Michigan Commercial Lease Agreement

Introduction

A Michigan commercial lease agreement is a legally binding contract between a landlord (lessor) and a business entity (lessee) for the rental of commercial property. Commercial properties include retail spaces, office buildings, warehouses, factories, restaurants, and industrial facilities. Unlike residential leases, commercial leases in Michigan are largely governed by contract law principles rather than consumer protection statutes, giving parties significant flexibility in negotiating terms.

Legal Requirements

Writing Requirement (statute of Frauds)

Under Michigan's Statute of Frauds, any lease for a term exceeding one year must be in writing and signed by the party making the lease to be enforceable. ^[2] A written memorandum of the essential terms may satisfy this requirement, though a comprehensive written lease agreement is strongly recommended for commercial transactions.

Recording Requirements

While Michigan does not require commercial leases to be recorded, recording a long-term lease at the county Register of Deeds provides significant benefits: ^[3]

Provides constructive notice to third parties of the tenant's interest

Protects the leasehold interest against subsequent purchasers or encumbrances

Establishes priority of the lease in the chain of title

Documents recorded must comply with Michigan recording requirements including: 2.5-inch margin at top of first page, 10-point minimum type size, legible printing in black ink on white paper, and proper notary acknowledgment.

Required Disclosures

Hazardous Substance Disclosure

A landlord who has knowledge that any portion of the property is a "facility" (containing hazardous substance releases) must provide written notice to the tenant before transferring any interest in the property. ^[4] The disclosure must include:

The known general nature and extent of the hazardous substance release

Any land or resource use restrictions that apply to the property

A restrictive covenant or notice recorded in the deed records satisfies this requirement. This disclosure is particularly important for industrial, manufacturing, and former gas station properties.

Agency Disclosure (when Real Estate Agent Involved)

When a licensed real estate agent is involved in the transaction, they must disclose all types of agency relationships available and the licensee's duties to each party before any confidential information is shared. ^[5] Agency types include:

Seller's/Landlord's Agent - Represents only the landlord's interests

Buyer's/Tenant's Agent - Represents only the tenant's interests

Dual Agent - Represents both parties (requires written consent)

Transaction Coordinator - Neutral party facilitating the transaction

Types of Commercial Leases

Commercial leases in Michigan are typically structured in one of three ways, each allocating operating expenses differently between landlord and tenant:

Gross Lease (full Service Lease)

In a gross lease, the tenant pays a fixed rental amount and the landlord pays all operating expenses, including:

Property taxes

Property insurance (casualty insurance against fire and extended coverage)

Utilities

Common area maintenance (CAM)

Building exterior and structural maintenance

Parking area maintenance and snow removal

Major systems maintenance (heating, plumbing, electrical)

Gross leases provide predictable costs for tenants but typically have higher base rent to compensate the landlord for expense risk.

Modified Gross Lease

A modified gross lease splits operating expenses between landlord and tenant according to negotiated terms. Common arrangements include:

Tenant pays utilities; landlord pays all other expenses

Tenant pays a proportionate share of expenses above a "base year" amount

Specific expenses allocated to each party by line item

Modified gross leases offer flexibility and are common in multi-tenant office buildings.

Triple Net Lease (Nnn)

In a triple net lease, the tenant pays all operating expenses in addition to base rent:

Property taxes (first "N")

Property insurance (second "N")

Common area maintenance/CAM (third "N")

HVAC maintenance

Landscape maintenance

All utilities

Triple net leases are common for single-tenant retail and industrial properties. They typically have lower base rent but expose tenants to variable operating costs.

Essential Lease Terms

Parties

The lease must clearly identify the landlord (lessor) and tenant (lessee) with complete legal names and mailing addresses. For business entities, include the entity type (LLC, corporation, etc.) and state of formation.

Premises Description

The lease should precisely describe the leased premises including:

Street address

Square footage

Type of space (retail, office, industrial, warehouse)

Suite or unit number

Any included common areas, parking spaces, or storage

Permitted Use

Commercial leases typically restrict the tenant's use of the premises. The lease may permit: (1) all uses legal under law, or (2) only specifically enumerated purposes. Any change in use generally requires the landlord's prior written consent.

Lease Term

The lease must specify the initial term with clear commencement and expiration dates. Common commercial lease terms range from 3-10 years. Options to renew should be clearly stated with any rent adjustment provisions for renewal periods.

Rent

Base Rent: The monthly or annual rent amount, due date, and payment method must be specified. Commercial rent is often expressed as dollars per square foot per year.

Percentage Rent: Retail leases often include percentage rent - a percentage of the tenant's gross or net sales paid in addition to base rent, typically calculated monthly, quarterly, or annually.

Rent Escalation: Commercial leases commonly include annual rent increases, either as fixed percentages, tied to CPI (Consumer Price Index), or based on operating expense increases.

Security Deposit

No statutory limit on deposit amount (commonly 1-3 months' rent for commercial)

No requirement for separate escrow account (may be commingled with landlord's funds)

No mandated timeline for return after lease termination

Terms entirely negotiated between the parties

Tenants should negotiate specific terms regarding deposit amount, holding requirements, conditions for deductions, and return timeline in the lease agreement.

Late Fees

Commercial leases may include late fees for overdue rent. Common structures include: (1) flat fee per occurrence, (2) flat fee per day until paid, (3) interest-based fees, or (4) percentage of overdue amount. Late payments are typically first applied to the late fee, then to outstanding rent.

Insurance Requirements

There are no Michigan statutory requirements for specific insurance amounts in commercial leases. However, insurance provisions are critically important and should be carefully negotiated.

Typical Tenant Insurance

Commercial General Liability (commonly $1,000,000 minimum)

Property insurance for tenant's personal property, inventory, and improvements

Business interruption insurance

Workers' compensation (if applicable)

The landlord is typically named as "additional insured" on tenant's liability policies, and tenants must provide certificates of insurance before taking possession.

Typical Landlord Insurance

Casualty insurance for the building structure

Extended coverage (fire, windstorm, etc.)

Liability insurance for common areas

Assignment and Subletting

Under Michigan common law, a tenant may assign or sublet their leasehold interest without landlord consent unless the lease contains restrictions. ^[6] However, virtually all commercial leases restrict this right.

Common Lease Provisions

Prohibition on assignment or subletting without prior written landlord consent

Consent "not to be unreasonably withheld or delayed" (tenant-favorable)

Landlord has sole discretion to approve or deny (landlord-favorable)

Exceptions for corporate affiliates, subsidiaries, or merger transactions

Important Considerations

Original tenant typically remains liable for all lease obligations after assignment or sublease

Landlord may require financial information about proposed assignee/subtenant

Landlord may verify proposed use doesn't violate exclusivity agreements with other tenants

Unauthorized assignment or subletting constitutes a material lease breach

Ada Compliance

The Americans with Disabilities Act (ADA) applies to commercial properties open to the public. ^[7] Both landlords and tenants have legal responsibility for ADA compliance.

Shared Legal Responsibility

Both landlord and tenant can be sued by third parties for ADA violations

Lease clauses allocating responsibility do not shield either party from third-party claims

Penalties: Up to $75,000 for first offense, $150,000 for subsequent violations

Lease Recommendations

Require landlord warranty that premises are ADA-compliant at lease commencement

Clearly allocate responsibility for future compliance costs

Specify which party is responsible for common area accessibility

Address responsibility for compliance with any future accessibility standards

Default and Remedies

Tenant Default Events

Failure to pay rent when due

Violation of lease terms (use restrictions, insurance requirements, etc.)

Unauthorized assignment or subletting

Bankruptcy or insolvency

Abandonment of premises

Landlord Remedies

Notice Requirements: For non-payment of rent, Michigan law requires a 7-day notice to quit before filing eviction proceedings.

Summary Proceedings: Michigan provides an expedited eviction process called "summary proceedings" governed by MCL 600.5701 et seq. ^[8] Filing fee is $45. After judgment, an Order of Eviction can be filed 10 days later.

Self-Help Prohibited: Michigan law prohibits landlord self-help evictions. Landlords cannot change locks, cut utilities, or remove tenant property without a court order and law enforcement involvement.

Additional Remedies

Acceleration of remaining rent due under the lease

Recovery of costs to re-let the premises

Damages for breach of lease covenants

Retention of security deposit for unpaid amounts

Termination

Expiration

The lease terminates automatically at the end of the stated term unless renewed or extended by agreement.

Early Termination

Mutual agreement of the parties

Material breach by either party

Destruction of premises making it unsuitable for intended use

Condemnation (eminent domain) taking all or substantial portion of premises

Exercise of any early termination options stated in the lease

Holdover Tenancy

If a tenant remains in possession after lease expiration without landlord consent, a holdover tenancy may be created. Commercial leases typically specify that holdover rent will be significantly higher (often 150-200% of the prior rent) to discourage this practice.

Surrender of Premises

Upon termination, the tenant must surrender the premises in the condition required by the lease (typically "broom clean" with all tenant property and improvements removed unless otherwise agreed). Failure to properly vacate may result in additional damages.