Running head: COMMERCIAL LEASE ANALYSIS 1
Commercial Lease Analysis
Hannah Wallace
BUSI 561
Liberty University
COMMERCIAL LEASE ANALYSIS
1. What is the distinction between a “commercial” and a “residential” lease? In a
commercial lease agreement, should the law seek to protect the interests of the commercial
tenant more than the interests of the commercial landlord? Why or why not?
A residential and commercial lease differ in several ways. To begin with, a residential
lease is a contract between a tenant(s) and a landlord to utilize property for housing, while a
commercial lease is a contract between a business tenant(s) and a landlord to utilize property for
commercial purposes. These commercial purposes typically generate profit through the sale or
manufacturing of a good or service. Therefore, the defining distinction between a commercial
and a residential lease is the purpose of property utilization. Additional distinctions include the
payment of rent, which in a residential lease is based upon a set amount per month, with the term
of lease widely varying from months to years. This substantially differs from the payment of rent
within a commercial lease, which is based upon the amount of square footage within a rented
property, and in some instances is based on a percentage of the gross income received by the
tenant, with the term of the lease typically set for a few years (“Differences Between a
Residential and Commercial Lease,” n.d.).
Within a commercial lease, the assumption is made that both the commercial tenant and
the commercial landlord are on an equal level playing field when it comes to experience,
knowledge, and access to information in the lease negotiation process. For this reason, the law
should not seek to protect the interests of the commercial tenant more than the interests of the
commercial landlord, but rather both parties should be protected uniformly. There are fewer
tenant protection laws for commercial leases than for residential leases, but this is due to the fact
that the law operates under the aforementioned assumed equal playing field in the negotiation of
a commercial lease (“The Commercial Lease: What You Should Know,” n.d.).
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COMMERCIAL LEASE ANALYSIS
2. Sections 5 and 6, respectively, impose on the commercial tenant the obligation of making
repairs to the leased property, and of making alterations and improvements to the leased
property. Should the lease impose these obligations on the tenant, or should such
obligations be legally imposed on the commercial landlord? Explain your answer.
Due to a commercial tenant’s full utilization of the property for the generation of profits,
the commercial tenant should be allowed to make alterations and improvements to the leased
property to maximize profits, and therefore should equivalently also be obligated to make repairs
to the leased property. It is only logical to impose the obligation of full repair for the allowance
of full utilization. However, as expressed in Section 5 of the commercial lease agreement,
exemptions of repair do often exist for the commercial tenant. In this particular commercial lease
agreement, repairs under the obligation of the tenant are expressly defined as routine repairs of
floors, walls, ceilings, and other parts of the property damaged or worn through normal
occupancy, but exempt the tenant from repairs involving major mechanical systems or the roof.
Yet, problems ensue with these exemptions, as “the question then arises as to who bears the
liability for the repairs to the items covered by those exceptions” (Christensen & Duncan, 2004,
p. 629). While it has commonly been assumed and determined in the courts of law that tenant
repair exemptions fall under the obligation of the commercial landlord, some courts of law have
ruled that in the absence of expressed obligations there is no obligation to repair on either the
tenant or landlord (pp. 630-633). Therefore, it is important to expressly define the obligations of
both commercials tenants and landlords.
3. In the default provisions of Section 15, what is the landlord’s duty to “mitigate”
damages? Should the landlord be required to mitigate? Explain.
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COMMERCIAL LEASE ANALYSIS
In the event that a commercial tenant breaches a lease, it is the legal obligation of the
commercial landlord to mitigate damages. This requires that the landlord, through reasonable
effort, minimize the effects and losses that could result from a breach of lease (LaMance, 2018).
This, in effect, entails that the landlord makes a reasonable effort to relet the property to a new
tenant in due time, and does not let the property sit empty until full damages are claimed. This
duty stems from the application of the avoidable consequences doctrine in common law, which
places the responsibility of minimizing damages upon the person who has been injured or
wronged, such as the commercial landlord in a case of a breach of lease (Groll, 1968, p. 313).
Due to such precedence in common law, the landlord should be required to mitigate damages.
While the burden of proof in the mitigation of damages is assigned to the landlord, the
question remains as to what constitutes reasonable effort in the mitigation of damages. Although
this determination ultimately comes down to circumstantial analysis, some of these
determinations have become law in several courts. Such determinations of reasonable effort in
the mitigation of damages include the listing of the property with an agent or realtor, advertising
and contacting potential tenants, and placing a ‘for lease’ sign on the property (Silver, 2015, p.
14). When such actions are taken, reasonable efforts to mitigate damages are fulfilled, and
impede a tenant’s ability to hold a failure to mitigate defense against the landlord in the ultimate
payment of damages.
4. Sections 2 and 19 discuss the creation of, and the parties’ rights in, the security deposit.
Do these rights favor the landlord or the tenant? Is that appropriate? Why or why not?
The rights expressed in Sections 2 and 19 as it pertains to the security deposit wholly
favor the landlord over the tenant. According to Section 19, not only can the landlord combine
security deposit funds with other funds gathered, but can also utilize the security deposit to
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COMMERCIAL LEASE ANALYSIS
satisfy any arrearages or failed tenant obligations as the landlord sees fit. Additionally, while the
tenant’s initial payment of the security deposit is expressly defined, there is considerable
ambiguity in how the deposit is to be reimbursed to the tenant by the landlord. This favoring of
the landlord over the tenant in defining security deposit rights is not uncommon, and has led to
numerous legal efforts throughout the years to establish equal rights for both the landlord and
tenant (Schaffzin, 2009, p. 252). While these efforts effectively equalized landlord and tenant
rights as it pertains to the payment, retention, and reimbursement of security deposits by the
1980s, security deposits on commercial leases still maintain very little regulation under the
previously discussed assumption that both the commercial tenant and the commercial landlord
are on an equal level playing field in the lease negotiation process (p. 262-263). This lack of
regulation can often lead to the inappropriate favoring of the landlord over the tenant, as
displayed in this particular commercial lease agreement in Section 19. Therefore, while the
payment of security deposits by tenants is necessary to protect against tenant non-performance of
obligations, it is crucial that the tenant enforce their lawful rights as it pertains to the payment,
retention, and reimbursement of the security deposit in the lease negotiation process so as not to
be later taken advantage of by the landlord.
5. Section 29 requires mediation, followed by arbitration, in lieu of litigation, to resolve
disputes. What are the advantages and disadvantages of such a provision? How should the
mediator and/or arbitrators be selected?
The advantages of mediation and arbitration in lieu of litigation are numerous. These
advantages include a timely and more cost efficient resolution of cases, as well as a more
confidential and participatory resolution structure which can ultimately lead to a more
predictable and satisfactory settlement for both parties. Despite the numerous advantages, there
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COMMERCIAL LEASE ANALYSIS
are key disadvantages to the provision of mediation and arbitration in commercial lease disputes.
These disadvantages include difficulty in choosing a mediator or arbitrator that is truly neutral
and impartial to both parties, and the fact that a mediator or arbitrator may operate in
consideration of fairness, and not strict interpretation of the law (Taylor, n.d.). For these reasons,
it is important to clarify mediator and arbitrator qualifications in such commercial lease
provisions that allow for mediation and arbitration in lieu of litigation. Such qualifications could
include some form of a legal background, such as a current lawyer or judge, a law expert, or a
retired lawyer or judge. The selection of a mediator or arbitrator with such qualifications will
ultimately limit the disadvantages of mediation and arbitration, and increase the likelihood that
both will result in the successful resolution of commercial lease disputes between landlords and
tenants.
6. As a businessperson guided by a Biblical worldview, what changes would you make in
this lease to make the terms comport more closely to Scripture?
As evidenced in this particular commercial lease agreement and discussed in the previous
questions, commercial lease agreements can oftentimes inequitably favor the landlord over the
tenant. This in combination with the little governmental regulation that is imposed on
commercial lease agreements allows ample opportunity for landlords to unscrupulously take
advantage of unknowledgeable tenants. The Lord highly values justice and integrity in business
practices, so much so that the Bible states, “Better a little with righteousness than much gain with
injustice” (Proverbs 16:8, New International Version). However, the Bible also speaks to the
benefits of just and equitable business practices, stating, ““Good will come to those who are
generous and lend freely; who conduct their affairs with justice” (Psalm 112:5, New International
Version). Therefore, as a businessperson guided by a Biblical worldview, I would make sure that
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COMMERCIAL LEASE ANALYSIS
this particular commercial lease agreement comports more closely to Scripture by ensuring the
equitable consideration of both the landlord and tenant in issues such as rent, social security
payment and reimbursement, and repair obligations. Additionally, I would make sure that the
commercial tenant has a full understanding of their rights as a tenant, so as to hopefully prevent
the commercial tenant from being taken advantage of in the future by the commercial landlord.
References
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COMMERCIAL LEASE ANALYSIS
Christensen, S., & Duncan, W. (2004). Exemptions from a tenant’s express obligation to repair:
Is the landlord responsible by implication? Deakin Law Review, 9 (2), 621-641. DOI:
10.21153/dlr2004vol9no2art257.
Differences between a residential and commercial lease. (n.d.). Free Advice Legal. Retrieved
March 8, 2020, from https://real-estate-law.freeadvice.com/real-estate-law/real-estate-
law/residential_lease_commercial.htm.
Groll, R. (1968). Landlord-tenant: The duty to mitigate damages. DePaul Law Review, 17 (2),
311-326. Retrieved from https://via.library.depaul.edu/cgi/viewcontent.cgi?
article=3137&context=law-review.
LaMance, K. (2018). Duty to Mitigate Damages. Legal Match. Retrieved from
https://www.legalmatch.com/law-library/article/duty-to-mitigate-damages.html.
Schaffzin, D. (2009). Landlord weapon or tenant shield? A proposal to reform North Dakota’s
residential security deposit statute. North Dakota Law Review, 85 (2), 251-286. Retrieved
from https://web-b-ebscohost-com.ezproxy.liberty.edu/ehost/pdfviewer/pdfviewer?
vid=1&sid=dc1527b4-473f-46d8-8e5a-bf2cad75490c%40pdc-v-sessmgr06.
Silver, L. (2015). Mitigation of damages in commercial lease abandonment cases. In-House
Defense Quarterly, 12-15. Retrieved from
https://www.gordonrees.com/Templates/media/files/pdf/Silver%20DRI%20-Mitigation
%20in%20Comm%20Lease%20cases.pdf.
Taylor, S. (n.d.). What are mediation and arbitration?. All Law.
https://www.alllaw.com/articles/legal/article9.asp.
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