The Basics of Commercial Property Law
Commercial property laws govern the buying, selling, leasing, and use of non-residential spaces, such as office buildings, retail stores, warehouses, and factories. These laws are important for investors as they can have a significant impact on the return on investment for a property. Investors need to be aware of zoning laws, tax obligations, and any restrictions on the use or modification of the property. Failure to comply with these regulations can result in loss of revenues or costly fines.
For landlords and tenants of commercial properties, such as retail shops, restaurants, or office spaces , understanding commercial property laws is essential to avoid disputes that could lead to costly litigation. Landlords need to ensure their leases comply with applicable laws and provide clear terms for rental payments, maintenance responsibilities, and termination rights. Tenants should review lease provisions to understand their obligations for repairs, insurance, and any restrictions on their use for the duration of the tenancy.
Unlike residential properties, which are primarily governed by landlord and tenant acts and focused on protecting the rights of tenants, commercial property laws focus more on the rights of commercial property owners and investors while also balancing the practical needs of businesses.
Key Legal Definitions
Within the realm of commercial property, there are a number of key terms and definitions that are widely used across relevant laws and regulations. A few of the most important terms are outlined below, based on the relevant provisions:
Lease agreements – these are the legal contracts that are signed in order to formalize an agreement between a commercial property owner and a tenant. A lease will outline the rights and responsibilities of each party, including the payment of rent, maintenance of facilities, and other obligations.
Zoning laws – the local, state and federal laws that dictate how land can be used for different purposes, including commercial practices and development. Zoning laws are typically established to promote efficient land use, safety and the general betterment of society. They are enforced at the local level.
Tenancy rights – these are the legal rights that come with a lease agreement. There are many types of tenancy rights that a tenant can have in commercial property, including exclusive possession of the premises, quiet enjoyment, freedom from harassment by the landlord, access to essential services and rights to common areas.
Understanding Commercial Leases
The most significant agreement that will be entered into between a landlord and a tenant will be the lease agreement. There are a number of important components that all commercial leases should contain. From a practical point of view, the lease agreement should specifically detail the length of the term of the lease (including options to renew), the amount of rent to be paid, including any increases, options for further lease terms, increases in rental amounts, increases in any common area maintenance expenses, rental taxes, etc. Included within the lease should also be details with respect to tenant’s obligations to provide insurance, types of insurance, delivery of certificate of insurance, surrender of premises, types of uses, pre-approval rights of landlord for alterations and improvements, acceptable use of the premises, etc. It is not uncommon for certain tenants to require very specific terms within their lease agreements (i.e. movie theaters, banks, etc.), while other tenants are more flexible and have less demanding requirements with respect to their use. In any event, it is critical that these demands be fully realized within the lease agreement itself.
Perhaps the most significant factor to look for within a lease agreement or to demand from the agent or landlord is the length of the option for the lease to be renewed. Typically, leases are entered into for a term of five (5) years or ten (10) years with two (2) to three (3) options to renew. The important component of the renewal options is the term of those respective renewal options. Many renewal options are set at the then-adjacent market rent. Depending on the timing of the then-adjacent market rent, this may be a very favorable component of the renewal option or an extremely unfavorable component to the lease. Even where the then-adjacent market rent is unknown, the renewal option should specifically set out the methods by which the then-adjacent market rent will be determined (i.e. perhaps based on an appraisal, the rental value of comparable properties within the area, etc.).
It is important that both landlords and tenants keep in mind that any lease agreement is typically subject to the approval of both the landlord and tenant’s counsel. Through the counsel, they are able to conduct their respective due diligence with respect to the property. Additionally, within the lease there should be a provision that allows for the assignment of the lease, or a sublease of the premises, by the tenant to a third party/parties. Landlords do have higher leverage in this area, as they are then approving a party outside of their expectations and requesting them to assume some of the obligations initially contracted for with the original tenant. However, landlords should certainly be conscious of the fact that it is critical and important for their tenants to be able to assign their respective leases to third parties, or sublease to third-parties.
As a result of the potential lease of commercial premises, it is quite likely that the tenant will require counsel to assist in negotiating the terms of the lease.
Zoning and Development Regulations
Always an important area for any new lease, or buying or selling commercial real estate, are zoning and land use rules. Zoning rules essentially designate what types of businesses can operate from a given location. For example, residential zoning generally does not allow a fast food restaurant to open at the corner of a neighborhood block. Most municipalities in the United States have zoning ordinances and building codes that prohibit certain types of uses in certain zoned sections of the city or county. Zoning ordinances should be checked by the landlord or lessor and the lawyer and the tenant before any of them sign a long-term lease because the current zoning rules can determine if the landlord is leasing space that can be used as planned or if the zoning rules will need to be changed and if so, how that change will affect property taxes, etc. Even if the tenant has an established business or trade, the property may discuss a different business and the new business is not zoned appropriately for that trade, then the sales will be lost.
Most zoning ordinances also contain requirements for obtaining special use permits (also referred to as "conditional use permits"). Some municipalities issue "special use permits" for things like a drive-through window or to allow a truck to make a high volume of deliveries for a new commercial warehouse. These permits are often time-consuming and costly to obtain, requiring months to prepare and file, and a number of public hearings before a board of adjustment. Know your zoning.
Tenant Rights and Obligations
The legal rights and responsibilities of tenants in commercial properties are invariably examined and codified in the lease itself. However, certain obligations remain both implied and are of common law origin. These obligations will apply irrespective of the contents of a tenant’s lease.
The duty to pay rent is the most fundamental obligation and is not dependent upon the nature of the property being rented. The General Principles relating to the duty to pay rent are:
The tenant must pay the rent personally; the payment of rent by a third party cannot be implied as a release of the tenant;
Payment must be within a reasonable time;
Payment must be without any condition or deduction;
Rent must be paid at the place of performance as specified in the lease; and
Rent must be paid in UK currency (being euros will not suffice) .
Tenants have a common law duty to repair and maintain the property at law, subject to the terms of the lease. Specified repair and maintenance obligations will take precedence over the general common law obligations. Tight restrictions on repairing obligations are common, although large corporations may be able to negotiate a more lenient form of repair obligations.
Tenants have an obligation to give notice of damage to the property to the landlord within a specified period. Failure to do so can result in penalties for the Tenant.
Dispute Resolution and Remedies
Like all rental arrangements, leases in a commercial property context can give rise to disputes. Some examples of questions that may arise in this regard include: Key strategies to avoid disputes include setting out the entire agreement in full in the lease document and documenting all correspondence and verbal communications that may affect the lease agreement. Despite best efforts, sometimes disputes arise. Again, the parties in such cases can make informal effort to resolve the matter before calling in the lawyers, but if a dispute does occur, fortunately there are a number of avenues for resolution under commercial law. Mediation, arbitration and litigation (i.e. the court process) are all options, depending on the preferences of the parties and the specific nature of the dispute. In mediation, the parties get together with their lawyers and/or other advisors to try to reach an agreement with the assistance of an unbiased third party. Sometimes parties have a mediator in common selected for them, while in other cases each side will have its own. Even in the latter case, it is commonly advisable for the parties and their lawyers to meet jointly with a single mediator to save time and money. Mediators usually have experience in the field of the dispute and can therefore be helpful in forecasting the position that a judge or arbitrator might take. They also assist the parties with identifying and reconciling their differences, and finding a mutually acceptable solution so as to settle the dispute. Mediation can save significant resources by resolving a commercial property dispute before it results in costly litigation. Arbitration is similar in some respects to mediation, but clearly different in others. Like mediation, the parties often appoint the arbitrator or arbitrators jointly to decide the dispute, although the arbitrator will always be selected openly. Whereas mediation does not generally involve the arbitrator making a decision on the matter, in arbitration the arbitrator will decide the dispute if the parties cannot negotiate a resolution through their own efforts or through mediation. In this sense, arbitration is more like litigation. This may make it less appealing than mediation to some, since litigation is generally an adversarial process wherein the parties seek to "win" so as not to suffer a result that legally binds them. Nevertheless, it sometimes makes more sense to arbitrate than not – e.g. where access to a specialized arbitrator is important such that compromising on who gets the arbitrator is not practical. A further factor to consider is that the parties can agree to afford either the mediator or an alternative person or panel the right to conduct the arbitration, which would allow each to show the roles of mediator and arbitrator in respective chronological order. Litigation is often the last resort, and is complicated and slow. While it is generally more public than any other form of dispute resolution, it can also be beneficial to allow the parties to appraise the legal issues in fair detail, to expose the risks of potentially large awards or penalties against one of them, and to assist in settlement negotiations or in crafting the final terms of a negotiated settlement. Often, a court judgment will not be as strict in its terms as a contract or mediation/arbitration award, or will include some room for interpretation or flexible implementation, which may likewise make subsequent settlement possible. It is often preferable to try to amicably resolve disagreements rather than to litigate, as it can be faster, cheaper and allow more leeway to reach an acceptable outcome for all parties. Nevertheless, if necessary or if desired it may be necessary to initiate litigation to protect one’s interests.
Emerging Trends
In an era where technological advancements and environmental sustainability are at the forefront, trends in commercial property laws are dynamically shifting. These changes are largely driven by the need for smart investments, corporate responsibility, and adherence to new regulatory requirements.
The Internet of Things (IoT), for example, is impacting how commercial properties are designed and maintained. Smart buildings that leverage IoT technologies require new legal considerations, such as intellectual property rights around IoT data, cybersecurity measures, and the liability of both owners and tenants in regards to data protection. As IoT sensors and devices collect vast amounts of data, it’s essential for investors and landlords to understand the ownership of this data and who is responsible for its protection under both privacy laws and contractually agreed-to terms.
Technological innovation also extends to financial transactions in commercial real estate. Blockchain technology, with its ability to create secure, transparent financial dealings, has the potential to revolutionize how transactions are executed. While the use of cryptocurrencies in real estate is not yet widespread, considerations around digital currency and blockchain transactions will likely become a focus for legislators. This will affect contract writing, financial transactions and the registration processes for property, especially when dealing with new types of digital real estate such as virtual or augmented reality spaces.
Another important trend is the increasing emphasis on green building practices. Environmental concerns have taken center stage in recent years , leading to more regulations such as energy codes and environmental impact assessments for new developments. The passing of regulations requiring energy performance certifications, for instance, means that both investors and tenants must have a solid understanding of compliance obligations. Investors need to be well-versed in how to incorporate the associated costs into their budgets and property values, while tenants should be prepared to select spaces that comply and support their own sustainability goals.
The influence of ESG (environmental, social, and governance) factors is also becoming more pertinent to commercial property law. Investors are placing more importance on properties that can demonstrate ESG oversight, with buildings that outperform peers in these areas commanding a higher return on investment. This shift has spurred a greater focus on compliance obligations for property managers and landlords. They will need to stay current on changes in laws regarding sustainable practices and equal access, and ensure they are aligned with business interests and consumer expectations.
Emerging commercial property laws, driven by tech and environmental changes, offer opportunities for investors and tenants alike to increase property value, improve brand image, and foster a culture of sustainability. To navigate these changes effectively, investors and tenants should work closely with legal counsel now to formulate strategies that align with the new environment. By being forward-thinking and adaptable, stakeholders can leverage the opportunities that these new laws present.