Commercial Lease, What you need to know. Print E-mail
Written by Kerry S. Doolittle   
Friday, 09 April 2010

 This is a lengthy article, but if you are about to sign a commercial lease, whether as a landlord or a tenant, these are all things you need to consider before you sign.


     Issues Involving Commercial Leases

    A commercial lease presents great risk to both landlords and tenants.  In legal matters, as in most things, an ounce of prevention is worth a pound of cure.  The parties may not always recognize how the money spent on creating a well written commercial lease saves them money, but they will most assuredly find out how much a poorly written lease will cost in the end.

    Good writing takes time, and a lawyer’s time is expensive.

    During my career, many of the commercial leases I came across contained so much legalese that even the lawyers do not fully understand all the terms.  Some commercial leases are just plain badly written.  Do not assume that only a lawyer will be able to understand the terms.  Every sentence should be direct, clear and understandable.

    Computers discourage good writing.  Copying language found in one lease to another is too easy.  To simply cut and paste without understanding creates a mess.  Editing for continuity is a must, but too often overlooked in the haste of daily practice.  Unnecessary duplication should be eliminated.  Ambiguity should be eliminated.  The intent is to write a lease which both the landlord and the tenant can readily understand without a law degree.

    Most leases are written for the landlord.  Landlords usually have more than one rental unit, and re-let the premises over time to different tenants.  A one time investment in a lease form is used repeatedly.  You would expect, therefore, that a landlord who collects thousands of dollars per month on each unit would be willing to spend a few thousand dollars to have a good, tight lease form prepared. 
    Unfortunately, landlords sometimes make the mistake of wanting a lease form prepared cheaply and quickly, or worse, purchasing a generic lease form without consulting an attorney.  At some point, when a dispute arises, landlords learn the hard way what is wrong with that lease form they purchased for a few hundred dollars. 

    On the other hand, tenants spend a lot of money to rent the space.  Moving in and getting a business operational takes time and money.  Budgets and cash flow are major issues.  Tenants sometimes elect to not spend additional money for an attorney to review the lease.  When a problem arises, the tenant finds out the hard way that paying for a review up front to avoid the problem would have been a lot less expensive than trying to fix the problem.

    To be fair, landlords and tenants may not always have the experience and knowledge to recognize a poorly drafted lease.  They trust the attorney who drafted the lease to prepare a good lease. 

    Nevertheless, whether you are a landlord or a tenant, you should invest your own time in carefully reading the lease form.  If you find any part confusing, highlight it and ask for clarification.  Ask questions about anything you do not understand.  Point out any language which you find confusing.  If you are confused about it, the other party may be confused about it as well.  You may point out something the lawyer or the other party thought was clear.  As a result, you end up with a better product. 

    A poorly written lease creates the potential for conflict by allowing the parties to reach different interpretations of what is required.  Not surprisingly, each party seems to find an interpretation which favors themselves over the other party.  A poorly written lease does not provide clear cut resolutions, which only prolongs a dispute, resulting in longer delays, more litigation expenses, and often less financially sound remedies.

    A well written lease prevents disputes from arising by clearly laying out each party’s responsibilities.  When a dispute nonetheless arises, a well written lease clearly defines how the dispute ought to be resolved. 

    One result of the fact that most commercial leases are prepared for the landlord is that most commercial leases strongly favor the landlord.  No big surprise there.  Any tenant should closely and carefully read every word of a lease form presented by a landlord.

    A tenant should not hesitate to negotiate for more favorable terms.  Every detail of the lease is open to negotiation, but just how far a landlord is willing to compromise depends on the rental market for that area.  If the market is strong, and a landlord expects to have no problems finding a tenant, he will be more likely to say this is the lease, take it or leave it.  On the other hand, if the market is soft, and particularly if the space has been vacant, the landlord may be more willing to compromise on terms or offer incentives.  You will not know for certain unless you ask. 

    Do not be surprised if you point out a particular term you think is unfair and find that the landlord agrees with you.  Sometimes they do not even know all the details of their own lease.  They left the job of writing it to someone else and never bothered to read it.  Believe me, it happens.

    Whether you are a landlord or a tenant, I will discuss various issues which you need to understand, and which you should carefully review in your proposed lease.  In so doing, I will attempt to provide you something of a checklist to follow when reviewing the lease.  A warning, however.  Do not attempt to use this checklist as a substitute for consulting a qualified attorney for specific advice.  Use it as a basis for discussing your concerns with your attorney.  Just in case you have not gotten the message yet, the money you spend on a good attorney may seem like a lot at that moment, but it pales in comparison to the money you will spend later if a dispute arises.

    1.    If a specific term or point of discussion between you and the other party to the lease is important to you PUT IT IN WRITING IN THE LEASE.

    Most legal documents contain a section lawyers call “boilerplate”, which is the fine print which everybody overlooks and ignores because it represents “standard” terms.  If the lease does not have the standard boilerplate, you are already in trouble.  Those terms are intended to prevent disputes or to minimize disputes.  This is one classic example.  One such term usually says something like this:

    Integrated Agreement.     This Agreement constitutes the entire agreement between the parties hereto, and there are no agreements, understandings, restrictions, warranties (express or implied), or representations between the parties other than those set forth herein or herein provided for.  Any prior agreements and any representations, inducements, promises or agreements, oral or otherwise, between the parties not embodied herein shall be of no force or effect.

    How does this affect you?  Let us say that the landlord told you that you could put up an extra large psychedelic neon orange and purple sign on the side of the building visible from the nearby highway to advertise your new “goofy golf in the dark” business.  A part of the written lease may state that you are only permitted to place a sign on the marquee, and it must match the color and style of the other signs (boring black letters on a white background), and a sign on the front door or window no more than two feet square, and all signs must have prior written approval from the landlord.  You sign the lease trusting the landlord’s oral statement of permission to use your sign.  After you move in and are ready to start up your new business, the landlord tells you that you have to take down that hideous sign, the other tenants are complaining, and the local government is threatening to cite you and the landlord for violation of the sign ordinance.  Your business will suffer without that “free” advertising, and you will need to spend money on other advertising methods to let people know your business is there.  What is your remedy?  You have none because this provision said that oral agreement did not exist and even if it did, it “shall be of no force or effect.”

    No matter how mundane or trivial the detail may seem, if it is important to you, be sure it is written down in the Special Stipulations section of the lease.  That section should look something like this:

    Special Stipulations.     Notwithstanding any other terms of this Agreement, the following special stipulations shall apply and control over any other terms in conflict with them:

    1.    Tenant shall be allowed to install a twenty foot tall by thirty foot wide sign on the west side of the building facing Interstate Highway 20, using psychedelic neon orange and purple colors to advertise Tenant’s business occupying the premises.

    2.    Do your Due Diligence!

    Of course, by the time you sign the lease, you already checked with the local government to make sure the sign ordinance will permit the sign you intend to use, and got that verification in writing.  I sure hope so.  It does not matter that the lease says you can if the local government says you cannot.  The landlord cannot be responsible if you do not do your “due diligence”.

    You should check with the local governing authorities to make sure that the current zoning of the property permits your intended use of the premises, and learn about any set backs, screening, signage, licensing, permitting and other requirements or restrictions which might be imposed on you in order to conduct the intended business.

    3.    What is a “Triple Net” lease?  Why you need to know.

    A commercial leases is often written as a triple net lease.  A triple net lease can cause sticker shock to an unwary tenant. 

    A triple net lease is one where the tenant pays not only the “base rent”, but also pays a pro rata share of the landlord’s expenses for: (1) insurance on the whole property, (2) real estate taxes on the whole property, and (3) “CAM” or common area maintenance expenses (the “triple”) as “additional rent”.  I will discuss each of the three parts of the triple separately.  The lease is considered “net” because the tenants together essentially reimburses the landlord for all of the landlord’s expenses associated with the property.  Therefore, the “base rent” is net or after expenses and represent’s the landlords profit. 

    Here is the idea.  The landlord is trying to rent the property out and make a certain net return after covering all of his expenses.  He can do that by charging a much higher rent, and then paying the taxes, insurance and common expenses out of it, leaving a net return of the excess.  Or, he can do that by charging a smaller base rent (the profit he wants to make) and the actual taxes, actual insurance and actual CAM as "additional rent". 

    The landlord usually does the latter because it puts the risk of rising taxes, insurance premiums and maintenance expenses on the tenant, and his "net profit" is assured.  Tenants prefer the former as it puts the risk of increasing costs on the landlord and gives them a predictable financial obligation from month to month and year to year.

    The purpose of your negotiation is to (1) limit the amount of your financial obligations, and (2) bring greater certainty and predictability to your financial obligation by shifting the risks of future increases to the other party as much as possible.  The other party is seeking the same objectives.  Market conditions will dictate who prevails. 

    Two very important things for tenants:

        First, remember that if you are a tenant under a triple net lease, you must know how much those items will add to your monthly financial obligations.  Unanticipated costs can literally kill a business. 

        Second, recognize that you have no control over increasing property taxes, insurance premiums or common expenses.  Your expenses may dramatically increase over time.  You must plan ahead.

    Landlords, recognize that sudden and excessive cost increases might put your tenant out of business.  You may choose to share the burden rather than lose a tenant to bankruptcy.  If that happens, the burden is entirely yours, and that increased cost may soften the market as well.

    If the risks seems great, perhaps a tenant can negotiate a lower base rent, or negotiate a compromise where each party assumes part of the risk.  Remember, it all depends on what the market will bear.

    4.    Carefully review and understand every detail about the “Common Area Maintenance” or “CAM” expenses.

    The biggest potential cause of a dispute in a commercial lease is the CAM (common area maintenance) expenses.  This may be called by another name, such as Direct or Indirect Expenses, but the description should be recognizable as the common maintenance expenses of the property.

    Often, the lease language is left open ended, and thus purposefully ambiguous as to what is included in CAM, which gives the landlord a lot of leeway to include his expenses in the CAM, but also gives the tenant a lot of leeway to argue about what should be excluded.

    Tenants should be careful because the CAM component of your financial obligations may be larger than you expect.

    Basic CAM charges include such things as weekly trash pick up, landscaping, mowing, leaf blowing, electricity to the signage, etc., the expenses for operating and maintaining the premises as a whole which benefit the tenants.

    CAM is easily abused however, and because the definition of CAM in the lease tends to be vague, it creates arguments over what should or should not be included.  CAM sometimes include the landlord's overhead expenses such as his bookkeeper, office staff, office electricity, etc.  Those charges can be arguable as to whether or not the landlord's own overhead is truly related to maintaining the property.

    Here are some examples of questionable CAM expenses.  The landlord hires a relative to perform the weekly leaf and debris removal from the parking lot, and pays a huge "contract price", then charges it to CAM account.  The landlord hires his brother-in-law the plumber to work on the property at extra high fees because he just adds it to the CAM account.  It cost the landlord nothing to make a generous contracts with friends or relatives because the tenants fully reimburse those expenditures.  The landlord pays his wife $200/mo. for "bookkeeping" (i.e. taking the checks to the bank), and then charges that to the tenants under CAM.  The landlord owns multiple properties and divides his own office expenses proportionally to each property as “management fees” (i.e. paying himself to manage his own properties?).  The worst landlords try to work it so that all of their own overhead and operating expenses are added to CAM in one way or another.

    As a tenant, you definitely want to be careful to limit what can be included in the CAM, and perhaps even negotiate a cap on the CAM to give the landlord incentive to keep the expenses down. As a landlord, you want to be as specific as possible about what you are including in the CAM to minimize the room for arguments.

    The best way to avoid surprises is to:

    (A)    make sure the definition of CAM is not open ended, and

    (B)     require the landlord to provide you in writing a detailed list of what expenses are included in the CAM he charges, and

    (C)     require the landlord to provide you in writing the itemized break down of actual CAM charges for the last 12 to 18 months for that facility, and

    (D)     ask the landlord for your initial estimated CAM, and

    (E)     know what your prorata share is, i.e. your unit's square footage divided by the property's total square footage.

    5.    What taxes will you pay?  Are you ready for it?

    Taxes add another substantial cost to the lease.  As a tenant make sure you know the amount of your actual prorata share of current taxes. 

    To reduce the risk, negotiate a deal where the landlord and the tenant each pays a portion of the amount of any future increases in the property taxes.

    The tax proration is another potential problem.  Lets say a landlord owns 10 acres on which he will build ten buildings of equal size, with ten units per building of equal size, assuming one building per acre.  If all the buildings are built, the tenant should be paying 1% of the total property taxes in a triple net lease. (1unit occupied ÷ 100 units total).
 
    If this is the first building, the landlord may attempt to require the tenant to pay 10% as the tenant’s prorata share of all the property taxes since there are only 10 units at this point in time.  He tries to get complete reimbursement of the property taxes.  Instead, the tenant should be paying 10% of the total taxes on one building plus 1% of the taxes on 10 acres of land.  The landlord should be carrying the cost of the vacant land and empty units.

    Be sure you know the percentage of your prorata share as well as the dollar amounts.

    6.    How is base rent calculated?  How to compare?

    Commercial leases usually calculate the “base rent” on an annual amount of rent divided into twelve monthly installments.  The annual rent figure is calculated using a square foot price.  For example, if you are renting a 38,400 square foot unit, and the square foot price is $3.35, the annual and monthly rent figures are calculated like this:

    $    3.35    per square foot, multiplied by
    x         38,400.00    square feet of rented space, equals
    $    128,640.00    per year rent, divided by
    ÷               12.00    months, equals
    $    10,720.00    per month base rent.

    The best way to compare the cost of your rental space is to ask other businesses how much they are paying per square foot, and whether or not they have a triple net lease.  Since the size of commercial space can vary so greatly, this gives you a common denominator for comparison.

    Also note, however, that retail space may pay more than warehouse space.  The use of the space, the location of the space, the convenience of things like parking and getting in and out of the parking lot, all influence the value of commercial space.  Use the information you gather about market conditions to assist your efforts at negotiating reasonable terms. 

    Also, retail space leases sometimes contain another “additional rent” in the form of a percentage of gross sales.  This is an example of where the landlord profits more when the tenant does well.  Therefore, the landlord has an incentive to help the tenant’s business by keeping up the appearances of the common areas for example.  This can also be an area of incentive, where a lower base rent is offered to aid a fledgling business, but a percentage of sales is taken so that as the business grows, so does the rent.  This gross sales percentage is very common is retail shopping malls and strip centers.

    7.    Look for subtle ambiguities for therein lay the traps.

    Most ambiguities in a contract are unintentional.  The writer has one idea in mind and expresses that thought in a way that seems to makes sense.  It is never easy for an author to catch his own ambiguous writing because as he reads the material, he is always thinking about what he meant when he wrote it.  This is why I always like to have my client review drafts of documents before I finalize them.  A fresh pair of eyes will see what I miss.

    Unfortunately, ambiguities are at the root of most disputes because the parties each interpret the ambiguity in their own favor.  A large volume of legal authorities has developed over how the courts can interpret ambiguous language in a contract.

    “Ambiguity is defined as duplicity, indistinctness, an uncertainty of meaning or expression used in a written instrument, and it also signifies being open to various interpretations.”  That is a court’s definition.  Simply put, it is language which can be interpreted to mean two or more different, and usually incompatible, things. 

    Here is a very simple example: “black witch”.  At first glance it seems simple enough, two words.  How can it be ambiguous?  But does it mean a witch who happens to be black (as in race), or does it mean a witch who practices black magic (as in evil intent)?  Each reader could have interpreted that either way and not thought about the alternative interpretation.  The two words need clarification of what the author intended.

    Here are a few real world examples from actual cases involving contract disputes, note the underlined portion in each:

    From McGuire Holdings, LLLP v. TSQ Partners, LLC, --- S.E.2d ----, 2008 WL 786878, March 26, 2008:

    Here, the Agreement required TSQ to clear, grade, and fill Parcel A to “an average elevation of approximately 1,067 feet with slope to drain of two percent (2%), substantially as shown on the [attached] plan.”

    We agree with the trial court that the language of the Agreement was ambiguous. Clearly, it required TSQ to construct a water drainage system for the benefit of parcel A.  It is unclear, however, whether the term “drain” was used as a noun or a verb.  If “drain” was used as a noun, as TSQ contends, the Agreement could be interpreted to mean that the water runoff from Parcel A was intended to flow into a drain located on Parcel A. On the other hand, if the term “drain” was used as a verb, as McGuire argues, the Agreement could be construed to grant McGuire access to the detention area shown in the plat referenced therein for stormwater drainage.

    From Covington Square Associates, LLC v. Ingles Markets, Inc., 283 Ga.App. 307, 641 S.E.2d 266, January 12, 2007:

    Accordingly, the relevant question is whether security guard costs are contemplated by the term “Common Area Costs,” as defined in Section 6.4. In defining the term “Common Area Costs,” the lease does not list security guard costs after the phrase “shall include,” nor does the lease list them after the phrase “shall not include.” In light of this lack of clarity, we apply the rules of contract construction to discern the meaning of the provision.

    Of particular importance here is the phrase “ ‘Common Area Costs' shall mean the costs and expenses incurred by Landlord in the operation and maintenance of the Shopping Center and the Common Areas, and shall include repairs [and other listed items].” (Emphasis supplied.) Covington argues that the phrase “and shall include” is not limiting, and the omission of security guard costs from the list of particular items that shall be included is not dispositive. Ingles argues, and the trial court held, that the maxim “[e]xpressio unius est exclusio alterius[, t]he express mention of one thing implies the exclusion of another,” (punctuation omitted) Krogh v. Pargar, LLC, supra, 277 Ga.App. at 39(2), 625 S.E.2d 435, applies here. Such application would mean that security guard costs were not included in the costs to be calculated by the “Common Area Costs” formula, because they were not enumerated in the list of items that “shall include.” This interpretation is arguably tenuous in light of the fact that, in the same sentence, a separate list of excluded items is given. However, looking to similar language in Section 6.3, addressing maintenance, the lease uses the following terminology: “Landlord shall maintain ... the Common Areas in clean condition and good repair, including but not limited to: (i) maintaining all signs, landscaped areas, [etc.]” The use of the phrase “but not limited to” in Section 6.3, and its absence in Section 6.4, implies a different operation of the word “include” as used in Section 6.4, in that it may be read in that context to be a limiting term, similar to “shall consist of.”


    From Auto-Owners Ins. Co. v. Parks, 278 Ga.App. 444, 629 S.E.2d 118, Ga.App., March 24, 2006:

    While the policy provides coverage for the peril of a “landslide,” Auto-Owners claims that the only reasonable construction of “landslide” is that it refers to earth movement resulting from a naturally occurring event rather than an artificial event caused by human force or agency. [excavator operator caused landslide] We disagree.  Here, the policy fails to define the term “landslide.” However, Merriam-Webster's Collegiate Dictionary (11th ed. 2003) states that a landslide is “the usually rapid downward movement of a mass of rock, earth, or artificial fill on a slope” and does not limit the term to downward movement resulting solely from natural causes. As such, the plain dictionary meaning of “landslide” does not support the restrictive gloss placed on that term by Auto-Owners.

    I bet the authors of the various documents in these cases never expected the ambiguities found by the parties once a dispute arose.  The problem is that once a dispute does arise, parties get very creative and diligent in looking for ambiguities.  Once found, only a court or jury can resolve the ambiguity, which can be very expensive indeed.

    8.    Beware of required notice to terminate at the end of term.

    A lease will often contain a term requiring the tenant to give written notice of the tenant’s intent to terminate the lease at the end of the lease term, usually sixty to ninety days in advance.  If notice is not given, the lease may provide that the lease continues “month to month” beyond the end of the specified term or that the lease “automatically renews” for an additional term.  While a residential lease typically has a term of one year, commercial leases usually have much longer terms.  Five year, ten year and twenty year commercial leases are not unusual. 

    If the tenant plans to move out at the end of the lease term, which may be any number of years after the lease began, it is easy to forget that a written notice is required.  An unwary tenant could end of paying two or three additional months of rent (in a month to month extension) or several years of additional rent (in an automatic renewal) because the tenant did not give that written notice far enough in advance.

    9.    Carefully review the consequences of a default, which can be harsh.

    A tenant should carefully review the default provisions of the lease.  If your business struggles and you are unable to pay the full rent obligations, or if you attempt to close or move your business and leave the premises before the end of the lease term, the consequences can be financially devastating.

    For example, in the event of a default by the tenant, a lease may require the tenant to immediately pay all of the rent for the entire term (an acceleration clause), as well as other damages the landlord might claim.

    I suggest you attempt to negotiate less harsh default consequences.  For example, attempt to limit liability for future rent (after the tenant leaves the premises) to a period of time in which the landlord does find or in the exercise of good faith and reasonable effort should have found a new tenant (thus avoiding double dipping by the landlord and motivating the landlord to find a new tenant quickly).

    My suggestion is to ask for something like if tenant is in default and landlord elects to terminate the lease, then tenant owes all amounts then due and payable (at the time tenant leaves possession) plus an amount equal to 3 months (the # being negotiable) rent as a liquidated damage, and that is the landlord's sole remedy.  Of course, that leaves the landlord the option of not terminating the lease, and continuing to demand full rent from month to month.

    As the tenant, if the landlord insists on keeping the remedy as written, then insist that it include language that the landlord must make a good faith effort to re-let the premises in mitigation of any damages, that the tenant may assist in locating a suitable tenant, and once the landlord has or in the exercise of good faith and due diligence should have re-let the premises, the tenant's obligation for rent or other charges cease.

    10.    What happens if the premises are destroyed mid-term?

    What happens if a tornado, fire or some other casualty damages the premises so badly that the tenant cannot continue to operate its business?  Take a look at the destruction of property section.  The lease might call for the automatic termination of the lease as of the date of the casualty; or provide either the tenant or the landlord an option to terminate the lease; or simply provide that the rent abates (i.e. is not payable) until the premises are rebuilt.  The lease might require the landlord to rebuild the premises within a specific period of time.  The potential options are immense.

    A landlord may want to keep the tenant on the hook by not allowing a termination of the lease in the event of a casualty loss.  In that way, the landlord can rebuild the premises with confidence that the tenant will be required to resume rent payments as soon as the certificate of occupancy issues.

    If the lease does not allow the tenant to terminate after a casualty loss, the obvious problem is that during the rebuilding period, the tenant does not have a location to operate its business.  The tenant must either be out of business during that period or secure another location.  The tenant may need to sign a long term lease on the new location.  In other words, the tenant may not want to come back after six months, incurring relocation expenses a second time.  The tenant may want an option to terminate the lease an only owe rent up to the point of the destruction.

    11.    Personal Guarantees.

    This is an issue where each party should hope for the best and plan for the worse.

    If you are a tenant, DO NOT SIGN A PERSONAL GUARANTEE if you can possibly avoid it. 

    If you are a Landlord, ALWAYS INSIST ON A PERSONAL GUARANTEE FROM THE INDIVIDUAL who owns and operates the business which is signing a lease.  Ask his/her spouse to also sign the personal guarantee.  If more than one principal is involved, insist they all sign personal guarantees.

    On this issue, landlords and tenants have polar opposite positions.

    Tenants should never sign a personal guarantee.  You do not want to be personally liable for all the potential damages in the event the business fails or breaches the lease.  That is one reason you incorporated.  If the business fails and either files bankruptcy or simply goes insolvent, the landlord can still collect all monies owed by the tenant under the lease from any individual who signed a personal guarantee.  That means that you individually may end up filing bankruptcy and/or losing a lot of your personal finances if the business falters.

    Landlords should always get personal guarantees.  You do not want the tenant to simply walk away when things get tough.  If the individuals have their personal wealth at risk, they have more motivation to stick it out and make it work.  If the business defaults anyway, you have more opportunity to collect damages from the individual.  Getting the spouse to also sign the guarantee prevents the individual from protecting his personal assets by placing everything in his spouse’s name.

    12.    Who owns the security deposit?

    The landlord’s interest in the security deposit is primarily convenience.  The landlord does not want to be required to segregate the security deposit.  He wants to put the security deposit in his own bank account and keep the interest that money earns during the term of the lease.  In some cases, the landlord is not even required to hold the funds.  He may spend the money.  His only obligation is to pay the amount of the security deposit back at the end of the lease assuming the premises are returned without damage.

    The tenant’s interest in the security deposit is the fact that (a) it is usually a large sum of money, (b) the tenant is deprived of use of the money during the term of the lease, and (c) the tenant wants to be secure that the money will be refunded.

    I recommend that the tenant negotiate for the Landlord to hold the security deposit in a segregated account or investment vehicle (C.D. for example), in trust for the tenant, with the interest accruing to the tenant's benefit (i.e. the security deposit will grow with interest).  This ensures that your money is still working for you while being held as a security deposit, not for the landlord, and assures that the funds are there at the end of the lease term. 

    What happens if the landlord files bankruptcy?  What happens if the landlord just does not have the money to refund the security deposit?  When the security deposit is held in a separate fund in trust, if the landlord files bankruptcy, the money in that account still belongs to the tenant, not the landlord, and is protected.

    13.    Can you Sub-Let or Assign the Lease?

    Is there a prohibition against sub-leasing a portion of the building?  If you don't need all the space right away, that may be a way to lighten the burden by sharing space.  A local furniture store might need temporary space to store excess inventory, something like that.

    Is there a prohibition against assignment of the lease?  If your business is faltering, you may be able to find someone to take over your lease by assignment, but the lease may prohibit that remedy.

    14.    Is there a Right to Renew the Lease?

    Adding a right to renew the lease can give the tenant some assurance that if the business does well, he will be able to continue to operate well into the future.  Without a right to renew, the landlord may insist that the tenant vacate the premises or pay a much higher rent for a new lease when he sees how successful the business has become.

    A renewal will usually provide for an increase in rent based upon either set figures or a percentage.

    15.    What is the beginning and ending dates for each anniversary of the Lease?

    Not all leases begin on January 1 of the year.  When you began your lease in a different month, say August, it is easy to forget that the rent might increase automatically on the anniversary date.  It should be easier to remember that rent kicks up at the beginning of the year because we naturally think of January 1 as beginning a new year, not August 1.  You might want to define January 1 as the date on which events like rent increases occur regardless of when the anniversary date occurs.

    16.    Every Lease Needs a Legal Description.

    The lease needs some sort of legal description.  Without it, the lease is technically invalid, but that seldom works as a defense after the premises have been occupied.  A deed book and page reference or plat reference is sufficient.  That information should be filled in on the lease or a copy of the deed or plat at least attached as Exhibit A.

    17.    Does the Lease Permit All of your Intended Uses?

    A commercial lease often has a paragraph stating that the premises are leased for the purpose or uses of ______.  You as a tenant want the uses language to be as broad as possible.  If the list is too narrow, you may run into trouble down the line.  For example, a neighbor might complain about the noise created by your business.  The landlord could come to you and say you cannot do some portion of your business activities (attempting to limit the noise and complaints) because they were not listed as permitted uses.  Be sure to list every activity you may engage in, now or in the future, and then add “and all other uses reasonably related thereto.”

    18.    What are the Rules & Regulations?

    Often, a landlord will require compliance with the development’s rules and regulations. The landlord always wants that control, and by establishing rules and regulations which the landlord can change from time to time in his sole discretion, the landlord can effectively control unanticipated situations (like making too much noise). 

    A tenant should insist that a copy of any existing rules and regulations be added as an exhibit to the lease, and change the lease language to include that “any future rule changes require the tenant's written approval, which will not be unreasonably withheld.”
 
    19.    How to Sign the Lease.

    Whether you are a landlord or a tenant, you are probably acting through some sort of business entity such as a corporation or limited liability company.  To avoid accidental personal liability, be sure the business entity signs the lease, for example:

A.B.C., Inc.

______________________________
By.  John Smith, CEO.

    You want the entity name and the official capacity of the person signing clearly disclosed so that there is no question it was executed on behalf of the entity, and not by an individual doing business (d/b/a) as A.B.C.

    Conclusion

    Experience is most assuredly the best teacher, but she is a hard and expensive educator.

    My best recommendation whether you are a landlord or a tenant, read your lease before signing with two different color highlighters in hand.  Use one color to mark language you do not like and want to see deleted or changed in some way.  Use the other color to mark language which you find confusing or which you do not understand.  When finished, make a color copy to hand to your attorney.  Be sure he or she knows which color means change and which means explain.  After your attorney reads the lease, sit down face to face to go through the lease section by section. 

    If this is the attorney writing the lease, let the attorney re-write the lease with the changes discussed.  Then repeat the process of review, highlight and discuss until you have a final draft that is as short, direct, and easy to understand as possible.  (In a commercial lease, short may still mean 20 pages long.)  Be sure you fully understand all the terms.

    If the attorney is not the one writing the lease, let the attorney prepare a list of requested changes with the objective of making the lease as short, direct and easy to understand as possible.  Then present that list to the other party as part of your negotiations.  When you receive the new draft, repeat the process as many times as necessary.

    This will require a large investment of your time, and no small amount of your money, but is not your business worth the investment?

    Good Luck.

    Kerry S. Doolittle

 

Last Updated ( Friday, 09 April 2010 )
 
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