Important Things to Look for in Commercial Leases

In Business Tips, Business Transactions, Contracts by Larry DonahueLeave a Comment

When looking at commercial leases either as a prospective tenant or as someone who wants to make sure they know their lease terms, it’s always a good idea to read the entire agreement yourself and have a lawyer review it, if possible. If you’re saving money by reviewing your own lease, there are certain clauses to be aware of that tend to be more one-sided than others.  Some (but not all) of the most common areas are below.

Lack of Tenant Remedies in Commercial Leases

This is a more general thing to be aware of than a specific clause, but some leases don’t include remedies for the tenant if the landlord fails to perform their basic responsibilities, such as to hand over keys by the agreed-upon date, or make exterior repairs. These commercial leases are also often silent on what the remedies are if the landlord is in default. Some leases will even try to limit the tenant’s remedies, so that tenants cannot claim for things like lost profits or other damages. These sections will be in contrast to the precisely defined tenant default section, which will lay out in detail how the tenant can default, how long the tenant will have to remedy said default, and what remedies are available to the landlord even after they have reclaimed the subject property. Landlords might do this to try and limit their liability, so that tenants cannot easily make a claim that the landlord was in default, or, if the landlord was, the tenant’s remedies may be restricted to the point that trying to sue is not practical.

Division of Costs in Commerical Leases

Something to look out for is how the costs for maintenance of the property are divided – is the landlord responsible for all maintenance, or the exterior only? Is the landlord going to maintain the heating/HVAC, or is that the tenant’s responsibility? It’s important to consider that going in as these could impact your business’s budget. Similarly, how much insurance are the tenants expected to carry? Some types of businesses are expected to carry more, but some landlords are more risk-averse and may ask tenants to carry extra insurance beyond what the tenant believes is strictly necessary. Other things to keep an eye on can also include building fees, or property taxes, depending on how those are paid.

Landlord Can Enter Property and Seize Goods in the Event of Default

No one expects their business to fail, but being prepared for the worst is a must. Many default clauses include language that the landlord can not only enter the premises by force, but the tenant also waives liability for any damages caused by the landlord when they do. Clauses like this should be avoided or modified, if possible, to remove the waiver of damages and the “with force” language. Similarly, the lease contains language about eviction without terminating the lease, either modify the proposed lease or consider looking elsewhere. Tenants who already have a lease should read through it and pay close attention to the default section so they are prepared should their business default.

Force Majeure in Commercial Leases

Almost all leases, including commercial leases, will consider what happens if the lease ends, either through the natural end of its term or prematurely through eminent domain or force majeure. However, not all of these clauses spell out what happens to deposits or other monies paid in advance. Some leases grant the landlord an extended period of time, such as 90-180 days, to decide whether to terminate the lease, with no rent abatement for the tenant, who no longer has a place to run a business. It is advisable to spell out as many of the details in these clauses as possible, even if you think you will never have to rely on this clause. If the details are not spelled out at the outset, you may have to litigate them later.

Rent Increases or Fees

Most commercial leases have provisions for extending the lease under the current terms, usually at a slightly increased rate of rent. Sometimes, however, the sometimes the rate of rent will be sizable, so it is important to review the figures and do the math, even if the initial rent seems reasonable. The rate may also be tied to additional costs – for example, there may be a percentage of the profits each month that increases with the rent– that will need to be taken into account as this can affect your business’s budget. In some leases, the renewal is automatic unless notice is correctly provided by a specific date, making it tricky to end the lease.

 How to Give Notice

Tenants should pay close attention to when and how they need to notify the landlord to accept an extension or terminate the lease. Formal notice may also need to be provided if notifying the landlord of anything important that may need to be referenced by an attorney later, such as a landlord’s default under the lease terms, notifying the landlord that the force majeure clause is now in effect, etc. Most leases have a notice clause specifying how the tenant notifies their landlord and vice versa. Even if both parties have a more casual way of regularly contacting one another for day-to-day business, the safest course of action is that you review the lease and follow the notice instructions to the letter for renewing or not renewing the lease. You can still send them a text or an email, but if your lease calls for sending a certified letter, consider sending a letter as well.

Final thoughts: Remember, most landlords will allow some negotiation on clauses. Keep an eye out for additional clauses in the lease that aren’t included with similar clauses. For example, extra insurance clauses that are stuck on at the end, or extra ways for the tenant to default that aren’t included in the “tenant default” section. Just because the provisions that seem unfair are “worst case scenarios” doesn’t mean that’s not an indication of how the landlord intends to treat you for the duration of the lease. Even though they are supposed to be worst case scenarios, those default or force majeure clauses could become extremely important, especially in the coming months.  And remember, if you read through the lease and think it’s unfair, trust your gut or consult an attorney.

If you have a lease and need additional information on force majeure, L4SB can help you determine if you are eligible to make a claim. Our flat-fee Force Majeure Review means that for $149.99 we will review your contract and consult with you to let you know what your options are.

Give us a call today at 1-888-992-4952 or Contact Us online and let us help you renegotiate your contracts and agreements.

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