A commercial lease can create bankruptcy-grade potential liability for a tenant, its co-signers and personal guarantors, and it can put a property owner behind an “8-ball” that jeopardizes his/her entire investment. Lease agreements create significant legal relationships with substantial financial impact and a lot to consider. Whether you are a landlord or a tenant, here is a non-exclusive list of eleven issues that should be pondered and negotiated BEFORE a lease is signed.
1. Most commercial leases establish a full-term rent obligation. That is, the obligation isn’t a monthly payment; it’s one enormous obligation broken down into monthly payments. Moreover, acceleration clauses are typical; in the event of default ALL those monthly payments become due at once.
2. There is no implied duty to mitigate losses in a commercial lease. If it’s not specifically included, the landlord is not obligated to re-rent the premises, and even if s/he does the rents collected don’t automatically reduce or end your liability.
3. Attorney fee clauses don’t automatically work both ways. If there’s a conflict, legal expenses can be prohibitively high. Watch the language carefully – some provisions seem to be bilateral, but in effect they are not. Don’t assume attorney fees are addressed only in the clause labeled “Attorney Fees”. It is often found in the default or remedies provisions, or anywhere else for that matter.
4. "Additional rent” is a term defined within the agreement, and sometimes that definition is awfully broad.
5. Renewal options, extensions and early-termination provisions aren’t always intuitive. Some are automatic, others are not. Some are a
combination. They can have very specific requirements and deadlines.
6. Hold-over and other lease-end provisions interplay with renewal options, extensions, etc., and they can have surprising results. There is not a universally applied outcome when a lease’s natural term ends.
7. Assignment and sublet restrictions and requirements vary. A change in ownership, business structure or even management might result in a violation.
8. In multi-tenant buildings not all leases include “exclusivity” provisions to prevent the landlord from renting the adjacent premises to a competitor poised to end your business. Also, some leases give the landlord the right relocate you to another “equal” premises within the building under some circumstances.
9. Maintenance, repairs and replacements are not all created equally, and they don’t necessarily benefit landlord and tenant equally. Security provisions can give the landlord collateral rights in your inventory, fixtures, even your sales. Financial disclosure requirements are not uncommon, particularly if rent is tied to productivity in any way.
10. Omission of provisions or language can have a substantial impact. Don’t assume a very short lease is better than a long, convoluted lease. It may be easier to read, but it’s harder to analyze potential costs and liabilities.
Bonus note - Most corporate leases require personal guaranties separate from the lease agreement. Personal guaranties deserve their own discussion, so I won’t go into it much here. A personal guaranty makes YOU liable even though you aren’t a party to the lease, and can hold you liable even after you think the lease is no longer relevant. Generally personal guaranties are designed to eliminate every defense you otherwise might have. Don’t sign one until you understand its scope.
Unlike a residential lease, which generally must comply with a body of statutory law designed to protect residential tenants, commercial leases are a mass of moving parts, and all of those parts are significant. When the lease is signed often there is no conflict on the radar and everything seems positive. But the lease is there to deal with conflicts when something gets negative. The best time to understand your lease is BEFORE you sign it – NOT after the law suit has started.