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BUSI561 COMMERCIAL LEASE ANALYSIS
BUSI 561 Commercial Lease Analysis
Christopher Hodnett
Liberty University
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BUSI561 COMMERCIAL LEASE ANALYSIS
Commercial vs. Residential Leases
A residential lease is an agreement between a tenant and the landlord to use property for
day-to-day living arrangement. The property is for personal use, not to gain a profit. The rent is
usually based on a monthly payment made per month over the course of an agreed upon
timeframe, typically measured in months or years.
A commercial lease is an agreement between a tenant, usually the owner of a business,
and landlord. The use of the space would be for running a business with the goal of gaining a
profit. The rent is usually based on several factors, including but not limited to the size of the
space, the term of the agreement, and even the performance of the tenant’s business.
I do not believe the law should seek to protect the interests of the commercial tenant more
than the commercial landlord because the commercial tenant is more legally affluent in
negotiations than the presumed residential tenant and should have the background to support the
understanding of the agreement they are entering into. In addition, the commercial tenant is using
the leased space to gain a profit, whereas the residential tenant is using the space for day-to-day
living quarters. It’s also likely the commercial tenant has access to additional resources such as a
lawyer, to help with negotiations. One such example that sets a clear distinction between the
protections afforded to a residential tenant versus a commercial tenant is what happens when the
tenant doesn’t pay rent.
The big difference with commercial versus residential is the ability to get rid of your non-
paying tenants. With residential tenancy you deal with a lot of tenant rights.
Unfortunately, some people abuse the system and end up squatting for lengthy amounts
of time on the landlord's dime. In commercial leasing, if they don't pay they are out, so
you can recover your missed rent right away. [ CITATION New18 \l 1033 ]
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BUSI561 COMMERCIAL LEASE ANALYSIS
Repairs to Commercial Property
I believe that because a tenant is making a profit in a commercial lease, the expectation
that they handle repairs is fair, as long as it’s normal wear and tear. After all, a good
businessperson would plan for these types of reinvestments in their budget. I also agree with the
line in the agreement that says, “except for major mechanical systems or the roof, subject to the
obligations of the parties otherwise set forth in this Lease.” In the case of major system repairs, I
agree that the landlord should be held responsible for making the repairs. However, it’s what is in
the agreement that ultimately matters. The tenant needs “to be fully aware of the obligations
acquired in leases of premises” [ CITATION Cra19 \l 1033 ].
As for Section 6 – Alterations and Improvements, I experienced this first-hand when a
growing church in my hometown was moving into a leased space. The space had previously been
used as a retail environment, and certainly wasn’t setup for a church atmosphere. In the
agreement, the church insured it had the ability to make changes to the interior of the building,
including adding or tearing down walls, adding and removing fixtures, and change the parking
lot orientation.
Mitigating Damages
Mitigating damages is “the requirement that someone injured by another's negligence or
breach of contract must take reasonable steps to reduce the damages, injury, or cost, and to
prevent them from getting worse” [ CITATION Mit \l 1033 ] In the event of a broken lease, as
outlined in Section 15, “a landlord must try to re-rent the property reasonably quickly and keep
his or losses to a minimum -- that, is to mitigate damages” [ CITATION Mit \l 1033 ].
I personally don’t believe a landlord should be required to mitigate if the tenant broke the
agreement. The landlord should be entitled to become whole. I like how the Pennsylvania courts
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BUSI561 COMMERCIAL LEASE ANALYSIS
handle this. In Pennsylvania, “the landlord can recover rent from the tenant without attempting to
relet the premises. The tenant, of course, can employ an agent to relet the premises in
Pennsylvania and mitigate the damages, just as the landlord otherwise would have to do. Thus,
the Pennsylvania rule allows for mitigation of the damages; it just puts the onus on the party who
has broken the lease and caused the damage” [ CITATION Dav14 \l 1033 ]. In my opinion,
putting the responsibility on the party who broke the agreement is only fair. As we see in many
residential lease situations, a lessee may get out of their lease if they are able to find someone
who is willing to take the lease on, thus removing the burden from the landlord.
Security Deposits
In my opinion, the rights surrounding the security deposit favor the landlord. I agree with
the terms and think it is fully appropriate for a tenant to pay a security deposit, and for that
deposit to be used when necessary throughout the lease. I believe that causing damage to the
property or doing anything to break “an important term or condition of your lease—a default—
also constitutes grounds for termination of the lease. Can the landlord use the deposit and
terminate? Unless the deposit clause clearly states that the landlord can’t do both, that’s what
might happen” [ CITATION Ste17 \l 1033 ].
One such issue that supports a need for, and the language around the strictness of
commercial lease security deposits is what happens when a tenant declares bankruptcy.
In general, a security deposit is an asset of the bankruptcy estate under section 541(a). A
landlord, however, has a security interest in the deposit, and courts have permitted
landlords to retain security deposits to the extent of their allowable claims. [ CITATION
Com18 \l 1033 ]
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BUSI561 COMMERCIAL LEASE ANALYSIS
As the landlord, you have to protect yourself from the tenant against things like
bankruptcy, damage, or breaking other terms of the lease. A security deposit affords this
protection.
Mediation, Arbitration, and Litigation
Again, I find this provision in favor of the landlord, as a protection mechanism to avoid
costly legal fees. When signing the closing papers for our house, I signed an agreement that had
no limit on days spent in mediation. Essentially, we signed an agreement that says if we have
issues or a dispute, we would engage in mediation until the dispute was resolved.
In the commercial lease agreement, both parties can move past mediation and into
arbitration after 60 days. I like the requirement of mediation and arbitration over litigation
because it brings the two parties who are closest to the situation together to talk about it. These
same two parties came to the original agreement without litigation, and I support talking first
before bringing in the courts.
In terms of selecting a mediator and/or arbitrator, I believe the selection should be made
to guarantee there is no favor to either party. There are professional mediation organizations
where both parties can vet the mediator to ensure neutrality.
A good mediator “will generally try to ensure that:
Each party defines what it actually wants out of the negotiation - its real interests, in
other words.
Each party understands the positions and needs of the other.
Each party operates in good faith” [ CITATION Uni \l 1033 ].
Applying a Biblical Worldview
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BUSI561 COMMERCIAL LEASE ANALYSIS
As a business-person, I agree with this commercial lease. I agree that the terms are
strong, and lean towards the favor of the landlord, but it’s not an exchange of goods. The
property is still in the landlord’s possession, and the terms outlined help protect that property.
However, I do think the Bible offers us direction when it comes to agreements.
If I were to apply a Biblical worldview to an agreement, I would simplify the terms, just
as Jesus simplified the law and prophets to the great commandment: “‘Love the Lord your God
with all your heart and with all your soul and with all your mind.’[a] 38 This is the first and greatest
commandment. 39 And the second is like it: ‘Love your neighbor as yourself” (Matthew 22:37-39
New International Version).
Jesus tells us to love our neighbor as our self. Leviticus 6:2 says “If anyone sins and
commits a breach of faith against the LORD by deceiving his neighbor in a matter of deposit or
security, or through robbery, or if he has oppressed his neighbor” (English Standard Version).
Therefore, I believe the Bible tells us that to love our neighbor, we should honor our
commitments, and landlords and tenants should be able to come to fair agreements without all of
the terms and stipulations.
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BUSI561 COMMERCIAL LEASE ANALYSIS
References
Andrews, C. (2019, February 6). What do you mean, I have to cover YOUR property? Retrieved
from Insurance Journal: https://www.insurancejournal.com/blogs/academy-
journal/2019/02/06/515898.htm
Commercial Leases in Bankruptcy: What Happens to the Security Deposit? (2018, September
19). Retrieved from American Bar Association:
https://www.americanbar.org/groups/business_law/publications/blt/2009/01/07_escobar/
Crump, D. (2014). Should the Commercial Landlord Have a Duty to Mitigate Damages after the
Tenant Abandons; A Legal and Economic Analysis. Wake Forest Law Review, 187-205.
Mitigation of Damages. (n.d.). Retrieved from Cornell Law School:
https://www.law.cornell.edu/wex/mitigation_of_damages
Steingold, F. S., & Portman, J. (2017, November). Negotiate the Best Lease for Your Business.
Berkeley: NOLO.
University of Kansas Community Tool Box. (n.d.). Retrieved from Seeking a Negotiator,
Mediator, or Fact-Finder: https://ctb.ku.edu/en/table-of-contents/advocacy/direct-
action/negotiator-mediator-fact-finder/main
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