Most of us have probably signed a property lease agreement at some point. Some of us have probably even read the whole thing before signing. Our experiences have taught us that we have certain rights as tenants, but how clear are we on these rights? There are very significant and important differences between residential and commercial contracts. As business owners, it is important to be aware of these differences.
Residential Lease Agreements
A residential lease agreement is a contract between an individual tenant and the landlord to use property for his/her living arrangement. The property is primarily used for a residence, not for a profit. No commercial purpose exists such as for the sale of goods, services, or manufacturing products. The consideration (rent) for the occupation of a residential rental is typically based upon a set amount per month varying from a month-to-month lease to a term of years.
Commercial Lease Agreements
A commercial lease is a contract between a business tenant and landlord for use of commercial property to generate a profit through the sale of goods, services, or manufacture of a product. The consideration (rent) is typically based upon the amount of square footage occupied by the tenant plus, in some instances, a percentage of the gross received by the tenant. The term of the lease is typically for a set number of years where upon near the end of the term, the tenant has an option to renew for another set term.
Beyond the obvious differences, it is very important to remember that commercial lease agreements do not provide the same protections that residential tenants receive by law. For example, in a residential lease, tenants are entitled to an implied warranty of habitability. This means that the landlord is legally obligated to maintain the property and keep it maintained to a standard that is fit for human occupation. This requires that a landlord maintain all plumbing, electricity, safety of structures, and provide hot and cold running water, among other things. Residential tenants receive these statutory protections against the wrongful conduct of a landlord. These protections are put in place for several reasons, notably because of the value placed on safe and secure housing. However, commercial tenants have no legally enforceable standard on which they can rely.
The reason that these differing standards exist is because it is presumed that a commercial tenant is in a better position to negotiate the terms of their lease. There is a prevailing notion that most individuals entering into a residential lease do not typically have the degree of skill, knowledge, or sophistication of a commercial tenant whose interest is to make a profit through a business venture. Accordingly, commercial tenants receive almost no statutory protections.
What does this mean?
The language of the lease rules. A typical commercial lease will put most or all of the responsibility for repairs on the tenant and will reserve only “structural” repairs or maintenance for the landlord. Further, standard commercial leases will often use vague language to indicate standards such as that of a “prudent landlord” or “prudent tenant”; or suggest that the premises must be maintained to a “first rate” standard or in “good order, condition, and repair”. As you can see, this language doesn’t really paint a clear picture of who is responsible for what and what the standard really is. This can become a big problem when your business is interrupted by an expensive and necessary repair, but the lines are blurry in determining who is responsible for the repair.
How to protect your business.
Be prepared. It may seem silly to try and imagine all the things that could potentially go wrong in your business space, but it is the nature of occupying property. Sooner or later, something will need repair and it could be expensive. There is a lot of room to negotiate with commercial leases, and at the beginning of the occupancy is the best time to put in place a clear and reliable agreement so each party knows their obligations. Having a clear and well written commercial lease agreement will help to protect your investment, allow your business to thrive, and reduce the potential for dispute.