What is a Choice of Law Provision in a Commercial Lease and Why is it Important?

When reviewing a commercial lease, the choice of law provision—also known as a governing law clause—is a common element that deserves attention. This clause identifies which jurisdiction’s laws will apply to the interpretation and enforcement of the lease. For landlords, tenants, brokers, and legal advisors involved in transactions that span multiple states or countries, understanding the role of this provision can help support clearer expectations and more consistent outcomes if a dispute arises.

Predictability and Certainty in Dispute Resolution

At its core, a choice of law provision is about certainty. Commercial leases frequently involve parties from different jurisdictions—especially in today’s interconnected real estate market where ownership entities, lenders, and tenants often span state lines (or national borders). By clearly stating in the lease which state’s or country’s laws will apply, both parties avoid the uncertainty of having that determination made later by a court. This predictability is especially valuable in high-stakes disputes where small legal nuances can lead to very different outcomes.

Why State Law Matters: Varying Legal Standards

The governing law can affect the interpretation and enforceability of particular lease terms. Consider, for example, clauses related to:

• Default and Remedies: States vary in how strictly they interpret notice provisions, cure periods, and permissible remedies for breach.
• Non-Compete or Use Restrictions: What may be enforceable in one jurisdiction (such as a radius restriction in a retail lease) could be struck down in another as contrary to public policy.
• Limitation of Liability: Certain states impose stricter scrutiny on clauses attempting to limit or waive liability.

Choosing a legal regime that favors your interests—whether as landlord or tenant—can be an important part of your broader negotiating strategy.

Avoiding the Complexity of a “Conflicts of Law” Analysis

Absent a governing law clause, a court must perform a conflicts of law analysis to determine which jurisdiction’s law applies. This analysis is fact-dependent and considers elements such as:

• Where the property is located
• Where the lease was negotiated and executed
• Where the parties are headquartered or reside
• Which jurisdiction has the most substantial relationship to the transaction

This process can be unpredictable, especially if the underlying dispute involves facts that span multiple states (e.g., a tenant headquartered in Texas leasing space in New York from a landlord based in Illinois). Including a governing law clause avoids this uncertainty and streamlines any litigation or arbitration process.

Related Consideration: Choice of Venue Clauses

Often paired with a choice of law provision is a choice of venue or forum selection clause—which specifies where disputes will be litigated or arbitrated. While these clauses are distinct, they work together to provide clarity on both the applicable law and the geographic location of any proceedings. Choosing favorable venue and law together can reduce litigation risk and cost.

Conclusion

The choice of law provision plays an important role in shaping how a commercial lease is interpreted and enforced. By identifying the governing legal framework at the outset, parties can reduce the likelihood of procedural complications and align their approach to dispute resolution with their broader business goals. While it may seem like a small detail in a lengthy lease, this clause can provide practical benefits when thoughtfully negotiated and clearly drafted.