Commercial and Residential Lease Differences
Commercial Real Estate Investments
Commercial and Residential leases have some difference. However, there is some component of commonality in binding contracts. A contract is an agreement between landlord and tenant and is designed to transfer rights of exclusive possession and used in exchange for the payment of rent and other obligations (Geschwener, 2010, p280). There are commonalities between the two leases, but one gives more protection to the tenant and the other more protection for the landlord. It is essential to know what type of lease is needed and what obligations are required for each person signing the lease.
There are also differences in the residential and commercial leases. Residential leases are simple and pretty straightforward, but a commercial lease is complex and difficult to understand. Looking at leases, the consumer should ensure the right lease is being used. While apartment complexes, senior homes, and hotels are considered commercial real estate, senior homes and hotels do not require leases and apartments use residential leases. It is important to understand the differences and know who is responsible for items in the lease.
Establishing trust is essential to the foundation in the tenant and landlord relationship. When examining, three tenant and landlord duties of residential and commercial property the top three that come to mind are: maintaining an active relationship, maintenance of the premises, and the handling of the destruction of buildings. There is no clear roadmap for a successful path. There are gray areas. They are areas of concern and uncertainty even with a lease that outlines the duties and responsibilities of all parties involved.
A commercial lease is very specific as to what is expected from the tenant. This lease has separated articles, and each of these articles explains what is required for the tenant and landlord. Commercial leases tend to give more protection to the landlord. The term of a commercial lease is significantly longer than a residential lease, and a commercial lease is typically three to thirty years in length. Commercial leases are typical net leases, single net lease (In a single net lease, the lessee is responsible for paying property taxes.), double net lease (In a double net lease, the lessee is responsible for property tax and building insurance. The lessor or landlord is responsible for any expenses incurred for structural repairs and common area maintenance.) Triple net lease (A triple net lease agreement on a property where the tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance. (Net Profits, 2001) In such a lease, the lessee is responsible for all costs associated with the repair and maintenance of any common area (also known as CAM – Common Area Maintenance). This form of lease is most frequently used for commercial freestanding buildings. However, it has also been used in single-family residential rental real estate properties.) A residential lease can be monthly or annually. The responsibility of taxes on the property is another difference. Residential leases are not responsible for taxes. In contrast, commercial tenants can be responsible for taxes and insurance (DeRoss, 2008).
A commercial lease has articles that explain what is required and when it is expected. Typically articles 1-5 are essentially the same as the residential lease. They stipulate the address, rent, time, date, length, & deposit. Then the next articles discuss the taxes, obligations for repairs, construction/build-out completion, and alterations. Article 9 addresses the tenant’s covenants. 1. The tenant is responsible for acquiring the necessary licenses and permits needed, 2. The landlord must be permitted on the leased premises to inspect the property for repairs, improvements, or additions. The lease continues to discuss the property, signage, and insurance indemnity of use. The section on insurance Article 13, outlines the tenants’ liability should damage occur. Potential tenant must make sure that they understand these requirements. Article 14-16 goes into detail about damage, condemnation, and default. Specifically, article 16 is critical and may cause some legal issues if not understood or followed. It explains about remedies of the landlord. Articles 17-20 cover title, extensions/waivers/disputes, property damage, and miscellaneous. The lease has to be signed by both tenant, landlord, and in some states witness or notary.
A residential lease has just as much responsibility for the tenant but is not as detailed. A residential lease in the state of California looks like the first page of a real estate sales contract. In a residential lease, the tenant has more protection and less responsibility. But it is just as critical to know what is expected of both the landlord and the tenant. Tenant are often not aware of their rights, and it is imperative to research what can and cannot be done.
A residential lease is broken down in lines. Lines 1-5 has the date, landlords name, and tenants name. Lines 6-8 is the address of the property to be leased. Lines 9-13 list who can occupy the above-mentioned address. Lines 14-19 gives detailed information on the terms of the lease. Lines 20-31 addresses rent like how much to pay when to pay, late fees and grace periods if allowed. Lines 32-41 outlines information on the deposit, and lines 42-46 speak about pets, i.e., if they are allowed and if so if there is a security deposit required. Lines 54-64 talks about the condition of the property and the surrender of property at lease end. Lines 65-75 lets the tenant know what kind of changes to the property are allowed, if any, and how they should go about getting those changes done. Lines 76-91 tells the tenants what to expect if there are damages and indemnifications. Lines 92-113 speaks on the landlord’s right to enter and repairs to the property should any arise. Lines 114-158 discuss early termination/default of the lease or abandonment of the property and what the landlord’s rights are. Lines 159-173 speaks about notices and how they are to be given and received. Lines 174-196 talks about waivers, governing law, times of the essence, equal housing, and lead-based paint. Lines 197-212 is about the brokers, salespersons, and their relationship to each party. Lines 213-228 gives the opportunity to discuss special provisions. Lines 229-232 are attachments that may be needed for the lease of the property. This may include lead-based paint disclosure, application, dual agency, and mandatory arbitration addendum. Lines 223-246 are the signature lines and information. Attached to this lease agreement is an application that must be filled out and accepted before the lease may be done.
In each of these leases, the landlord is responsible for a few things. In a commercial lease, the landlord is responsible for compliance of building codes, negotiating clear terms for the lease agreement, minimizing risk and liability, duty to maintenance and repairs, and attaining diverse insurance coverage (Pekin Insurance, 2015). Both residential and commercial tenants have differences when it comes to property repairs. This means residential tenants report their problems to the landlord and commercial tenants normally solve their repair issues unless it falls in what is considered the common area. (Geschwener, 2010, p.303). When negotiating a lease, it is important to understand the “term of the lease is typically for a set number of years whereupon near the end of the term, the tenant has an option to renew for another set term” (Freeadvice, 2017).
Also, the landlord and tenant are both responsible for maintenance of the premises, though the tenants are not obligated to make repairs. Under current landlord-tenant laws, some jurisdictions require landlords to make repairs on residential units and keep them in habitable condition and maintain the common areas. The owner must make any necessary repairs to common areas such as hallways, stairs, and elevators and maintain safety features such as fire alarms, sprinklers, and smoke alarms (Geschwener, 2010, p.302). The tenant is only required to return the premises in the same condition they received it, with the allowances of normal wear and tear. But in contrast, tenants of commercial and industrial properties usually maintain the buildings and make their own repairs. Commercial business owners often enhance the property in an attempt to increase earning potential. One example is a retail store looking for ways to be more fashionable and modern to draw customers and increase sells. (De Roos, 2008).
In conclusion, this essay has provided an assessment of commercial and residential leases by highlighting the duties of both the landlord and tenant and comparing the differences between commercial and residential leases.
De Roos, D. (2008). Commercial real estate investing. Hoboken, NJ: John Wiley & Sons
FindLaw. (2017). Learn about the law. Landlords’ Duties Regarding Repairs, Maintenance, and to provide notice to tenants for entry. Retrieved from http://realestate.findlaw.com/landlord-tenant-law/landlords-duties-regarding-repairs-maintenance-and-to-provide.html
Free Advice Legal. (2017). Real estate law. Differences Between a Residential and Commercial lease. Retrieved from http://real-estate-law.freeadvice.com/real-estate-law/real-estate law/residential_lease_commercial.htm
Geshwender, A. (2010). Real Estate Practice and Principle. South-Western, Cengage Learning.
Legal Vision (2015) Legal Obligations of a Tenant in a Commercial Lease. Retrieved from https://legalvision.com.au/legal-obligations-of-a-tenant-in-a-commercial-lease/
NET PROFITS.(Commercial Net Lease Realty Inc.)(Brief Article)(Statistical Data Included). (2001). Orlando Business Journal, (50).
Portman, J., Steingold, F. S., & Portman, J. (2005). Negotiate the best lease for your business. Berkeley, CA: Nolo.
Pekin Insurance. (2015). The Top 5 Commercial Landlord Responsibilities Learn which commercial landlord responsibilities are the most important so you can be the best at what you do. Retrieved from http://blog.pekininsurance.com/business/the-top-5-commercial-landlord-responsibilities,
Schell, E., (2015). LinkedIn. Commercial Lease Agreements vs. Residential Lease Agreements. Retrieved from https://www.linkedin.com/pulse/commercial-lease-agreements-vs-residential-ed-schell.