Negotiating or drafting a first commercial lease can be daunting, especially for lawyers who aren't familiar with commercial landlord-tenant law. Remember, a lease may hang over your client's head (or you own) for many years. Larry Libman offers 10 issues to consider when negotiating or drafting a commercial lease.
Aug. 1, 2012 – Negotiating or drafting a first commercial lease can be daunting, especially for lawyers who aren’t familiar with commercial landlord-tenant law. It’s important to remember, however, that the lease may be hanging over your client’s head (or you own) for many years. Any upfront mistakes could cripple your client down the road.
Clauses and terms of art in commercial leases might look perfectly innocuous, unless you know exactly what they mean. Furthermore, it is amazing how many things can go wrong in a tenancy. A friendly, rational relationship can sour over dozens of different issues, and it’s dangerous to assume that your client and the landlord will always be able to work out an equitable solution.
The best answer is to make sure your client’s rights and interests are protected in the governing document itself. Attorneys with commercial real estate experience will know how to do that. But here are some basic points to consider when negotiating or drafting a commercial lease:
Who is the tenant? The client’s business name is important. If your client has a limited liability company or a corporation, your client enjoys some protections, but only if the client’s business form is noted in the lease. Make sure that your client’s business entity is clearly stated as the tenant, otherwise your client may be liable for the rent and any additional costs.
How does your client want to pay? Does your client want a flat monthly payment for the duration, or a gradual step-up rent that increases over time? Be careful about any lease in which the client pays a percentage of income to the landlord; the landlord now has an interest in the client’s sales and may push to pursue short-term profits instead of long-term growth. As the landlord typically has some control over where and how the client places business signs, this may become a point of contention.
What does your client get? A share of the parking lot does not necessarily come with the property. Your client might be obligated to pay for the electricity, but what about other utilities? Common areas? Restrooms? What about air conditioning and heating, and at what temperature does your client want to keep the property? Spell this out in the lease; don’t take these issues for granted.
What can your client add to the property? Your client may want to change the floor or re-do the lighting, which may add value to the property. Make sure the lease allows your client to do that, or at least allows your client to do it with the landlord’s written consent. And make sure you spell out what happens to those new lights if your client decides to leave; if your client wants to take the lights, the lease must say so.
What about your client’s cleaning solutions and other chemicals? Many landlords are worried about their insurance premiums going up once your client starts storing caustic chemicals on the property. Your client may need them to conduct business, however. Watch for language that precludes your client from storing any hazardous chemicals on the property. Make sure the lease allows your client to store chemicals reasonably related to the business. Talk this over with the landlord and make sure he or she is on the same page. If insurance premiums are a major factor, your client may need to offer to pay for the increase.
What about the landlord’s chemicals? By leasing the land, your client may inadvertently exposed to serious liability if anyone discovers hazardous substance spills on the property – even if your client had nothing to do with it. Make sure the landlord includes a warranty that there are no discharges, spills, emissions, etc., and consider an indemnification clause whereby the landlord will cover your client.
What if your client wants to renew? If your client wants an option to renew the lease when the contract ends, that information must be specifically expressed. Outline the terms of that option. Otherwise, your client may have to start this whole process over – while competing with other people who want that space – when the lease term expires.
What about repairs? Nothing can sour a good landlord/tenant relationship like something unexpected breaking down. Unless the contract specifically says otherwise, the landlord is obligated to repair all major problems in the structure (plumbing, wiring, etc.) and all areas under the landlord’s control. Watch for language to the contrary, and make sure your client’s obligations to repair items in the client’s control are spelled out.
What does your client want? If your client is just renting, make sure the lease says so; this is known as the Habendum Clause. If your client wants to rent with a purchasing option, make sure to lock in the terms of that option. Does your client want first right of refusal? Or right of first offer? A blanket option to purchase doesn’t necessarily mean your client is the only person who can buy that property.
Finally, what if everything goes bad? As a commercial tenant, the law presumes your client knows what’s being signed. The implied warranties that protect residential tenants don’t apply to commercial tenants. Make sure the lease discusses options to break the lease if the property no longer meets your client’s intended purpose. All warranties of fitness for a particular purpose must be expressed in the lease.
Once you’ve considered all of these items, have a seasoned commercial real estate attorney look it over. There are still a dozen little issues that can catch a commercial tenant unaware, and an experienced attorney can help identify and plan for them.
But if you plan ahead for all the possible contingencies, and make sure the lease accurately spells out your client’s wishes, your client is a big step closer to hanging out the business sign with the comforting knowledge that – whatever else happens – the lease won’t be one of your client’s problems.
About the Author
Larry Libman, U.W. 1983, is a partner in the Madison office of Axley Brynelson, LLP. His areas of practice include business, real estate, and securities law. Contact him at (608) (608) 283-6727 or at firstname.lastname@example.org. Libman also thanks Axley summer law clerk Jeremy Lyon for contributing to this article.