How commercial leasing differs from residential

By Jonathan Schmidt / Guest Column

Let’s say you’re a budding entrepreneur with a cutting-edge idea for a technological widget. Or perhaps you’ve finally found the time and finances to expand the craft beer brewing you’ve been doing in your basement into a full-scale brew pub.

One thing that a majority of entrepreneurship and small businesses have in common is they are commercial tenants.

Most of us have been tenants at some point in our lifetimes and many of us have been landlords. But for the majority of us, that relationship involved residential tenancy. While residential leases and commercial leases are both contractual agreements, commercial tenancy is different in many ways.

As defined, a commercial lease is a contract between a landlord and a business tenant specifically for commercial purposes, such as for the sale of goods, services or manufacturing products.

In a residential landlord-tenant relationship, there is an additional burden placed on the landlord, because it is assumed that the average tenant does not possess the same skill and sophistication as does the landlord in terms of lease agreements. Therefore a basic “benefit of the doubt” is given to the tenant with many associated legal protections.

Conversely, it is assumed that a tenant in a commercial lease agreement will possess the knowledge and sophistication to engage professionals to assist in the lease negotiations. These includes professionals such as lawyers, architects, IT professionals and contractors.

In short, the landlord and the tenant of a commercial lease have the leeway, but also the responsibility to contemplate, negotiate and write their own agreement terms. To the uninitiated entrepreneur or new small business owner, this can be daunting. This is especially true because there is much less built-in legal protection for the commercial tenant, even as there is almost always much more financially at stake.

A commercial agreement provides many more opportunities to negotiate over a wide range of areas and issues. All of those issues can be opportunities or they can prove to be pitfalls if they are not carefully considered upfront. Further, commercial leases are much harder to break than residential leases.

Here are some things to consider:

Tenant improvements: Very often there are modifications necessary to a commercial space before a tenant even moves in. The details of any modifications, whom will bear the costs and to what extent they are allowed must be considered and agreed upon.

Property taxes: Define which taxes and or assessments are to be included in the definition of property taxes and for what duration they will be assessed.

Operating expenses: Tenants typically pay a share of the operating expenses incurred by the landlord in the operation and maintenance of the building. What that “share” includes should be negotiated.

Repair and maintenance: Commercial landlords and tenants should negotiate what potential repairs and maintenance fees for which they will each be responsible.

Subletting or assigning the lease: Can someone else occupy some or all of your space, and if so, will that other party pay rent to you or to the landlord?

Tenant remedies: What will happen if the landlord defaults on his or her obligations to the tenant? Can the lease be terminated in such cases or rent decreased/abated to remedy the tenant?

Termination or relocation: How can the lease be terminated and under what circumstances? If not negotiated and included in the lease, a tenant may be unilaterally relocated, for example.

Exclusivity: If you are a retail or services business, make sure that the landlord won’t lease space to a competitor.

Commercial leases are naturally more long-term than most residential leases, and as much as possible, short- and long-term matters should be carefully considered. What do you need in place when you open for business day one? What if you need enhanced electrical accommodation for extra computer servers? It can be difficult to anticipate it all. An attorney can carefully navigate the legal language in the lease stipulations and clauses to ensure you are protected for the duration.

Jonathan Schmidt is an attorney and partner with Nazette, Marner, Nathanson & Shea LLP. He practices in areas of business and litigation. He can be contacted at jschmidt@nazettelaw.com or www.jschmidtlaw.com.