No Statutory Safety Net: The Importance of Commercial Lease Terms

Posted by WMCIF on September 14, 2016 in Law, Posts

Commercial and residential leases differ in several important ways.  The amount of legal oversight of the rental agreement is one key distinction.  You may know that a landlord can use the security deposit paid on a rental house or apartment only for certain repairs and that the security deposit must be returned shortly after you move out.  The Landlord and Tenant Relationships Act (LTRA) is the Michigan law that imposes many restrictions on rental agreements in the residential context.

But, this law does not apply to commercial leases.  Instead, the landlord and tenant have the freedom to make their own rules through the terms of their rental agreement or lease.  The LTRA tends to protect tenants, so commercial tenants lack a legal safety net to protect them from onerous lease terms that might not be enforceable in the residential setting.  However, a landlord can benefit from the ability to structure the lease terms to fully protect itself from a tenant that doesn’t care for the property as well as the landlord would like.

Because the lease is the rulebook for the relationship between the commercial landlord and tenant, it is critical that both parties carefully review and negotiate the terms.  The rental agreement need not be lengthy, but it should be in writing.  In fact, leases for a rental period longer than a year must be written and signed.  The terms should cover some basic information.  For example, both the landlord and tenant will benefit from a straightforward paragraph that states the amount of a security deposit and how it should be returned.  The tenant would also prefer to add limitations to the landlord’s ability to retain the funds and to require a specific notice of the purposes for which the funds are withheld.

Commercial leases may contain many other terms, nearly all of which the parties can tailor to meet their needs.  Some questions to consider include: How can the tenant use the property? Who pays for the taxes, utilities, maintenance, or repairs?  Can the tenant undertake improvements, big or small, to the property and who pays for those improvements?  Before entering a commercial lease, which might span a period of several years, it is worth the time to know and understand the terms.

For more information on commercial real estate transactions, including leases, attend the WMCIF Space Matters presentation on October 4, 2016.

Article written by Suzanne Sutherland of Hilger Hammond.