Mediation and Mitigation of Damages in a Commercial Lease

Lease Analysis

1. What is the distinction between a “commercial” and a “residential” lease? In a commercial lease agreement, should the law seek to protect the interests of the commercial tenant more than the interests of the commercial landlord? Why or why not?

A commercial lease is a contract drawn up and signed between a commercially zoned property and a business tenant. In other words, the lease is for a business owner to do business in the rented space. The residential lease is a contract between a landlord of a residentially zoned property and a tenant who plans to live there. In a commercial lease agreement, the law should seek to protect the interests of the commercial tenant and the commercial landlord equally (Goldman, 2002). One should not receive preferential treatment under the law over the other, otherwise the transaction is uneven and biased against one party. Unfortunately, landlord and tenant reform is not a new concept and is rather one that has existed for many decades, if not centuries (Lesar, 1960; Trapido, 1978). Any unfair transaction will result in a marketplace that is unstable. Even though there are arguments on both sides—i.e., that it is inhumane to force non-paying tenants out of buildings in the event of an emergency like that of the COVID 19 hysteria, or that landlords have a right to evict non-paying tenants—the matter should be solved with discretion and fairness in a way that is logical and empathetic towards both sides.

2. Sections 5 and 6, respectively, impose on the commercial tenant the obligation of making repairs to the leased property, and of making alterations and improvements to the leased property. Should the lease impose these obligations on the tenant, or should such obligations be legally imposed on the commercial landlord? Explain your answer.

Whether the tenant or the landlord should be responsible for making repairs to a building is really something that should be discussed prior to signing the contract. If the tenant can make a good case that he will be an anchor tenant in a particular area where there is much space available from the landlord and that the anchor tenant could thus draw more business and more renters to the area, then there is good incentive on the part of the landlord to draw up special terms for the anchor tenant, including offering to address all repair issues (Agrawal & Cockburn, 2003). It is a trade-off worth considering because of the positive impact that having an anchor tenant can have on a complex (Gatzlaff, Sirmans & Diskin, 1994). If the tenant is not going to be an anchor tenant, the incentive to supply these favorable terms is likely to be less. However, considering that so many buildings are now dormant as a result of the rise of ecommerce, landlords may find that they need to offer better terms to renters if they seek to have any business at all. The environment has changed so much in just the past 15 years, that this is one debate that could resolve itself simply because it now appears to be a renter’s market.

3. In the default provisions of Section 15, what is the landlord’s duty to “mitigate” damages? Should the landlord be required to mitigate? Explain.

Landlords are obliged to mitigate damages when a lease is broken. The reason for this is that if the landlord breaks the lease and evicts the tenant, that tenant’s business is interrupted and losses are likely to be incurred (Flynn, 2000). To not mitigate damages would be akin to, say, the government shutting down everyone’s business because of a flu virus going around, and then informing business owners that they were on their own and if they had to close down permanently that it was too bad but the government had an emergency situation and that was just the way it was. If a landlord acted this way to a tenant, he would be sued and the tenant would win. It is a good law to have in place because it ensures that the contract will be upheld and enforced even if the landlord seeks to break it—for he will then be obliged to pay the tenant whatever damages would be likely to be incurred as a result of the eviction and the stoppage of business. To extend the analogy used above, it should be apparent that every business in America has legal grounds for suing the government that required it to shut down this year.

4. Sections 2 and 19 discuss the creation of, and the parties’ rights in, the security deposit. Do these rights favor the landlord or the tenant? Is that appropriate? Why or why not?

The rights in the security deposit favor neither the landlord nor the tenant, although the argument could be made that it favors the landlord because it is held as a security against damages or non-payment made on the landlord’s property. However, the security must be deposited and interest earned on the money and the money returned with interest to the tenant at the end of the contract agreement if there has been no need or cause for its use to be made on the part of the landlord. Thus, it is a win-win arrangement for all parties and should not be viewed as a negative by either side. The landlord should receive a security deposit just to help cover some of the risk involved, and the tenant should be obliged to pay a security deposit because it is in the same spirit as that which obliges the landlord to mitigate damages if he were to break the lease. There are protections that are put into the contract that pertain to both sides, and this one, it could be said, favors the landlord—but it is not without favor, too, for the tenant. Nonetheless, it is appropriate because the landlord should have a right to protect himself against neglect on the part of the tenant.

However, in this contract, the terms favor the landlord because it allows for commingling of funds (if not illegal, which it should be under state law) and it does not indicate whether any interest will be earned for the tenant on the funds. The tenant should object to these terms.

5. Section 29 requires mediation, followed by arbitration, in lieu of litigation, to resolve disputes. What are the advantages and disadvantages of such a provision? How should the mediator and/or arbitrators be selected?

The advantages of mediation are numerous: first, it allows a resolution to be pursued without putting significant costs into attorneys; mediation can lead to quick and satisfactory resolution for both sides at a fraction of the cost typically incurred through outright lawsuit. The disadvantage of mediation and arbitration is that there is no trial by judge or jury but rather a process in which an agreement is essentially hammered out and if not hammered out then at least supervised by an arbitrator in whom both sides agree to place their trust and accept the outcome. Some people might feel that their case is open and shut and thus will not want mediation but rather a trial in which they can be 100% vindicated. This cannot or likely will not happen in mediation. The selection of mediator and arbitrator should be facilitated by both sides thinking about whether they want a mediator who is evaluative or facilitative, because this will affect the way the outcome is reached. Evaluative mediators will focus on the details, while facilitative mediators will focus on the big picture. Since the mediator is paid by both parties, they have an interest in selecting one that both can agree upon; thus, cooperation is necessary even at the beginning stages of mediation.

6. As a businessperson guided by a Biblical worldview, what changes would you make in this lease to make the terms comport more closely to Scripture?