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Commercial Lease Agreement
BUSI561_C01_202140
Dr. Martin
10/17/2021
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Commercial Lease Agreement
Distinction between Commercial and Residential Lease Agreements
Lease agreements are legally binding documents between tenants and property owners.
These agreements address policies and conflict resolution methods for living in a rental space.
Due to the varied natures and needs of tenants, lease agreements are broadly classified as either
Commercial Lease Agreements (CLA) or Residential Lease Agreements (RLA)[ CITATION
Mer20 \l 1033 ]. The most basic difference between CLA and RLA is that, CLA are intended for
and signed by a business (tenant) and property owners to give the tenant the right to use the
property for business and/or profit-making purpose[ CITATION Mer20 \l 1033 ]. RLA on the
other hand is a legally binding agreement between a landlord and a tenant which gives the tenant
the right to use the property as a residence.
The differences in the use of commercially and residentially leased properties largely
affects the terms of the lease. The impacts are usually visible on the legal protection[ CITATION
Man \l 1033 ]. Since commercial leases are viewed to be permeated by knowledgeable business
people, there is less legal protection beyond what is contained in commercial lease agreement
than in residential lease agreements[ CITATION Mer20 \l 1033 ]. As such, the lessor of
commercial property is responsible for declaring the terms of the lease as opposed to a RLA,
where some terms are explicitly declared by law and cannot be modified.
The law should therefore seek to protect the interests of commercial tenants as opposed to
commercial landlords. The law already makes a presumption that commercial tenants are
knowledgeable and are able to negotiate a CLA. Although the CLA can be designed and
documented uniquely for each commercial tenant, the power accorded to the landlords leaves the
commercial tenants at the mercy of the lessor who are responsible for drafting the contracts.
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Lease Obligations
The lease agreement should impose the obligations of making repairs in respect to section
5 and 6 to the tenants. The agreement is a CLA, hence the tenant intends to conduct a business
activity and to profit from it[ CITATION Mer20 \l 1033 ]. Therefore, alterations and other
improvements to the property for the purpose of aligning to the business objectives and goals
such as installation of personal property, equipment and trade fixtures must remain the
responsibility of the tenants[ CITATION Man \l 1033 ]. Assigning such a responsibility to the
lessor beats logic as the property owner will not directly benefit from such alteration and
improvement as much as the tenant will as the changes will at most cases, be unique to the
lessee[ CITATION Mer20 \l 1033 ]. Moreover, the tenants, after winding up their business, will
leave with all the personal items installed in the building. Having the tenant shoulder such
installation will result into huge loses as it is not financially beneficial to the lessor. In addition,
damages to the leased property arising from normal occupancy should also be repaired at the
expense of the tenant. The tenants, during the tenure of the lease agreement are required to be
responsible and to take care of the property as they are also benefiting from it[ CITATION Ovi18
\l 1033 ]. As such, any repairs done during the lease agreement must be a tenant expense.
Mitigation
The landlord’s duty to mitigate damages under section 15 of the lease agreement refers to
the reasonable efforts made by the landlord to prevent the termination of the lease agreement and
the repossession of the property by the landlord. To fulfill this duty, the landlord under section 15
must contact the tenant if and only if, the tenant defaults to pay rent, fails to uphold lease
agreement and if the landlord intends to declare the lease ended. Notifying the tenant and giving
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reasonable time allowance to work on the notice(s), the tenant has enough time to cure the
default.
The landlord should be required to mitigate[ CITATION Ovi18 \l 1033 ]. Since the
landlord should not have the capacity to just re-claim a leased property, the landlord has to make
reasonable efforts to ensure compliance from the tenant[ CITATION Hus17 \l 1033 ]. Section 15
of this lease agreement thus requires the landlord to contact the tenant by means of issuing
written notice three times before reclaiming the property. These written notices allow the tenant
to act in such a way that cures the default arising from either negligence or error. Moreover,
Furth-Matzkin (2017), note landlord’s duty to mitigate protect the commercial tenant from
devious landlords’ harassments in case of a better deal from another potential tenant.
The Security Deposit
Under section 2 and 19, the lease agreement creates rights in the security deposit between
the lessee and the lessor. The lessor rights include holding the security deposit without liability
for interest and ability to move the security deposit other funds. The lessee rights include the
ability to have the security deposit upon demand if the tenant is not at default at the termination
of lease. With this regard, the landlord is favored by the rights created under section 2 and 19.
Although the security deposit is meant to protect the landlord from damages to the unit caused by
the tenant, it is not appropriate[ CITATION Hut10 \l 1033 ]. This is because, the landlord, is not
only able to commingle the deposit with other funds which increases the landlord capital to
venture into other businesses, but also allows the landlord to default returning the security
deposit or return a portion of it.
Moreover, commingling of the security deposit with the landlord’s other incomes allow
the security deposit to appreciate[ CITATION Hut10 \l 1033 ]. Under the time value of money,
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the security deposit (cash) held by landlord’s in lieu of tenants, should be charged a reasonable
interest to favor both the tenant and the landlord. Also, ambiguity on how to repay the security
deposit is created at the end of section 19 making it hard for the tenant to reclaim the security
deposit.
Disputes
Integrating a dispute resolution mechanism during lease agreement negotiation helps in
enforcing contract at reasonable cost and quickly without involving the courts. In addition, when
both parties agree on how to resolve conflicts beforehand, allows the parties to maintain their
working relationship by allowing for a collaborative yet flexible dispute resolution method of
agreeing how to disagree[ CITATION Law10 \l 1033 ]. However, having a disputes resolution
provision in a contract could act as an incentive to breach the contract as the provision prevents
litigation. According to Furth-Matzkin (2017), landlords are also likely to alter the course of
mitigation by using unexpected and enforceable contract terms.
Section 29 of the lease agreement highlights mediation and arbitration in lieu of litigation
to solve disputes. Arbitration, a proceeding managed by a third party, an arbitrator, requires the
conflicting parties to table their evidence and arguments to the arbitrator who then decides on the
conflict[ CITATION Law10 \l 1033 ]. Arbitration is advantageous as it is not only legally
enforceable but also less expensive and faster than litigation. Its main disadvantage is that the
decision of the arbitrator is final and cannot be appealed.
Mediation, on the other hand, involves conflicting parties discussing their disputes under
the assistance of an impartial party[ CITATION Law10 \l 1033 ]. Mediation is advantageous as it
is confidential, voluntary, preserves relationships and reduces cost for resolving conflicts.
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However, mediation is disadvantageous as its result are not legally enforceable and a party may
tend to draw out a dispute as they hand no intention of resolving the disputes.
The efficiency of mediation and arbitration lie in the ability of choosing the right
mediator or the arborator. In addition to having efficient communication the arborator and the
mediator must be knowledgeable in the field the disputes is arising from. Moreover, the arborator
and/or the mediator must also be able to meet with the conflicting parties at the parties’
convenient places.
Biblical Worldview
Often, CLA usually oppress the tenants as there is minimal legal protection as the law assumes
the tenants are knowledgeable and able to negotiate for lease agreements. This assumption, for
instance, have enabled the landlord in the lease provided to take advantage of their bargaining
power to hold security deposit with ambiguity on whether it will be paid back to the tenant. The
Bible, in Matthew 5:37, states “Let what you say be simply ‘Yes’ or ‘No’; anything more than
this comes from evil”. As such, the landlord should either declare the provision to either
reimburse or hold the security deposit without other provisions in between.
Moreover, the Bible teaches fairness and just in all dealings. A just and fair landlord must be able
to show love to his tenants. Mark 12:28-31 states “And one of the scribes came up and heard
them disputing with one another, and seeing that he answered them well, asked him, “Which
commandment is the most important of all?” Jesus answered, “The most important is, ‘Hear, O
Israel: The Lord our God, the Lord is one. And you shall love the Lord your God with all your
heart and with all your soul and with all your mind and with all your strength.’ The second is
this: ‘You shall love your neighbor as yourself.’ There is no other commandment greater than
these.” As such, the landlord should be able to extend care to the tenants by assisting in repairing
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damages resulting from normal occupancy. Proverbs 16:11; “A just balance and scales are
the LORD's; all the weights in the bag are his work”, also emphasize on the need for the master to
take care of the servants.
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References
Furth-Matzkin, M. (2017, May 25). On the Unexpected Use of Unenforceable Contract Terms:
Evidence from the Residential Rental Market. Journal of Legal Analysis, 9(1), 1-49.
doi:https://doi.org/10.1093/jla/lax002
Hussar, A., & Kull, I. (2017, October). Juridica International. The Landlord’s Limited Right to
Terminate a Residential Lease Contract, 24(71), 71-83.
doi:http://dx.doi.org/10.12697/JI.2016.24.08
Hutchison, N., Adair, A. S., & Park, K. (2010, July). The value of rental deposits. Journal of
Property Investment and Finance, 28(4), 250-262. doi:10.1108/14635781011058866
Law Reform Commission. (2010). Alternative Dispute Resolution: Mediation and Conciliation.
Manley, M. (1988). Before You Sign That Lease…. Harvard Business Review. Retrieved from
https://hbr.org/1988/05/before-you-sign-that-lease
Merrill, T. W. (2020, September 11). The Economics of Leasing. Journal of Legal Analysis, 12,
221-272. doi:https://doi.org/10.1093/jla/laaa003
Oviedo-Albán, J. (2018, November 30). Mitigation of Damages for Breach of Contract for the
International Sale of Goods. Revista Scientific As Javeriana(137).
doi:http://orcid.org/0000-0003-2174-4765
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