What is a Commercial Lease in Michigan?
Commercial lease agreements are like more complex versions of residential lease agreements, and in Michigan, they’re generally governed by the same basic legal principles as residential leases — though the rules governing a business tenant’s lease offer some unique limitations on the rights of landlords. Commercial leases typically involve parties with relative equal bargaining power, in contrast to leases for residential dwellings, which often apply the remedial protections of the Consumer Protection Act.
Landlords often use the comparison of commercial leases to residential leases because it allows tenants to expect the same minimum rights that apply to all residential tenants in Michigan. However, the details of a commercial lease differ from the terms found in a residential lease: the property being rented is usually zoned for commercial use only, for instance, and the terms of occupancy may include a higher rent. Responding to complaints about the utilities in the property may present a different experience for a commercial tenant than the experience of a residential tenant at another property.
Similarly, the eviction process can be different for commercial tenants — the time it takes to evict a business is often much less than the time it takes to evict a residential tenant. However, even for commercial leases, the tenant has the right to demand habitable premises, and also has the right to the return of any security deposit (as specified by law). A business tenant is also prohibited from the premature termination of the lease, unless the lease agreement is modified by the court.
Michigan law also applies the same reasonably practical expectations of habitable living space that it does for residential tenants to a business. In Michigan, tenants have the right to habitable premises. The issue of habitability is on the radar of most state legislatures, especially in light of the current trend of short-term rentals and airBnB-type leases; some states have been looking to import the same obligations for owners of short-term rental properties that currently exist for owners of long-term leases .
Where a residential tenant might have many opportunities to recoup losses that exceeded their security deposit, a commercial tenant is unlikely to have much, if anything, left covered after discovering their office flooded or the roof fell in. This is one of the main arguments made by commercial landlords for more limited rights for their tenants when it comes to seeking damages. However, in Michigan, the calculus around habitability is slightly different (though the rules around reasonable grace periods, for example, are similar).
A commercial lease is an agreement between two businesses. But the fact remains that there’s still a landlord-tenant relationship, and even commercial leases are subject to the contracts that make them as legally binding as they are. All bets are off, however, if the agreement is unclear. Any errors or poorly-worded clauses in the agreement can lead to misunderstandings later on.
Certain lease clauses are standard for a commercial lease. Tenants naturally want a period of time to review the lease and its terms, and later, to make any necessary changes. Landlords, on the other hand, want the agreement to be signed quickly so that customizations can begin to the property. The standard for these rounds of negotiations is that each party has a reasonable amount of time (usually, 30 days), but the landlord’s preference may override the tenant’s unless otherwise stated.
It is always a good idea to be clear in legal agreements, using the same words throughout. A great measure for this is to refer to parties to the agreement by name instead of by role: "Tenant" and "Landlord" are okay, but "Lessee" and "Lessor" are not.
Commercial leases often vary in the terms they include. For one, commercial landlords tend to find ways of mitigating their losses if they have to file an eviction. For one thing, the courts take a dim view of overdue rent payments, and for another financial loss is ultimately theirs if a tenant disappears before making full payment on their lease.
Key Provisions of a Michigan Commercial Lease
The following are some of the key components of the common bond between landlord (lessor) and tenant (lessee), the commercial lease agreement:
Lease Term
A commercial lease generally has a fixed term that usually ranges from five to 10 years but could be longer, particularly for larger companies that value the ability to establish a stable base of earnings with a predictable overhead. Lease terms are customarily set out in the lease with a definitive starting and ending date.
Rent Structure
The rent or lease payment due each month is, of course, the most conspicuous section of the lease agreement. Because it has such a vital impact on operating expenses and often finance earnings, rent can be a complex structure when taking into consideration the time-tested elements of leasehold financing transactions. For example, common rent structures include the net lease (including single, double and triple net) or the modified gross lease with profit or loss participation rights. When the landlord retains more control over the property, such as in a net lease, it is most important to determine the tax and accounting treatment. While the tenant will usually be carrying this property on its balance sheet, the valuation of what the land and building components of the property are worth should consider all of the operating agreements including easements and utilities, like water and electric.
Maintenance and Repair
A careful approach to this section should include tax and insurance planning considerations as well as the allocation of future costs, including reserve funds (if any) to cover repairs.
Termination
Be sure to include a termination clause should one party default on its respective obligations or completely abandon the agreement.
Legal Requirements and Tenant Rights
Commercial lease agreements in Michigan must meet certain legal requirements, though many of these requirements are less strict than those governing residential leases. In particular, the Michigan Commercial Landlord and Tenant Relationship Act (CLTRA) is an important piece of state legislation that addresses many landlord and tenant rights and responsibilities in regards to commercial leases.
The CLTRA governs the obligations and remedies of parties to commercial leases, including landlords, tenants, subtenants, assignees or other transferees, and guarantors. Under the CLTRA, landlords have the right to take possession of a property after providing a tenant with appropriate notice when the tenant has surrendered the property or has failed to pay rent. Tenants have the right to remain in possession of the property for the duration of the lease unless they breach the terms of the lease. The landlord has the right to mitigate damages by re-renting the property to a third party. Tenants also have a duty to pay rent for the entire duration of the lease or for the period agreed to in the lease.
While many lease terms can be modified to better reflect the party’s needs (including the rent payment schedule), there are certain limitations on what can and cannot be included in a commercial lease. Per Michigan law, landlords may not:
Landlords may make any other agreement with a tenant in a commercial lease, provided that it is in writing and not against public policy. Further, landlords may include other tenant obligations by contract, including repair and maintenance duties.
Certain lease provisions are subject to a test of reasonableness, including re-entry by the landlord for default or inspection purposes. A court may determine that a commercial lease provision is unreasonable if any of the following exist:
Michigan law offers significant protections to commercial tenants and landlords in the event of a dispute. Provided that a tenant does not breach the terms of a lease, the landlord cannot evict the tenant without a court order. Likewise, commercial tenants cannot terminate a lease unilaterally. Eviction requires a court-ordered judgment for possession, and this judgment cannot be obtained earlier than ten days after the order is made.
Eviction actions may seek rent and possession only, and cannot seek any incidental damages, such as damages sustained by third parties. Any money judgment a landlord obtains may not be enforced until written notice within five days after obtaining the judgment.
When a landlord fails to comply with the terms of a commercial lease, a court may stay possession of the property until the landlord complies. Courts have significant discretion to order equitable relief, including extending the lease if the tenant prevails. In addition, Michigan law allows a court to award reasonable attorney fees when the parties’ agreement provides for permissible attorney fees in the event of a dispute.
Common Mistakes and Negotiation Strategies
Upon initially reviewing a commercial lease agreement, parties sometimes miss negotiating points that are very important in a lease context. Some common pitfalls include:
—The absence of limitations on the landlord’s ability to relocate the tenant, substantially alter the space they occupy, or increase the rent. A good commercial lease should give the tenant some recourse if the landlord seeks to significantly redefine the original deal. In Michigan, it is customary for tenants to negotiate limits on the landlord’s ability to relocate them to another space; some owners stand firm on their right to relocate tenants within their space but agree to pay moving expenses. Many transactions contain a specific schedule for rent increases over the course of the lease.
—Improperly defining use. A commercial lease should spell out a precise definition of the type of activities the tenant will pursue in the leased space. Leases that allow a broad set of activities significantly limit the landlord’s control over the property. A restrictive covenant protects the property in the same way that a clear use definition protects the landlord.
—Too little or overly limited parking. Commercial tenants need sufficient parking for their employees and customers. Some tenants may negotiate a right to free and unfettered access to all parking spaces. This is especially important in high-density user properties such as mixed-use facilities where patrons of restaurants and retail might use the same spaces as employees.
—Energy clause ambiguities. The energy clause sets out the parameters for how tenants will pay for utilities. Since energy prices can fluctuate over a lease term, the tenant should seek a formula that adjusts the costs and quantifies the payment schedule. The goal is to create a predictable estimate of utility costs over the duration of the lease.
—Ambiguous assignment and sublet restrictions. A commercial tenant might wish to assign or sublet its space to another party for reasons such as loss of sales or downsizing costs associated with operating a business. Michigan allows the assignment or subletting of commercial leases with the consent of the landlord. But landlords often resist. They might fear that an assignee or subletter with less experience or credit capacity might impair the value of the existing lease and make the space difficult to fill in the future. One way to overcome this is for the tenant to negotiate a rent reduction for the landlord in exchange for assignment approval. It is also possible to negotiate a requirement that any new tenant would operate a business similar to the existing tenant or reduce the percentage of the space that can be sublet or assigned.
For a tenant, the best lease agreement balances a favorable negotiated position in its favor while controlling risk. For a landlord, the opposite is true. Either approach requires careful planning and negotiation to prevent long-term problems.
Lease Modifications and Renewals
Amendments and renewals are an important part of governing a commercial lease agreement in Michigan. Although not every lease agreement must include renewal provisions, it is quite common for both landlords and commercial tenants to agree to extend or modify their leases prior to expiration. Generally speaking, if negotiated properly, amendments and renewal terms can be recorded against the related real property, although such a requirement can be avoided when negotiated otherwise.
All amendments and renewals should be documented in writing and signed by the relevant parties. Not only does a written agreement protect the rights of the parties, but a written amendment or renewal is also generally required to accomplish the aforementioned recording with the relevant Register of Deeds .
While certainly not an exhaustive list, common issues to consider when drafting an amendment or renewal include: If there is a provision in the current lease agreement requiring written documentation of all amendments and renewals of the lease, do not forget to address this. Amendments that are orally agreed upon or not reduced to writing can complicate what should otherwise be a simple matter and can adversely affect the rights of the parties. A verbal modification or amendment could even be unenforceable.
Amendments and renewals of commercial lease agreements are not uncommon in Michigan, especially now given the slow, but promising, rebounding state of our economy. If you have questions about this process or how to move forward with renewing your commercial lease agreement, such as by extending the term of your existing lease or by renegotiating terms, or about whether to purchase the property you are renting, give us a call to discuss your options.
Settlement of Disputes in Commercial Leases
While commercial leases are drawn up to avoid disputes between landlords and tenants, disagreements can still arise. Fortunately, Michigan lease agreements often contain dispute resolution provisions, which can help negotiators resolve problems without resorting to litigation.
Mediation
Mediation is a method by which both parties of the contract meet with a third-party, neutral mediator. Together, the mediator and the two parties try to find a common ground and reach an agreement. You can agree to enter into binding or non-binding mediation. For binding mediation (or "baseball arbitration"), the mediator listens to both sides and then decides on a resolution. His or her recommendation is then presented to the parties. Parties do not have to accept the solution, and if they do not, the case can go to litigation. Binding mediation is also sometimes called "rent-a-judge," "private judging" or "early neutral evaluation." Non-binding mediation or "facilitative mediation" sets out recommendations as well, but the parties do not have to follow them. Facilitative mediators are usually trained professionals with legal backgrounds. This type of mediation is more likely to result in a mutually beneficial solution. The parties get to know each other in a relaxed environment where they can present their positions with the help of the mediator.
Arbitration
It is common to see an arbitration provision in a commercial lease that does not involve mediation. This requires the disputing parties to make a decision about the dispute to either a single arbitrator or a panel of arbitrators. Like a judge, these arbitrators will listen to both sides of the story and present each party with either a yes or no decision. This decision would be legally binding. מכונות רוורס
Litigation
Disputes can ultimately end up in the hands of a judge and jury if they cannot be resolved through mediation and arbitration first. There are limits on the amount of damages a plaintiff can receive if the court finds in favor of the tenant, but a jury could award the landlords the full amount of the damages requested if it believes the evidence supports such a finding.
How to Create a Michigan Commercial Lease
In the context of a commercial property transaction, the lease agreement must be drafted to conform with the relevant state law as well as standard commercial practices. The lease terms will vary based on the specific type of property involved, as well as how the property will be used. Therefore, it is essential that the parties consider how the lease will be used to minimize potential disputes and legal issues down the line.
Article 11 of the Michigan Business Corporation Act (Public Act 162 of 2008) states that commercial lease agreements must be in writing, signed by both parties, and reference the law’s provisions regarding lease agreements. Commercial landlords in Michigan must also comply with certain local laws when drafting a lease, such as the Michigan Truth in Renting Act. The lease must also contain the following items:
- The names of the landlord and tenant
- A complete description of the property
- The amount of rent and when payments are due
- The length of the lease period
- Any provision allowing the landlord access to the property, such as to make repairs
- Obligations of the tenant, such as paying utility bills, disposing of waste properly , and maintaining necessary licenses or permits
- Terms for continuation of the lease agreement
- Provisions regarding default
Some commercial lease agreements include additional paragraphs to cover a range of special provisions, including:
- Indemnification when required
- Restrictive covenants
- Assignment and subletting terms
- Disclosure of landlord financing
- Description of common areas
- Deposit amounts
- Alterations and/or improvements made while the property is leased
- Renewal terms
- Lease termination concerns
A real estate attorney may include additional provisions in the lease agreement, depending on the property being leased and the specific goals of the landlord or tenant. Some of the potential options include:
A real estate lawyer has the knowledge and experience necessary to assist a business entity in drafting a solid commercial lease agreement. It is critical to protect both the landlord and tenant, which means anticipating potential issues and addressing them upfront in the lease, rather than fighting about them later. While simply using a boilerplate lease agreement may appear to be a sensible option, it could lead to unforeseen liability and expenses. A real estate lawyer will make sure that the business entity’s rights are protected in an agreement that covers all the bases.