Differences Between a Residential and Commercial Lease

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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Written by Jeffrey Johnson
Insurance Lawyer Jeffrey Johnson

UPDATED: Jul 15, 2021

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Though each state has its own rules and regulations on commercial and residential leases, all states make general distinctions between the two types of leases between landlord and tenant. 

Residential Lease Agreement

A residential lease agreement is a contract between an individual(s) tenant and the landlord to use property for his/here living arrangement. A typical residential lease for housing includes a home, townhouse, condominium, and an apartment. The property is primarily used for a residence, not for a profit. No commercial purpose exists such as for the sale of goods, services, or manufacturing products. The consideration (rent) for the occupation of a residential rental is typically based upon a set amount per month varying from a month-to-month lease to a term of years.

Commercial Lease

A commercial lease is a contract between a business tenant and landlord for use of commercial property to generate a profit through the sale of goods, services, or manufacture of a product. The premise is a business space not designed for sleeping and day-to-day living for the residential tenant. The commercial property typically is a warehouse, strip mall, or office space in an industrial or commercial building. The consideration (rent) is typically based upon the amount of square footage occupied by the tenant plus, in some instances, a percentage of the gross received by the tenant. The term of the lease is typically for a set number of years where upon near the end of the term, the tenant has an option to renew for another set term.

Protections for the Residential Tenant

Because of the value placed on safe and secure housing, all governmental entities have a special interest in protecting the rights of the individual residential tenant from an unscrupulous landlord. Additionally, the prevailing thought is that individuals who enter into a residential lease do not typically have the degree of skill, knowledge, or sophistication of a commercial tenant whose interest is to make a profit in his business venture. As a result, every state has built in protections for the residential tenant stemming from the landlord’s failure to provide required safe and habitable housing to the landlord’s failure to timely return a former tenant’s security deposit. Moreover, many statutes allow a tenant attorney’s fees for habitability violations of a residential unit. Such infringements might include a landlord who knowingly fails to provide heat or remove rodents or cockroaches from a residential rental. The thinking behind awarding attorney’s fees comes from the presumed unequal bargaining power between a residential tenant and a residential landlord. 

Few Protections for the Commercial Tenant

States are pretty uniform in holding that there is little to no protection for the commercial tenant in his/her business arrangement with the landlord. The commercial tenant is presumed to be on equal footing with his/her landlord in negotiating a commercial contract, unlike the residential tenant. The assumption is made that the commercial tenant has the training, experience, knowledge, and sophistication to enter into the written commercial lease along with access to skilled third party professionals such as lawyers, contractors, and engineers to consult with in the negotiating process with the landlord. More opportunities to negotiate are available to the commercial tenant than the residential renter. Furthermore, the commercial lease is usually uniquely designed for the particular commercial tenant unlike the typical standard form of the residential lease. The commercial lease is also harder to break than a residential agreement with the renter. The tenant is typically a corporation or a limited liability company (an entity created by the owner of the business to protect himself from personal liability). If the tenant is an entity, the landlord generally requires a personal guarantee by the individual owner that he will make good on the contract should the tenant entity fail to make the monthly payments.

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