How Commercial Leases Differ from Residential Leases.
A commercial lease is defined as a contract created for renting business property from an individual or another business. The lease contract gives the tenant the right to use that business property for the purpose defined in the lease agreement. The contract will have a term or time where those particular rules will apply for the particular property the business is operating on. The commercial lease differs from a residential lease in the following key ways:
1. It does not have the protections that a residential lease has. Commercial leases are not subject to the consumer protection laws that residential leases receive.
2. A commercial lease may need to be viewed by an attorney to understand the obligations fully.
3. Residential leases have standardized forms, whereas commercial does not and should not.
4.No caps or rules exist on the amount of the security deposit, and this is only defined in the lease agreement itself (this will be discussed in more detail below).
5. A tenant’s privacy remains unprotected in a commercial agreement except as defined by the lease agreement.
Types of Commercial Lease Agreements.
In the commercial leasing arena, the most common types of commercial leases are warehouses, industrial space, retail, and office buildings. The commercial lease will often define the type of business allowed to operate in wide categories:
Office Spaces: located in the same building either actual rooms or cubicles housing various professions and differing trades make up office space commercial leases. Professional traders use this structure such as law firms, medical offices, telecommunications, accounting, etc.
Retail and Restaurant Space: located within a building or as a stand-alone building this structure has shopping centers, strip malls, and regular mall formats. Classified as fast-food restaurants, specialty eateries, chain stores, independent shops, or clothing stores and will serve the public and the building often becomes part of the branding.
Industrial Space: more about manufacturing and will often appear as a warehouse. Businesses that need to utilize storage space, buildings to house manufacturing equipment or factories make up this sector.
Specialized spaces: other commercial space that uses commercial lease consist of medical clinics and hotels.
The Lease: Essential Requirements:
At the onset of the commercial leasing process, a business tenant should investigate what the lease terms will mean in terms of their business needs. Make sure the physical space becomes defined in the commercial lease. Check the rent amount to see if it correlates to what the business will do and whether the business can afford the rental amount. Think long and hard about the length of the lease and whether a long-term or short-term lease makes more sense depending on your business. Below are some critical considerations for commercial landlords and tenants to consider.
Fixed end date: gives an exact end date for the tenancy. It benefits both parties as it makes clear how long the agreement lasts, it may limit whether rent can be increased during the term and can provide requirements that the landlord provide notice to a tenant when changes in rent can be made.
Tenancy: this refers to the lease period that the landlord and tenant agree that the business can reside and operate there.
Automatic renewals: this allows for the lease to continue without negotiating the original terms the landlord or tenant had. Someone must give the notice to terminate the lease for it to end. These types of leases will provide for what the increases will likely be.
Single net lease: a tenant pays utilities and property tax while the landlord pays maintenance, insurance, and repairs.
Net-net or double net lease: a tenant pays for utilities, insurance premiums, and property taxes while the landlord pays for repair and maintenance.
Triple net lease: a tenant pays for all costs in the building space while the landlord becomes responsible for structural repairs.
Full-service gross or modified gross: a contract for a multi-tenant building that splits operating expense and structural repairs as well as common area maintenance between the tenant and landlord.
A commercial lease frequently will provide the tenant with the option to either extend or renew the lease, upon expiration of the original terms. Absent a provision of this sort, the tenant will not have the ability to do so. It is important to understand the distinction Illinois courts have drawn between renewals and extensions.
Lease Renewal: deemed to be a “covenant to grant an additional term upon the condition specified. B. Stein & Co. v. Sandberg, 419 N.E.2d 652, 656 (2d Dist. 1981).
Lease Extension: deemed “not a mere right to an additional enjoyment of the term, but… a present demise for a future term.”
The court in Sanni, Inc. v. Fiocchi, describes it another way: a lease extension is considered a privilege that, when exercised, creates a present demise through the end of the extended term, while a lease renewal is a present demise for the initial term with a privilege to obtain a new lease for an additional period of time. 443 N.E.2d 1108, 1114 (2d Dist. 1982).
The difference has been litigated in Illinois courts and whether the tenant had exercised the option to extend or option to renew was crucial to determining whether a lease provision exculpating the landlord from liability was enforceable. See Chicago Title & Trust Co. v. GTE Directories Corp., 1995 WL 584434 (N.D. Ill. Oct. 12, 1995).
Security Deposit and Return.
As stated above, Illinois has no statutory provisions governing a commercial landlord’s duties and liabilities with respect to tenant’s security deposits. There is very little case law that exists in Illinois related to this subject, however, Auker v. Gerold provides some general principles for commercial landlords. 214 N.E.2d 618 (5th 1966).
In Auker, the lease at issue provided that the tenant’s security deposit was to be credited to the tenant during the final two years of the lease, however, a fire destroyed the premises prior to the last two years of the lease, and it was terminated. The landlord refused to return the deposit, under the theory that the deposit was an advance rent payment that it was entitled to retain. The court disagreed and found for the tenant.
The Auker court held that when the lease provision is ambiguous, a tenant’s money paid in advance of the lease term will be construed as security for the tenant’s performance under the lease. at 624. The key determination was that a tenant’s right to return of its deposit should be determined by whether the money was paid to secure performance or was the contracting parties’ determination of liquidated damages. Id. at 620.
Auker also discussed other established principals in commercial leasing, namely: Unless parties provide otherwise, payments to secure performance are adjusted on the actual basis of actual damages resulting from nonperformance. Id. at 620-21. Tenants are entitled to a refund of unearned advance rent payments absent a compelling consideration to the contrary. Id. at 622. An example of a compelling consideration is when the tenant was not entitled to a refund of the security deposit when the tenant was evicted for breach of covenant to construct a new building. See Cauley v. Northern Trust Co., 43 N.E.2d 147 (1st Dist. 1942).
These principles were addressed by the bankruptcy court in the Northern District of Illinois in In Re New World Institute, Inc., 1990 WL 16933 (N.D. Ill. Feb. 23, 1990). The New World court read the Auker case as standing for the following principles that should be noted by all commercial tenancies in which a security deposit is had:
A security deposit may be held for either prepaid rent or security for the performance of obligations under the lease;
A non-defaulting tenant is more likely to recover a security deposit than a defaulting tenant;
A tenant does not have an absolute right to refund of a security deposit if it is in the nature of an advance prepaid rent;
A security deposit will be construed as being security for a tenant’s obligations under the lease, rather than an advanced payment unless a contrary intent is expressly provided for in the lease;
A security deposit to secure a tenant’s obligations under the lease is recoverable upon lease termination;
A landlord can deduct actual damages, evidence by appropriate documentation, from a deposit held as security for the tenant’s performance.
Take-Away on Security Deposits and Commercial Leasing.
Based on the case law above, unless a lease clearly specifies the purpose of the security deposit and under what conditions the tenant will not be entitled to a return of it, the tenant will likely be entitled to a return of the deposit upon lease termination, less the landlord’s actual damages, if any, for nonperformance. Advance rent payments may be refundable unless the lease provides that such payments will be forfeited if the lease is terminated early as a result of a default of the tenant. Contact us if you need assistance in regard to a commercial lease to make sure you are getting the best result for your business to thrive