Updated: Aug 23, 2020
When negotiating a commercial lease, landlords should ensure that the lease provisions adequately the landlord's interest in the property. Below is a brief outline of some of the more important protections for the landlord when negotiating a commercial lease:
Use of Leased Premises. A use of leased premises provision sets forth the tenant’s use rights with respect to the leased premises, including the permitted use and any exclusive use right in favor of the tenant. From a landlord’s perspective, a use of leased premises provision should reflect that the use rights granted to the tenant are subject to any applicable local, state, and Federal laws and any exclusive use rights in favor of other tenants. The more narrow the use right provision, the more control a landlord will have over the tenant's use of the leased premises should the tenant decide to change its use as things move along.
Common Area Maintenance. A common area maintenance (CAM) provision sets forth the annual maintenance and repair expenses associated with the common areas and facilities of the property containing the leased premises. The CAM expenses are usually allocated on a pro-rata basis based on square footage. From a landlord’s perspective, the CAM provision should capture all contemplated CAM expenses associated with the common areas and facilities of the property containing the leased premises. Further, a landlord should include, as part of the CAM expenses, an annual administrative fee payable to the landlord to offset any administrative costs associated with carrying out the obligations related to CAM. A broad CAM provision in favor of the landlord should include the right of the landlord to collect management fees and reserves for capital repairs (roof replacement, pavement resurfacing, exterior painting, landscape replacement, etc.).
Maintenance and Repair. A maintenance and repair provision sets forth the maintenance and repair obligations associated with the leased premises. From a landlord’s perspective, the maintenance and repair provision should obligate the tenant to make all necessary repairs and maintenance to the leased premises during the lease term, including repairs to those items located outside of the leased premises that serve the leased premises. Additionally, a landlord could also require the tenant to maintain a maintenance contract for the HVAC systems serving the leased premises. A well crafted maintenance and repair provision will allow the landlord to complete repairs on behalf of the tenant should the tenant fail to timely make repair, and landlord would retain the right to charge administrative fees in addition to any actual repair charges. Of course, the landlord would also be able to hold the tenant in default should the tenant fail to make repairs timely.
Default. A default provision applicable to a tenant’s default is intended to outline the specific events that will constitute a default by the tenant under the lease. From a landlord’s perspective, a default provision should exclude a written notice requirement for a monetary default (i.e. a default based upon the failure to pay money when due) and provide a clear set of remedies, including acceleration of rents, upon the occurrence of an event of default. It is important for the landlord to outline a broad set of circumstances that could trigger an event of default by the tenant, so that the landlord retains as much control as possible should the tenant fail to comply with the terms of the lease.
Subordination and Attornment. A subordination and attornment provision sets forth that the lease is subject and subordinate to any liens on the leased premises, usually a mortgage, and that upon any event where a lien holder takes control of the leased premises, the tenant agrees to treat such lien holder as though they were the landlord. From a landlord’s perspective, a subordination and attornment provision should reflect that the lease is subject and subordinate to all liens on the leased premises, whether existing at the lease commencement or placed upon the leased premises during the lease term. Additionally, a subordination and attornment provision should require the tenant to execute, upon the request of the landlord, an acknowledgement confirming the existence and current terms of the lease.
Please note that the information contained in this post is only intended to provide a brief overview of some of the more important lease provisions that are often overlooked when negotiating a commercial lease. Ultimately, the scope of possible commercial lease provisions and the language within such provisions is quite broad and beyond the scope of this post. As with all legally binding agreements, it is important to have the assistance and expertise of a board certified real estate attorney before executing a commercial lease.
Please contact us with any questions regarding your commercial lease.