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| Jon Smith, CCIM, Sales Associate RE/MAX Commercial Brokers, Inc. |
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, 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 doesn’t become a coffee shop, motorcycle repair
garage, or 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.
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.
Jon Smith, CCIM
RE/MAX Commercial Brokers, Inc.
504-838-0001
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