A lease agreement should be read and understood in its entirety, but make sure to pay attention to some of the more important particulars of your commercial lease. Many of these elements are ignored or missed by tenants, to their detriment. Understanding how these elements are discussed and laid out in your lease will provide you with the information necessary to operate your business and have a fruitful business relationship with the property owner.
What follows are just some of the important clauses and pieces of information covered in a commercial lease, which you will want to understand fully in order to have a beneficial lease.
Note: These terms and conditions may vary significantly from state or county, so tenants and property owners should be mindful of any applicable regulations that are county- or state-specific to the property. If in doubt, consult with your legal representative for more issue-specific insight.
Notice to Renew or Terminate
One element of your lease that you will want to be absolutely clear on will be the required notice to renew or terminate. This clause will directly cover important information and stipulations regarding how you will be required to communicate your intentions as the lease comes to its endpoint.
Some leases may include provisions or impose specific time limits regarding renewals or terminations. So, for example, you may be required to give notice of your intention to renew your lease 3 months prior to the true end date of your lease. Similarly, you may be required to give advance notice of your intention to terminate the lease, even when said termination falls on the end date of your lease.
Methods for communication of your intentions, as well as expected timelines, should be contained within these clauses in clear language, and will typically be interpreted strictly. In order to be absolutely sure that you are in compliance, you will need to make sure to record all relevant dates in your calendar, and set reminders ahead of time. This will ensure that you have ample opportunity to submit everything on time and accurately completed.
Indemnity and Defense
Another important section of commercial leases that is often overlooked, is any language regarding indemnity obligations. While some don’t want to think about what could happen in the event of a breach of contract or other occurrence which could trigger an indemnity obligation, it is in your best interest to plan for these situations and hope they do not come to pass.
Some commercial leases may have language that requires one party to defend, indemnify, or hold another party harmless for their breach of contract, or other actions that could lead to dispute. You will want to be absolutely sure that it is clear what the scope and extent of the obligations you are responsible for, and how any potential disagreements will need to be settled.
Forum Selection and Costs
In addition to the nature of the indemnity and defense included in your lease, you will also want to pay special attention to language regarding the forum selection and costs surrounding any disputes. As the parties to a contract may be based out of different cities, or even states, it is important to outline which laws will be applied in the event of a disagreement before any disputes occur.
Your lease should outline which state’s contract law will be applied to any disputes, and may even provide the specific jurisdiction that litigation would need to be carried out within. In the event of binding arbitration clauses, you may be restricted from taking your issues to court to handle any disputes, and would instead need to use specific arbitration or mediation procedures that would be outlined.
Additionally, in some leases, there may be language outlining the necessity to pay attorney fees, court costs, and even some predetermined liquidated damages in the event of a breach or dispute.
An element that is often overlooked at great cost to tenants is the language within the surrender clause of the lease. There will typically be distinct language highlighting how you are expected to return the space to the owner when the lease ends. These will generally require you to return the space in the original condition that it was provided to you except for normal wear and tear, making it easier for the property owner to lease the property to another tenant.
In many cases, this means that any alterations that you may have made to the space will need to be reverted or undone to restore the space to its original condition. The only exception to this would be if you proposed tenant improvements in the past, which were then approved and added to the lease to reflect this. Otherwise, changes that you made to the space so that it would better suit your needs, need to be undone before the space can be returned to the owner.
This can be especially costly due to the fact that any work done needs to be done by licensed contractors, which means additional costs as well as time constraints. If not planned for ahead of time, the process of returning the space to its original condition can result in you breaking the time frame for return and termination of the lease, leading potentially to fines or increased holdover rent.
Responsibility for Upkeep and Repair Costs
Different types of leases (N, NN, NNN) will have different stipulations for who is responsible for various costs that may arise. This can range all the way from the tenant being responsible for all upkeep and maintenance, to the landlord bearing all responsibility, and varying degrees in between where these costs are shared.
You will want to check the language of your lease for explicit terms and conditions outlining who is directly responsible for the general upkeep and maintenance of the property. You will also want to know what the extent will be, such as how often you will be expected to book services that handle various types of preventative maintenance. From cleaning and trash collection to HVAC maintenance, there are a range of costs that the tenant could be responsible for if you are not aware of them ahead of time.
Similarly, you will want to ensure that you know if you are responsible for repair costs for the property, and to what extent. These types of costs can be fairly significant, depending on the nature of the repairs needed, so you will want to know who is going to be responsible for any repairs the property may need in the future.
Merger/Entire Agreement Clauses
The final element that you want to pay attention to in your commercial lease is the “Merger,” or “Entire Agreement,” clause. This will typically be found in a lease to provide explicit language stipulating that the agreement of the parties is “wholly contained within the contract.” The purpose of this is to negate any side agreements or verbal agreements regarding the lease and responsibilities of the parties involved.
This exists for the protection of all parties, ensuring that there is no confusion or misunderstanding as to responsibilities and expectations in the lease agreement. When issues are left open-ended or up for interpretation, they can lead to further issues when trying to resolve any disputes.
In the event that you do have a long-standing verbal agreement as a tenant or landlord, you should move to have it amended to the lease agreement so that it is in writing within your contract. This will prevent disputes or disagreements that would leave you with little legal recourse.
JOE ACKER >
Joe Acker joined SimonCRE in 2015 as General Counsel, where he provides a broad knowledge of real estate law and a tenacious, yet affable negotiation style that is appreciated by all parties in a transaction. Over the course of his career, Joe has built a reputation as an experienced and knowledgeable commercial real estate and corporate transactional attorney. He has been involved in more than $2 Billion worth of real estate transactions.
Joe’s expertise encompasses all facets of commercial real estate law, including review and negotiation of purchase agreements and leases, due diligence for development projects, and coordination of pre and post-closing issues. He is also experienced in corporate transactions, including the purchase and sale of businesses, facilitation of corporate contracts, and the formation of corporations and limited liability companies.