Note: This post discusses contracts and leases in general, broad terms and is not intended to be legal advice. You should always seek the opinion of a lawyer when dealing with leases, contracts, and other written instruments of business.
William Shakespeare may have written "A rose by any other name would smell as sweet, " but he was indeed talking about flowers and not commercial real estate. One of the most important, yet confounding, aspects of the acquisition of commercial property is the commercial lease form, and unfortunately, all too often many of them smell nothing like a rose.
A commercial lease is a legally binding contract between a building owner and the user of the property, and even though the asset classes in commercial real estate are common from one market to the next, there is no such thing as a standard, universal, or uniform commercial lease. Compounding the confusion contained in a commercial lease is that there is no typical structure or length. All too often a building owner will try to save money on legal fees by recycling a contract form picked up from a broker or one from another property. It is not uncommon for a tenant to see a lease that is cobbled together from several different contracts written specifically for several different uses.
Following the medical warning “don’t take prescription medication not prescribed to you” the end-user and the building owner alike would be well served to ensure that the lease they are entering into was written specifically for that property and looks at all of the conditions that need to addressing in each particular situation.
I can’t tell you the number of times I’ve been in court – on both sides of the table – because of inadequate, vague, and ambiguous language in a boilerplate lease misapplied to a tenant, who themselves didn’t take the time to read the contract.
Certainly, it is simple enough to determine if a lease is legally valid and binding. A quick check of the following can determine that:
- Names of all parties
- Description and ADDRESS of the property (and, yes, I’ve seen leases that omitted this)
- Consideration, or right to occupy premises in exchange for payment of a sum.
- Legality of Objective (can’t break any laws with the lease)
- Offer and acceptance
- Written form (there are some instances where verbal commercial leases are valid and binding; however if you get into a verbal commercial lease it will be as the old saying goes “a fool and his money are soon to part”)
The above are all conditions that must be met to make the lease valid and binding, however, within that lease lives a host of things that can trip up landlord and tenant alike if they are not carefully and specifically addressed in the lease.
Namely, these include:
Lease Term with specific commencement date and termination date. I’ve seen leases without a commencement date, or a blank commencement date. Always have a hard number in your lease for this. I try to avoid leases that read “Lease commences on the date of occupation by Tenant and expires 60 full months thereafter.” Instead, I like “Lease begins on July 15, 2017, and expires on August 31, 2022.”
Rent. Believe it or not, there are vagaries here too. Be sure that your rent section has when, where, and how to pay rent and a recourse if that method becomes delayed.
Occupancy and Use. For landlords especially, this is an important clause to add to a lease to ensure that the pleasant dress shop they’ve leased to doesn’t become a coffee shop, motorcycle repair garage, and death-metal rehearsal studio.
Utilities and Services. Use this section in a lease to spell out who pays for what, and who holds what deposits, if any. This is especially important in Gross and Net leases where the tenant pays some, but not all of the utilities.
Parking. If parking is a factor, it is critical to spell out all details of parking in the lease. Parking is as contractually essential to the operation of a commercial entity as anything. If parking is not available, then have the lease define this. Parking squabbles are one of those items of minutiae that can cause significant headaches down the road.
Signage. Another landlord clause, the Landlord should always retain the right to control any and all signage, including temporary window signage. Once that lease begins, this right is waived unless previously negotiated.
Tenant Improvement. Almost always, space will need physical repair. Use the lease to determine who is paying for what portion of the repairs, how long that process will take, and how that repayment will occur. Will the Tenant pay and have rent abated? Will the Landlord pay and bill back the tenant over time? This is another major area of the lease that is usually fumbled during execution and causes significant headaches in the future.
Alterations and Improvements. A third major landlord protection, if the tenant wants to make physical modifications after the lease commences, the Landlord should always retain the right to approve those alterations. You’d be surprised how many leases do not hold this clause.
Casualty and Condemnation. Who is responsible for what in the case of fire or other damage, and how can the lease be negated as such. I have seen leases without a casualty section, where the property was partially damaged by fire and the tenant had to sue to be let out of the Lease.
Right to Relocate. This states what rights (if any) a landlord would have to relocate a tenant within the leased premises. In smaller properties, this can be seen as a non-factor, but for smaller businesses within larger centers, having this protection can be critical.
Options to Renew. A good commercial lease has a section to renew, it states when the period to notify the landlord is and it indicates the terms under which the lease can be renewed. I was once in the middle of a landlord and tenant who spent over $100,000 in legal fees suing each other over a very poorly worded renewal clause. It is important to have this in writing and to make sure it is clear and unambiguous.
Sure, there are many other sections in a well written commercial lease. Sections such as right to assign, expansion options, holdover clause, estoppel certificates, and many other terms are ones you’ll see in a lease as you pass it on to your attorney. However, some of the ones I’ve highlighted above are ones that either get left out of a lease for whatever reason, or are so poorly written that they WILL cause a legal battle in the future.
Remember, one size does not fit all on a commercial real estate lease, and more draft contract forms are floating around that you can imagine. Always read your lease since you’re the one signing it, but always have a legal professional review it for you.
Landlords who go the cheap route by using boiler-plate or retread leases or tenants who try to save money by leaving legal counsel out of it usually wind up paying for it in one way or the other in the end.