Differences Between a Residential and Commercial Lease

Though each state has its own rules and regulations on commercial and residential leases, all states make general distinctions between the two types of leases between landlord and tenant.

Residential Lease Agreement

A residential lease agreement is a contract between an individual(s) tenant and the landlord to use property for his/here living arrangement. A typical residential lease for housing includes a home, townhouse, condominium, and an apartment. 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

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 premise is a business space not designed for sleeping and day-to-day living for the residential tenant. The commercial property typically is a warehouse, strip mall, or office space in an industrial or commercial building. 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.

Protections for the Residential Tenant

Because of the value placed on safe and secure housing, all governmental entities have a special interest in protecting the rights of the individual residential tenant from an unscrupulous landlord. Additionally, the prevailing thought is that individuals who enter 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 in his business venture. As a result, every state has built in protections for the residential tenant stemming from the landlord’s failure to provide required safe and habitable housing to the landlord’s failure to timely return a former tenant’s security deposit. Moreover, many statutes allow a tenant attorney’s fees for habitability violations of a residential unit. Such infringements might include a landlord who knowingly fails to provide heat or remove rodents or cockroaches from a residential rental. The thinking behind awarding attorney’s fees comes from the presumed unequal bargaining power between a residential tenant and a residential landlord.

Few Protections for the Commercial Tenant

States are pretty uniform in holding that there is little to no protection for the commercial tenant in his/her business arrangement with the landlord. The commercial tenant is presumed to be on equal footing with his/her landlord in negotiating a commercial contract, unlike the residential tenant. The assumption is made that the commercial tenant has the training, experience, knowledge, and sophistication to enter into the written commercial lease along with access to skilled third party professionals such as lawyers, contractors, and engineers to consult with in the negotiating process with the landlord. More opportunities to negotiate are available to the commercial tenant than the residential renter. Furthermore, the commercial lease is usually uniquely designed for the particular commercial tenant unlike the typical standard form of the residential lease. The commercial lease is also harder to break than a residential agreement with the renter. The tenant is typically a corporation or a limited liability company (an entity created by the owner of the business to protect himself from personal liability). If the tenant is an entity, the landlord generally requires a personal guarantee by the individual owner that he will make good on the contract should the tenant entity fail to make the monthly payments.

Case Studies: Differences Between a Residential and Commercial Lease

Case Study 1: Residential Lease Agreement

Emily signs a residential lease agreement to rent an apartment. The lease clearly states that the property is for residential use only and prohibits any commercial activities. Emily pays a fixed monthly rent for the duration of her lease, which is one year. The lease includes provisions for maintenance and repairs, as well as the return of the security deposit at the end of the tenancy.

Case Study 2: Commercial Lease

Michael leases a commercial space to open a retail store. The lease agreement outlines the specific terms and conditions for the commercial use of the property, including the payment of rent based on the square footage occupied by the business. The lease is for a term of five years, with an option to renew. Michael has negotiated certain modifications to the space to suit his business needs.

Case Study 3: Tenant Protections

Susan rents a residential property for her family. The state where she resides has strong tenant protection laws that ensure landlords provide safe and habitable housing. Susan’s lease includes provisions for landlord responsibilities, such as maintaining essential services, addressing repairs promptly, and returning her security deposit within a specified timeframe. In case of any violations, Susan has the right to seek legal remedies and may be entitled to attorney’s fees.