Commercial Rental Law in a Nutshell
Commercial rental law refers to the body of law that governs the rights and responsibilities of landlords and tenants in commercial properties—these properties include businesses ranging from retail stores to office buildings. Unlike residential rental law, which is primarily based on state statutes and local ordinances, commercial rental law is not as heavily regulated. This allows landlords and tenants more flexibility in drafting lease agreements to meet their specific needs. A commercial rental agreement, also known as a lease , is a legally binding contract between a landlord and a tenant in which the landlord grants the tenant the right to occupy and use the commercial property in exchange for payment of rent. These contracts set forth the terms and conditions under which the property can be used over a period of time. Commercial rental laws usually dictate what kinds of clauses or provisions can be used in these agreements, but, in a more heavily regulated industry, much of the information would be covered in a state’s commercial lease tax statutes or local ordinances. Whether you are a landlord or a tenant, you must understand the commercial rental law governing your property, its duration, and its use, so that you can best protect your interests.
Important Parts of Commercial Leases
When drafting a commercial lease, the following key clauses should be included:
Rent – The rent is typically paid monthly or quarterly in advance or a special rental schedule as agreed between the parties. The lease may make provision for regular rent increases. It must also stipulate when the first rental payment is to be made and for the payment of interest on any outstanding rental.
Termination – The lease must clearly state the duration of the lease, including the termination date, any renewal periods and whether a notice period is required.
Repairs and maintenance – The parties must agree who is responsible for the maintenance and repair of the premises, including the roof, structure and fittings.
Alterations and improvements to the premises – The lease may prohibit the tenant from making any changes to the premises without the landlord’s consent, or alternatively the parties may agree on what would constitute any significant alterations that the tenant would require the landlord’s consent to make.
Alterations on expiry – the lease should state that upon expiry or earlier termination the tenant must remove such fixtures as a landlord may reasonably require to be removed and restore the premises to its original state.
Subleasing – If the tenant intends to sublease portions of the premises to subtenants, or assign the lease to a third party, the lease must include an express provision whereby the tenant must obtain the landlord’s consent prior to entering a sublease or subsequent lease with a subtenant.
What Rights Do Lessors Have?
The rights and responsibilities of commercial landlords are governed by contract law and the laws of agency and trust. Both lessors and lessees should have a clear understanding of their obligations and entitlements under the legislation, regulations and the lease itself.
Landlords are required to give their lessee a right of quiet enjoyment on the premises. The landlord must also ensure an acceptable degree and standard of services and maintenance of the property, including structures, utilities and safety provisions.
The landlord must ensure the property is fit for the purpose under the lease agreement;
The landlord must not interfere with a lessee’s possession and quiet enjoyment of the property;
If the property is to be sublet or transferred, the consent of the landlord must be obtained;
Where the lessee has failed to pay rent when due, the landlord can commence eviction proceedings; and
The landlord has a legal call upon the property and/or other property of the lessee for the discharge of any debt.
Tenant Rights In Commercial Rentals
The rights afforded to tenants are much more limited than those available to residential tenants. Tenants are entitled to the exclusive use of the demised premises, but must comply with the stated use in the lease. Tenants of commercial space are also entitled to have their premises free from unreasonable interference from the landlord or its other tenants.
Tenants are entitled to reasonable privacy in the leased space, subject to the right of the landlord or landlord’s agents to enter the premises to make needed repairs, to inspect, or to show the premises for sale or rent.
The rent and any adjustments must be made in accordance with the terms of the lease, which may provide for a ranking in the event that the landlord receives more than one payment at a time. A tenant having no special ranking in regard to a rent payment can modify its payment to correct a mistake, but only by giving immediate notice to the landlord.
Commercial tenant leases often include provisions limiting the tenant’s activities on the premises, such as limiting hours of operation or recognizing that the tenant’s violation of certain laws constitutes a default . Leases may also contain broad exclusions from liability in case of disaster from natural causes.
Both leased real property and improvements on the property can be subject to mechanic’s liens filed by subcontractors, if proper notice is not given to the landlord. If a commercial tenant withholds consent to a mechanic’s lien filed on the property, they may be required to pay the costs of litigation in clearing the title of the property if the lien was dismissed.
Tenants have all rights conferred upon them by statute, and unless expressly excluded, by the lease. Failure of a landlord to comply with the terms of a lease may allow a tenant to:
•Seek a declaratory judgment for a failure to comply with the lease or to cure a default of the landlord
•Seek an injunction to require the landlord to comply with the lease
•Obtain an order to compel the landlord to fulfill its repair or replacement duties
•Terminate the lease
•Withhold rent
•Obtain a judgement for damages
Tenants may also have remedies prescribed by statute pertaining to fraud or misrepresentation regarding the leasehold. See C.G.S. §§ 42-110g(12), 47-286(f).
Resolving Issues In Commercial Rentals
The most difficult part of commercial leasing are often the disputes that arise, especially over maintenance, repair, and the effect of the lease on a landlord’s prospective transfers. Knowing how to anticipate and deal with disputes can save you, whether you are landlord or tenant, weeks of stressful wrangling.
One common dispute that arises in commercial leasing is whether certain repair costs are the responsibility of the tenant or landlord. Leases in general favor landlords to pay for capital items like roofs, boilers and fire protection systems and tenants to pay for minor repairs, so long as this construction is strictly adhered to. Courts are generally willing to skip past the "strict construction" standard when the capital improvement can be attributed to a construction defect for which the landlord is liable. When the repair appears to be distinctly a future capital expenditure, however, courts are probably going to make the tenant happy – even if the landlord settings aside money to pay for the future repair, the tenant will not be forced to perform the repair for which it is not responsible. For example, a court will determine who is responsible for the cost of replacing a leaky roof by looking who is responsible for cleaning and maintaining the roof. If a tenant is responsible for repairing leaks, it will not be responsible for replacing the roof.
Another common dispute is over the impact of a landlord’s potential transfer on real property. Landlords often seek to mitigate pushback against lease transfers by including a clause allowing them to assign their rights and obligations under the lease without consent but imposing a duty to notify the tenant of a material transfer. JPI Partners, LLC v. Patrick, 344 F.Supp.2d 940, 948 (W.D. Tex. 2004). A tenant does not have a cause of action for breach of contract against a landlord who refuses to agree to a lease assignment in the absence of the language granting the landlord unilateral right to assign its rights. Killeen v. Forney Ind, Inc., 651 S.W.2d 707, 709 (Tex. Civ. App. – Austin 1983). However, a landlord may not interfere with a tenant’s right to assign a lease where the tenant is not required to obtain consent. Id. If the parties do not settle their disputes amicably, they still have a variety of legal remedies available to them. Parties may submit their dispute to binding or nonbinding arbitration or mediation. These "alternative dispute resolution" (ADR) methods have a number of benefits, such as being inexpensive and quick compared to the cost and time associated with litigation. Even in cases where ADR is voluntary but a statute or contract requires good-faith attempts to settle a dispute, courts might order the parties to first do ADR before resorting to litigation. On the other hand, arbitration clauses in contracts may be found void if they have unforeseeable consequences, would call for an extreme inconsistency, or that bring the agreement so close to unconscionability as to reach the level of an unwarranted sacrifice of the interests of the party challenging the clause. Keymer v. Thomson, 901 S.W.2d 72, 76 (Tex. App. – Houston [14 Dist.] 1995).
Current Developments In Commercial Rental Law
Like every area of the law, commercial rental laws are subject to ebbs and flows. Socio-economic turmoil caused by the Great Recession resulted in a wave of tenant bankruptcies and defaults. Landlords and tenants alike have faced increased lease bargaining power due to these trends. But in the absence of new economic shocks, landlords are enjoying a healthy marketplace with a strong economy and favorable default law. Commercial leasing is about profit; residential landlords view their leases largely as necessities. Residential laws reflect this intention with consumer friendly rules. Similarly, commercial landlords will not invest energy into renegotiating a lease unless the rent increase generates profit. As a result, many commercial leases are "borrowing" from residential leases in: (1) termination rights; (2) notices; and (3) dispute resolution. With an improving economy, late fees and termination rights are growing. No longer burdened by claims of hardship (particularly amid a rental housing shortage) tenants face increased pressure to pay on-time. Landlords are inflexible on tenant defaults and unhindered in pursuing default payments. As a result, disputes over unpaid rent are less frequent as landlords are losing less frequently. Obsolete termination rights are being replaced with non-competitive alternatives . With rare exceptions, courts will not enforce opt-out clauses in commercial leases. Potentially, tenants may not be able to enforce build-out deadlines and other timelines. They also risk losing their deposit and other upfront costs. On the other hand, landlords are experimenting with new options. For instance, they are charging 5% if a tenant terminates and leaving a greater percentage in the remaining deposit. With this arrangement, tenants have incentives to reuse some of their deposit to successfully negotiate a lower termination penalty. While any default clause is difficult to enforce in non-judicial matters with tenants without an attorney, parties have greater leverage in court. Often, judges do not scrutinize the language of the default provisions. In California, for instance, the "reasonableness" standard is applied inconsistently to make penalty clauses enforceable in most circumstances. Raising the stakes for tenants who seek out a court to resolve a default dispute can result in increased settlements for landlords in litigation. These changes may seem small for landlords – except those currently facing an increase in lease disputes. A reduction in the duration of the lease term may not seem significant, but it has major implications for how various provisions are enforced here in California. Tenants should update their forms to account for these changes.