What You Should Know About Commercial Leasing and Disputes

A commercial lease is more than an agreement to pay rent in exchange for the use of property. It defines the legal and financial relationship between the landlord and tenant and can govern that relationship for years. The lease determines not only how much rent is paid, but also how the property may be used, who is responsible for operating expenses, maintenance and repairs, what constitutes a default, and what remedies may be available when a dispute arises.

For a business, those provisions can directly affect its operations and expenses. For a commercial property owner, they can affect rental income, control of the property, and the ability to enforce the lease. Understanding those rights and obligations before the lease is signed—and knowing how to respond when a dispute arises—can help protect the parties' business, financial, and property interests.

What Is a Commercial Lease?

A commercial lease is a legally binding agreement that gives a tenant the right to possess and use commercial property for a specified period, subject to the terms and conditions of the lease. A commercial lease may allocate significant financial, operational, and property-related responsibilities between the landlord and tenant.

Commercial leases commonly address the lease term, base rent and additional rent, security deposits, permitted uses of the property, maintenance and repairs, insurance, taxes and utilities, improvements and alterations, renewal options, assignments and subleases, events of default, termination rights, and available remedies. How those responsibilities are divided can vary significantly depending on the property, the type of lease, and the terms negotiated by the parties.

For that reason, the economic terms of a commercial lease extend well beyond the stated monthly rent. A tenant may assume responsibility for operating expenses, taxes, insurance, maintenance, or other costs, while the landlord may retain responsibility for particular portions of the property or particular expenses. Understanding how the lease allocates those obligations is essential to understanding the actual cost and risk of the transaction.

What Causes Commercial Lease Disputes?

Commercial lease disputes often arise when the landlord and tenant disagree over what the lease requires, whether one party has failed to perform, or what rights and remedies are available as a result. Common disputes involve unpaid rent or operating expenses, maintenance and repair obligations, property damage, permitted uses of the premises, defaults, renewal rights, and termination of the lease.

Disputes can also develop when circumstances change during the lease term. A tenant may want to assign the lease or sublease the premises, modify its operations, or make improvements to the property. A landlord may contend that those actions violate the lease or that another event of default has occurred. Unexpected expenses or conditions affecting the property can also lead to disagreements over which party bears the responsibility.

In each situation, the specific language of the lease is the starting point. Determining whether a breach or default has occurred requires examining the obligations the parties actually agreed to, any notice or cure requirements, and the remedies the lease provides if those obligations are not satisfied.

Common Commercial Lease Disputes

Commercial lease disputes often involve much more than whether rent was paid on time. A lease can allocate significant financial and operational responsibilities between the landlord and tenant, and disagreements over those responsibilities can affect both the property and the businesses operating from it.

Rent, Operating Expenses, and Other Charges

Rent disputes may involve more than the monthly base rent. Depending on the lease, a tenant may also be responsible for common-area maintenance expenses (CAM charges), property taxes, insurance, utilities, or other operating costs.

Disagreements can arise over whether a particular expense may be charged to the tenant, how the charge was calculated, or how an expense should be allocated among tenants. These additional expenses can represent a significant part of the overall economics of the lease for both parties.

Defaults, Notices, and Opportunities to Cure

Commercial leases typically identify events that may constitute a default and the remedies available when a default occurs. The lease may also require written notice and give the defaulting party a specified period to correct the problem before certain remedies may be exercised.

For that reason, the parties should review the lease carefully before sending or responding to a default notice, terminating the lease, or taking other action in response to an alleged default.

Maintenance, Repairs, and Improvements

Responsibility for maintenance and repairs can vary considerably from one commercial lease to another. A landlord may retain responsibility for certain structural or common-area components, while the tenant may be responsible for maintaining portions of the leased premises.

Disputes can also arise over improvements and alterations, who must pay for them, whether landlord approval is required, and whether the tenant must remove improvements or restore the premises when the lease ends.

Use of the Property and Business Operations

Commercial leases commonly define or restrict how the premises may be used. Those provisions can become important when a tenant changes its business operations, introduces a new use, or begins conducting activities that were not contemplated when the lease was signed.

Use provisions may be particularly important in multi-tenant properties, where leases may contain exclusive-use provisions or other restrictions intended to regulate how different businesses operate within the property.

Renewal, Extension, and Termination Rights

A renewal option can be valuable, but the lease may require the option to be exercised by a particular deadline and in a particular manner. Similar requirements may apply when either party seeks to terminate the lease.

Disputes can arise over whether a renewal was properly exercised, whether the lease was properly terminated, or whether an alleged default permits early termination. Missing an important contractual deadline can have significant consequences for either party.

Assignments, Subleases, and Transfers

A tenant's circumstances may change during a long-term commercial lease. The tenant may sell its business, reorganize, relocate, or want another business to occupy some or all of the premises.

The lease may restrict assignments and subleases or require the landlord's consent before a transfer occurs. Reviewing those provisions before completing a business sale, reorganization, or proposed transfer can help avoid creating a separate dispute under the lease.

Resolving a Commercial Lease Dispute

When a commercial lease dispute arises, the first step is to determine what the lease requires and what options are available. The lease may contain notice and cure requirements, mediation or arbitration provisions, or specific procedures that must be followed before certain remedies are pursued.

Many disputes can be resolved through negotiation, written demands, mediation, or another agreed dispute-resolution process. When a resolution cannot be reached, litigation may become necessary to enforce the lease, recover damages, regain possession of the property, or pursue other available remedies.

Timing can be important. A dispute involving business operations, rental income, possession of the premises, or an approaching contractual deadline may become more difficult to resolve if it is allowed to continue without being addressed.

Protecting Your Commercial Real Estate Interests

A commercial lease can affect a business or property investment for years. For that reason, careful review and negotiation before signing can be just as important as knowing how to respond when a disagreement develops.

Landlords and tenants should understand the financial obligations, operational responsibilities, default provisions, and remedies contained in the lease before problems arise. When a dispute does occur, identifying the issue early and understanding the parties' contractual rights can help protect the business, the property, and the value of the transaction.

The Spencer Law Firm assists commercial property owners, landlords, tenants, investors, and businesses with commercial real estate matters, including lease negotiation and review, lease disputes, defaults and termination, and other matters involving commercial property.

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