Commercial lease disputes can be disruptive to the businesses of both landlords and tenants. A landlord may be frustrated with the loss of rental income or the tenant’s breach of lease conditions. The tenant’s business can be harmed when a landlord does not fulfill requirements of the lease that are critical to the tenant’s operations. Unlike residential leases where non-payment of rent is often the main issue, many commercial disputes are related to a breach of some condition of the lease.
Courts interpret commercial leases very differently than residential leases. Tenants in residential leases receive protections of local ordinances and consumer protection laws. There is often an assumption in commercial leases that both parties are on equal footing or have a certain level of sophistication in negotiating lease terms. Commercial leases are therefore interpreted more strictly.
Here are four common disputes that often arise in commercial leases:
Lease option agreements are one way to circumvent a financing problem when the buyer has poor credit. A lease option is a lease between a landlord (seller) and a tenant (buyer) but with the option to buy. The tenant has the benefit of consumer protection laws and the right to walk away from the lease without purchasing. The option usually locks in the price for the tenant should they decide to buy. The option gives security to the tenant knowing they can “try before buying” and a guaranteed purchase price regardless of any increase in fair market value.
Lease options are similar to installment land contracts but have very different implications. (Learn more about installment contracts here).
Lease options also have risks and drawbacks. The tenant will have to pay something to the landlord in exchange for the right to buy (the option). This compensation is usually in the form of increased rent during the term or a lump sum payment at the start of the lease. If the tenant decides not to exercise the option, the payment is forfeited.
It happens countless times. A prospective buyer tenders a $10,000 deposit to a seller for a residential property. But prior to closing, a financing problem prevents the buyer from completing the sale. Most residential agreements of sale contain a mortgage contingency where the buyer may back out if financing is denied. The buyer is usually entitled to full return of the earnest money if denied financing.
Aggravated sellers often look for reasons to keep the deposit when the buyer’s financing is denied. One common dispute is over whether the buyer misled the seller as to creditworthiness. The seller’s argument is usually that no offer would have been made to the buyer if the seller had known of the credit issue.