Commercial Real Estate Leases: Let the Tenant Beware
When leasing space for your business, it is important to pay close attention to the terms of the lease. The landlord will generally provide a prospective tenant with a lengthy written document that consists of both business terms – the rent, length, amount of space, etc. – and legal terms – termination, assignment, liability, etc. The terms of the written document produced by the landlord typically favor the landlord.
A prospective tenant in a commercial lease normally pays close attention to the business terms of the lease. It is also important, however, that a prospective tenant closely scrutinize the legal terms, as they set forth the various rights and duties of the landlord and the tenant. Although tenants to commercial leases do not receive the benefit of the many consumer protection laws that place certain limits on provisions in residential leases, commercial leases are much more open to negotiation with regard to the terms of the lease and flexibility with regard to the space and term of the lease.
In embarking on a lease relationship with a commercial landlord, a tenant must at all times keep in mind that the lease is generally governed solely by the terms of the written document. It is very important that the tenant make sure that all of the terms negotiated are reflected in the written document and that all terms are completed before the document is signed by the tenant. If any of the terms are changed during the term of the lease, the changes should be in writing and signed by both parties. Oral agreements between landlord and tenant, whether prior to the signing of the lease or during the term of the lease, may not be enforceable.
Another point to which a tenant must pay close attention is that the lease will generally require the tenant to maintain the premises and keep it in compliance with all laws. It is very important, in light of such a requirement, that the tenant take possession of the leased premises with a warranty from the landlord that, as of the lease commencement date, the premises is in compliance with all applicable laws, ordinances and regulations. For example, if the premises is not in compliance with the Americans With Disabilities Act on the date the lease commences and the landlord has not warranted that the premises is in compliance with all applicable laws, it would be the responsibility of the tenant, since it is charged with keeping the premises in compliance with all laws, to bring it in compliance during the term of the lease. In terms of the Americans with Disabilities Act and many other laws, such compliance can be costly.
The lease document will also define the permitted use of the premises by tenant during the term. It is important that the use defined in the lease adequately describe the business and activities to be conducted by tenant at the premises. A use of the premises not defined in the lease, even if contemplated by the tenant, would constitute a default by tenant under the lease and would expose tenant to eviction by landlord and also monetary damages. Closely related to this “use” issue are restrictions in the lease on use of signs and the location of tenants in the same business. If a tenant’s business is heavily dependent on foot traffic, it will be necessary to ensure that the lease allows for a large and prominently displayed sign. If the tenant is occupying space in a retail center or strip mall, it will want to ensure that there is no tenant engaged in the same business in the same center or mall.
Commercial leases also contain provisions prohibiting assignment and subletting the lease without the prior written consent of the landlord. Many leases additionally provide that even in the case of an assignment or sublease that is permitted by the landlord, the tenant will remain fully liable under the lease. Assignment and subletting provisions need to be closely scrutinized and negotiated with the landlord to remove any continuing liability by tenant.
Commercial leases also often contain broad provisions limiting the liability of the landlord to instances of its gross negligence or intentional misconduct. The tenant should negotiate with the landlord to broaden the landlord’s liability to include its negligent acts and not just its grossly negligent acts. Additionally, a tenant must be adequately insured with liability, property and casualty insurance and business interruption insurance.
This article contains a few of the many issues that may arise and must be addressed by a tenant in negotiating a commercial lease. A tenant must carefully review the entire lease and negotiate with the landlord to remove or at least modify the onerous and unpalatable provisions of the lease document.
This article is informational only and not intended as legal advice. Speak with a licensed attorney about your own specific situation. To schedule a consultation with Leo Gibbons, please call 610-840-0227.