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Commercial Leases: What Landlords and Tenants Should Know

Real Estate

Previously, I wrote about the process for a landlord to evict a residential tenant.  (See: Real Estate Primer for Landlords:  Your Tenant Stops Paying) While the process for evicting a commercial tenant is the same as in a residential setting, the requirements for the lease itself differ greatly.  The parties to a residential lease are governed by strict statutory and common law requirements, while parties to a commercial lease are accorded broad latitude in defining their rights and obligations.  For instance, the Truth in Renting Act and the Landlord and Tenant Relationship Act, which govern the particular duties, rights, and obligations arising between residential landlords and tenants, do not apply to an office lease.  In this article, I highlight two notable distinctions between residential and commercial leases, in addition to outlining three of many common law rules that apply if the lease is not negotiated and drafted otherwise.

Distinctions between Residential and Commercial Leases:

  • Security Deposits – Residential security deposits are subject to extensive regulation.  In contrast, there are no corresponding restrictions on security deposits for commercial leases.  In fact, commercial landlords can even require an “evergreen” security deposit that requires the tenant to replenish the security deposit if the landlord applies a portion of it to cure a tenant’s damage or default.
  • Condition of Premises – Residential landlords are responsible for maintaining the habitable condition of the leased premises.  In the commercial setting, however, a landlord is generally not responsible for the condition of the premises and the tenant takes the property with all of its faults.  There is no implied covenant that the premises are fit for their intended purpose.

Common Law Rules:

  • Right to Enter Premises – A commercial lease is the equivalent to a sale of the premises for the term of the lease.  Therefore, the default rule is that a landlord has no right to enter or inspect the premises.  If a landlord wants to be able to have access to the property, this must be negotiated and drafted into a provision in the lease.
  • Right to Terminate – There is no common law right to evict a tenant because of a simple breach of a lease.  However, the parties may establish this right by agreeing to and incorporating a provision into the lease that allows for a power of termination.
  • Post-Eviction Rent – Under Michigan law, eviction of a tenant terminates the tenant’s obligation to pay rent.  If a landlord wants to have the right to collect post-eviction rent, this right also must be clearly established in the lease.

Lastly, incorporating the above mentioned lease provisions are solely at the option of the landlord and/or tenant. In its most basic form, a valid commercial lease is only required to contain the following four elements: (1) the parties to the lease, (2) the property being leased, (3) the amount of rent to be paid, and (4) the duration of the lease.

As was stated earlier, this article is by no means an exhaustive explanation of commercial leases; there are copious nuances and negotiation and drafting is key.  Please contact a business law or real estate attorney to ensure your lease accomplishes your objectives and that your rights are protected.

 

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