At Venture Law, we assist small businesses in a wide variety of commercial real estate matters including commercial leases, commercial real-property sales, and commercial evictions. Over the years of counseling and representing our clients on these commercial real-estate matters, we have developed expertise in assisting our clients in avoiding common and costly mistakes in commercial lease contracts. By identifying key issues for our clients and avoiding contractual pitfalls, we help our clients potentially avoid tens of thousands of dollars of disruption to their business. Here are eleven recurring clauses that future tenants should exercise care regarding prior to signing a lease contract.
Permitted Use
Commercial leases typically contain a single use a tenant may use the leased premises for. Just because a landlord will allow a permitted use, does not mean the use is permitted by local zoning rules and other restrictive covenants and easements. To minimize the risk of running into any issues, future tenants should request their landlord to warrant the intended use is not in contradiction with any restrictive covenants, easements, and zoning regulations. A future tenant’s attorney may also check the property’s zoning ordinance, property’s certificate of occupancy, and the county’s register of deeds to make sure the permitted use is not in violation of any covenant or ordinance of public record.
Future tenants should also draft the permitted use section with an eye to potential anticipated and unanticipated uses. Thus, future tenants should aim to draft the permitted use section broadly to allow any incidental uses. Not drafting the permitted use section broadly can limit a tenant from subleasing or assigning their lease or from making adjustments to their business strategy. Finally, a future tenant may prohibit the landlord from leasing any other space of a similar permitted use by requesting a restrictive covenant prohibiting the landlord from leasing to any other tenant with a similar business.
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Compliance with Laws
Leases often have clauses stating the tenant is responsible to comply with all federal and state laws. Although these clauses may seem innocuous, it is important for leases to allocate responsibility for specific compliance issues. Future tenants should seek to make explicit they are not responsible for any compliance tasks requiring substantial structural modifications to the common places or to the exterior of the premises. Thus, for example, a lease should allocate responsibility to the landlord for complying with building codes, the Americans with Disabilities Act (ADA), as well as environmental laws. Likewise, future tenants should also ensure that the landlord warrants that the premises were compliant with all laws prior to the start of the new term and the lease places responsibility on the landlord for any pre-existing violations.
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Operating Expenses and Repairs
Commercial leases usually pass along the expenses of operating a shopping center’s common areas as well as shopping center taxes to tenants. These expenses are usually not computable prior to entering into a lease. At that point, the landlord may only provide the future tenant with an estimate. To protect themselves against unpredictable expenses, future tenants should (1) reserve their right to audit the landlord’s expenses and tax bills, (2) request to examine prior years’ expenses prior to entering into the lease, (3) place a cap on certain operating expenses, and (4) limit the list of expenses to expenses closely related to the proper functioning of the shopping center and to expenses landlord has not already taken responsibility for in other provisions of the lease.
Tenants are often surprised they are liable for repairing the roof, HVAC systems, structural issues, and walls. Tenants may also be surprised when they discover their lease contradicts itself by placing responsibility on the landlord over certain issues in one section of the lease yet allocating responsibility over the same issues to tenant in another section. Future tenants can avoid these surprises by ensuring the lease agreement allocates financial responsibility to tenant only to the interior of the premises and explicitly limits or eliminates tenant’s liability over all exterior, structural, and HVAC issues.
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Assignment and Subleasing
Most leases we negotiate have clauses restricting tenant from assigning or subleasing their lease. Future tenants should ensure that if landlord’s consent is required, such consent can not be unreasonably withheld. Tenants should also draft exclusions to the consent requirement including minor ownership changes in their businesses. Otherwise, even the transfer of shares resulting from divorce or death may trigger landlord’s involvement.
Another common issue is “recapture clauses” allowing landlords to unilaterally terminate a lease if a tenant requests an assignment or sublease from landlord. Future tenants should eliminate these clauses as they otherwise can lose their lease just for merely requesting a lease assignment or sublease.
One other provision landlords like to include is a clause holding tenant liable for the actions of their assignee. Tenants seeking to avoid liability for actions of their assignee, should make sure the lease explicitly cuts off their liability for any future inactions or actions of their assignees.
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Term
Often, commercial leases will not not have specific dates for when landlord is to deliver premises. To avoid any unpredictability, it is important for a future tenant to place a specific date by which landlord is to deliver and, in case of late delivery, penalties such as termination and rent offset.
A future tenant should likewise ensure the date the rent term begins is not subject to potential disputes. For example, a lease may begin the rent period “three months after tenant takes possession of the premises.” This language should be avoided as a landlord may claim tenant took possession as of the first date of entry to the premises. Instead, tenant’s attorney should insist on specific language ensuring the rent period begins a specific period of time after landlord delivers premises in good shape.
If a future tenant anticipates remaining in the premises for a considerable amount of time, the future tenant should ensure the lease includes an option to renew with the renewal period rent amount calculated. If a future tenant knows that it is very likely to stay in the premises long term, it may negotiate a longer term lease with cheaper rent instead of a short term lease with a renewal option. That being said, a long term lease may be risky as future business and market conditions are almost always unpredictable.
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Improvements
Commercial leases typically mandate the landlord must consent to all modifications or improvements. In order to avoid allowing the landlord to dictate improvement plans, future tenants should ensure the landlord may not unreasonably withhold such consent and that consent is not needed for the more minor improvements.
Tenants often invest a considerable amount of money in a premises’ improvements. In order to avoid losing rights to any movable attachments installed at the premises, future tenants should ensure any fixtures will remain the property of the tenant after the termination of the lease.
Landlords will often times dedicate an allowance to improve a space prior to the tenant moving in. Future tenants, prior to agreeing on the amount of the allowance, should consult with contractors to ensure the allowance will be enough to develop the space to its plans and needs. If the landlord will conduct the initial improvements through its own designers and contractors, the future tenant should reserve the right to approve all designs. Tenant should also ensure the allowance is not used by landlord to portions of the premises the landlord already has a responsibility for pursuant to a provision of the lease agreement. Finally, future tenants may request any remaining portion of the allowance be allocated in favor of the tenant.
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Subordination and Attornment
Subordination clauses usually require the tenant allow landlord’s lenders place their security interests in a superior position to tenant’s lease. Attornment clauses usually require the tenant allow landlord’s lenders to take the place of landlord in case of foreclosure. Future tenants should ensure, in exchange for these concessions, landlord’s lenders do not interfere with or disturb tenant’s use of the premises.
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Cure
There is often ambiguity regarding tenant’s rights regarding security deposits. Tenants and landlords may disagree on what the security deposit was intended to be allocated for. Future tenants should, therefore, make sure the lease agreement specifically states what the landlord may or may not do with the security deposit.
Many leases obligate tenants to pay rent even if landlord fails to perform under the lease agreement. Most landlords will not remove this provision from their agreement forms, but future tenants may attempt to include language in their lease agreement allowing them to withhold rent if the landlord is in default.
Often times, lease agreements will allow landlords to take action upon a tenant’s default without notice to tenant. To avoid surprise and disruption, future tenants should seek written notice upon default as well as a grace period to allow the tenant a reasonable opportunity to cure any default.
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Casualty
Most leases contain clauses allowing landlord to repair premises after the premises were destroyed and to terminate the lease if restoration is not possible. With regarding to these clauses, future tenants should make sure that (1) landlord’s window to complete repairs on the premises is reasonable, (2) landlord completes the repairs in a reasonable amount of time, (3) tenant has the right to terminate lease prior to landlord beginning repairs, and (4) tenant has no obligation to pay rent prior to landlord completing the repairs.
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Relocation
It is common for lease agreements to contain relocation clauses allowing landlord to relocate tenant to another portion of a shopping center or building. A future tenant will ideally strike such provisions out of a lease agreement. If doing so is not possible, a future tenant should ensure (1) tenant’s business will not be unreasonably disturbed by such relocation, (2) tenant will be compensated for all expenses related to the relocation, (3) the new premises is as big or larger than the original premises, and (4) landlord is limited in the amount of times it may relocate the tenant.
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Indemnities
Most commercial lease agreements contain indemnification clauses where the tenant must compensate the landlord any third-party claim awarded against the landlord. To make these clauses more reciprocal and fair, future tenants should ensure that (1) these clauses do not apply to situations the landlord acted intentionally or recklessly, (2) apply only to damages stemming from inside the premises, and (3) should insist landlord indemnify tenant for any third-party awards against it.
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This is list is not meant to be all encompassing or a replacement of sound attorney representation. Instead, this list is intended to give prospective tenants an idea of how nuanced lease negotiations are and why it is important to have competent counsel while negotiating a commercial lease.
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