more information about lease types and responsibilities consult a lawyer or real estate broker.

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 repair 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

Warranty of Habitability

When renting a residential property, there is an implied warranty of habitability. This warranty guarantees that tenants have a reasonably clean, safe, and comfortable place to live that meets all codes. The implied warranty of habitability does not apply to commercial leases, however, unless the lease specifically provides for such conditions. This is another area where consulting an expert in commercial real estate can be beneficial. 

Rent Control Laws

In some areas, residential properties may be rent-controlled. These restrictions do not apply to commercial leases. At the expiration of the lease, the landlord may raise the rent, if they desire. 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 spell the end of your business or upending your business and moving to a new location. 

Property Values

Since commercial leases are usually longer in term and may assign property expenses including taxes and insurance to the tenant, a commercial lease can affect the property value. A long-term lease at a fair market value can be a bonus to the buyer and increase the value of the property. Likewise, a long-term lease at a rate that is too low can negatively affect the property value. 

For business owners, terms of the commercial lease also affects the value of the business. If you wish to sell your business, the lease terms can be an asset or liability depending on how well you negotiated in the beginning. If your lease is easily assumable by the buyer, it will be easier to sell the business. You may have no intentions of selling your business when you begin, but you should consider all aspects of the business before signing a lease.

Protect Your Business when Signing a Commercial Lease

All these considerations, and many more, should be considered before the lease is signed. You need to put in protections for your business and all possibilities. If this is your first commercial lease, consider consulting a contract attorney or a commercial real estate broker for help on understanding and negotiating the lease. 

Many terms of a commercial lease 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. But commercial leases are complicated. Contact us today to learn more about leasing commercial property and negotiating the best terms. 

Anne Barer

About Ro Crawford

Ro has extensive background in several sectors of the Real Estate industry including residential and commercial assets. Ro is responsible for developing a comprehensive marketing plan for each property as well as managing the company’s social media accounts. She designs, writes and edits offering memorandums, press releases, proposals for new business, eblasts and more. For questions, comments, or suggestions related to our blog, you can contact us via our website.