COMMERCIAL REAL ESTATE LEASES (PART 3)|
No matter how small a space or how short a term, a lease can trap a tenant into unexpected and significant liabilities. The following are examples of some traps for the unwary tenant:
When it comes to these and other "Boilerplate" sections of your lease, it doesn't matter until it does.
- Construction, Renovation, Repair and Remediation Obligations: Who pays for what when it comes to construction work required by events occurring after you occupy the Premises? Your lease should answer this question. For example, the problem arises when ADA (Americans With Disabilities Act and similar Minnesota laws) violations are raised. The same question with respective to fire code and building code violations. HVAC repairs/replacements? Casualty(fire, wind, etc.) losses? Except for some portion of casualty losses, your insurance will not cover these expenses. Therefore, events raising an obligation of repair, replacement or remediation need to be addressed in the lease to the mutual satisfaction of the landlord and the tenant.
- Overly Broad Indemnity Obligations: If a visitor to your Premises slips, falls and sues you and the landlord for an event that occurs within the confines of your Premises, it is normal to require you to indemnify the landlord against losses caused by this event. What does this mean? What if the slip and fall occurs outside the entrance to your Premises? How much insurance coverage do you have? Does your insurance even cover what happens outside your Premises? Can you even purchase insurance to cover what happens outside your Premises? Can you get insurance to cover your indemnification of the Landlord if the event occurs outside of your Premises?
- Waiver of Subrogation; Waiver of Claims: This item is one of the most misunderstood, yet critical, provisions in a commercial lease. To start to understand the numerous facets and ramifications would take a separate newsletter that would still leave you confused. In its simplest form, subrogation is a term denoting a legal right of the insurer to go against the third party who caused the insured loss. You burn down the landlord's building, the landlord's insurer pays the landlord and has the right to sue you for the entire loss. Good luck getting insurance for this unhappy event.
Suffice to say for now, a correctly crafted mutual waiver of subrogation and, possibly, a mutual waiver of claims, carefully reviewed by your insurance agent with compatible language in the respective insurance policies of the landlord and tenant is the best solution. How close you get to this best solution is dependent on first being aware of the ramifications of the lease language and how much of the proposed language can be changed through negotiation.
- Relocation; Re-Measurement Rights: Assuming the landlord has the right to relocate you to another space in the building (quite common demand by landlords), there are important issues that should be addressed in your lease. You should place limits on where the relocation can be (critical for retail tenants, important for most tenants). Define the costs of relocation to be reimbursed (it involves more than just bringing in movers).
Resist the right of the landlord to re-measure the Premises or change the standard of measurement. Rarely would such re-measurement or changes in measurement standards result in a rent decrease.
- Subordination Without Non-Disturbance; Quiet Enjoyment: These are a whole lot more than just arcane terms. Subordination means your lease is effectively lower in importance to the current or new lender's rights. Without a Non-Disturbance agreement, lenders could end up terminating your lease. Properly coupling a subordination and non-disturbance agreement protects you, especially in a foreclosure situation.
Quiet Enjoyment is a legal concept that goes back to the Middle Ages. It is still around for one simple reason - It is critical protection for a tenant. A simple and literal example. A new tenant moves into adjacent Premises. The new tenant operates incredibly loud machinery that rattles both your walls and your nerves. This is a breach of the covenant of quiet enjoyment given to you by your landlord. The covenant of quiet enjoyment is a must-have clause in your lease.
- Changes to Common Areas: Landlords often attempt to retain unfiltered rights to change Common Areas. If your access to the Premises, visibility (especially for retail tenants), parking, loading docks, or other important amenities are part of the Common Areas, you will want to limit changes to the Common Areas and amenities.
- Default; No or Limited Cure Periods: Default provisions can really hurt a tenant. These provisions are difficult to negotiate because the landlord's typical response (not completely meritless) is "don't default." Unfortunately for you, defaults occur even to the best of tenants. Rent is not paid on time due to simple technical reasons or because someone did not remember. Required annual maintenance/inspection of HVAC components fails to happen.
The most common default clause traps are: (a) no required notice of default from the landlord, (b) no or too short of a cure period, (c) or both, and (d) both interest and penalties for late payment of rents. Remember, a default can bring down the whole house on you.
At a minimum, a tenant should have an appropriate cure period, after notice of default from the landlord, to fix the problem.
- Damage Penalties - Making the Landlord More Than Whole: Remedy provisions are similarly difficult to negotiate, but sometimes they simply are too unreasonable as presented to the tenant. Common overreaching provisions include: (a) high liquidated damages for a breach of the lease; (b) excessive default rates of interest; (c) double recoveries - for example, recovery of full rent, plus a separate recovery of the full amount of any free rent, tenant finish allowance, or other allowances - all of which are amortized over the lease term and are thus already recovered if the landlord recovers the full rent; (d) unreasonable restriction on mitigating damages (e.g., types of tenants that the landlord will not consider as replacement tenants); and (e) landlord's lien (perfected as a UCC security interest) covering all of tenant's property (which could include the tenant's proprietary information and assets you may need as collateral for business loans).