Commercial Lease vs. Residential Lease: 5 Key Differences

Though commercial and residential leases both are written contracts for the use of real estate and share some common features, the two differ in several significant ways. If you work in either or both areas of real estate, then you should understand the five key differences between a commercial lease and a residential rental agreement.

Allowed and Required Uses of Property

The terms themselves point to one key difference: one type of lease relates to commercial property and the other concerns residential property.

  • Commercial leases concern spaces that produce or sell products or services, such as a retail store, warehouse, office, parking garage, or restaurant. The leases usually specify the types of business operations permitted on the premises. Some commercial leases require certain days and hours of operation.
  • Residential leases relate to spaces where people live, such as an apartment or house.

Residential leases usually prohibit the use of the property for most types of commercial activities, and commercial leases typically prohibit the use of the property as a living space.

Length of Lease

The duration of the lease can vary for both types, but generally:

  • Commercial leases tend to be for longer periods, usually a minimum of three to five years. Often the lessee has an option to renew once that period expires.
  • Residential leases typically are for one year, followed by a month-to-month basis.

Legal Protections

Tenants under a residential lease have several legal protections that do not apply to commercial tenants, in part because commercial tenants are presumed to have more resources and knowledge in negotiations and in part because people’s shelter is a basic need deserving of protection. These protections vary by state and, in some cases, by city. Residential tenants usually are better protected from eviction and rent increases than commercial lessees. For example, landlords must give residential tenants advance notice of rent increases and cannot evict arbitrarily. Additionally, security deposits for residential tenants are much more stringently regulated, both in the allowed amount at the beginning of the lease and the permitted deductions at lease end.

Responsibility for Maintenance and Repairs

Though both types of tenants are obligated to keep the property in a reasonable condition, responsibility for completing repairs and performing significant maintenance differs.

  • In commercial leases, the tenant usually is responsible for the majority of maintenance and repairs. The specific division of duties will be outlined in the lease. The landlord typically is responsible just for maintaining the physical building and common areas.
  • Residential leases usually allow tenants little responsibility for repairs. The tenant must notify the landlord or landlord’s property manager when something breaks in the unit. The landlord then is responsible for taking action within a reasonable time period for essential repairs, and the landlord must provide that the housing be safe.

Common Areas

Both types of tenants frequently enjoy the benefits of the property’s common areas, which are those areas and amenities shared by all tenants of that property. However, there is a difference in how the costs of those areas are paid.

  • Many commercial leases include a provision for common area maintenance, or CAM, charges. These are the costs of maintaining the shared areas of the property, such as maintaining the landscaping, vacuuming the lobbies and hallways, and re-paving the parking lot. Tenants might be assigned a pro-rata portion of the CAM, which assigns a percentage based on the tenants’ percentage of total square feet. These charges can fluctuate month to month.
  • Residential leases rarely require separate payment for common areas. Instead, monthly rent is a fixed amount.

Summary

Generally, commercial leases are for spaces where products are made, things are sold, or services are provided. They cover longer timeframes, include provisions for contributing to common area expenses and contain fewer tenant protections. Commercial tenants bear most of the burden for maintenance and making repairs. Residential leases are for places where people live. They usually span a year and contain numerous legal protections for the tenant. Residential tenants usually are not responsible for any repairs or maintenance.

Whether your interest lies in commercial property or residential real estate, take advantage of the insights and information about both types of property throughout the United States available in the ProspectNow databases.