Most individuals must navigate a residential lease at some point in their lives – typically for an apartment to live in before potentially purchasing a home later in life. In contrast, the majority of people will never need to negotiate or enter into a commercial lease – used for renting space to run a business. For those who do, it is important to understand the differences between the types of leases to avoid inadvertently making a bad deal. On the other hand, a business owner who has become familiar with commercial leases and then decides to invest in and rent out residential property should bear in mind the special rules for residential leases to avoid a costly mistake.
All states have some differences between laws governing residential and commercial leases based on the public policy position. While commercial tenants are presumed to be savvy parties operating a business and capable of negotiating and bargaining on an even playing field with their landlord, the average residential renter is unsophisticated and vulnerable to being taken advantage of by better positioned landlords. After all, renters tend to be younger and in a worse position financially than someone who needs to rent a space to operate their privately owned business. A commercial tenant is viewed as another equal player in the economic marketplace who is capable of, and therefore responsible for, the consequences of any contract they choose to enter into.
Wisconsin state law (primarily Wisconsin Statute Chapter 704) is a set of general rules that apply to all leases but that can be altered by contract (i.e. the lease), and then special rules for leases creating residential tenancies. Residential tenancy is further governed by state regulatory code (ATCP Chapter 134) providing more specific rules for residential landlords to follow. The list below highlights some of the major rules applying to residential leases in Wisconsin:
- Requirement to provide a check-in sheet at the start of a lease which the tenant can make notes of any conditions existing on the premises (Wis. Stat. 704.08).
- Requirement that leases must contain specific language notifying tenants of certain rights of domestic abuse victims (Wis. Stat. 704.14).
- Required special notice procedures to remind tenants of deadlines related to automatic lease renewals (Wis. Stat. 704.15).
- Minimum habitability standards that are generally waivable for commercial leases but required in residential leases (Wis. Stat. 704.07).
- Certain provisions, when included in residential leases, make the lease void and unenforceable (Wis. Stat. 704.44). The ten provisions listed act as a sort of “guard rail” on the terms of residential leases keeping certain one-sided terms from being imposed on any renters in the state. The prohibition on such terms are not universal, and it is important to review any form leases obtained that are not Wisconsin specific for inclusion of these terms.
- Strict rules on the receipt of, accounting for, and return of security deposits. (ATCP 134.06).
- The requirement to highlight and separate out certain terms as “NONSTANDARD” making them easier for tenants to see (ATCP 134, throughout).
In addition to these special rules contained in the Wisconsin state statutes and regulations, certain municipalities also have local ordinances imposing additional requirements. It is important to review any local laws that may provide further restrictions on residential leases.
For Example: Outside of strictly defined differences in legal rights and requirements, residential and commercial leases tend to vary in other ways. The following are typical differences:
- Commercial leases are generally longer. Typical residential leases are either month-to-month or annual. Such short terms are certainly possible for commercial leases, but three to five years with options to review for longer is more standard. Generally, commercial tenants will want short terms with many options to review, while commercial landlords will want the opposite.
- Commercial leases more commonly involve the tenant making significant alterations to the property. It is rare for residential tenants to take out walls, install new equipment, etc., but commercial leases often allow tenants to modify the space to suit their business needs. The responsibility for and ownership of these changes should be defined in the lease.
- Commercial leases tend to have the tenant take on more responsibility for maintaining the property and paying ancillary costs, like property taxes. A common subset of commercial lease is the “triple-net” lease, where, in addition to rent, the commercial tenant pays all of the property taxes, insurance and maintenance costs. Residential tenants pay rent and often pay the cost of utilities, but rarely are asked to directly pay for property taxes, maintenance or insurance costs.
For renters entering into a commercial lease for the first time, understanding the protections they may have benefited from without knowing about it in the course of their residential tenancies is important to fully review and potentially negotiate their commercial leases, where such protections do not apply. No one should ever sign a contract, like a lease, without carefully reading it first. Commercial tenants are exposed to the possibility of terms so burdensome the legislature banned them in the residential setting and thus need to review the lease carefully. For first-time landlords of residential properties, keeping these special rules in mind may be helpful in avoiding a costly mistake. Terms they may have grown accustomed to as “typical” in the commercial setting cannot just be inserted into a residential lease without first ensuring compliance with applicable laws.
In conclusion, whether you are entering into a commercial or residential lease for the first time you should be aware of the laws and rules in your state and local municipality. Please contact one of our experienced real estate attorneys if you have questions.