Ten pitfalls in a commercial lease

A commercial lease can be full of pitfalls for a tenant. Here are ten to consider:

1. Damage – The damage clause will often give only the landlord the right to terminate the lease if the premises are damaged. However, in that event both landlord and tenant should be able to terminate. Otherwise, the tenant may be unable to use the premises for a lengthy period of time and unable to walk away from the lease.

2. Assignment – Some leases allow the landlord to terminate the lease when the tenant requests consent to assign the lease to a buyer. Such a clause can devalue a business that a tenant wants to sell.

3. Repairs – Some landlords try to make a tenant liable to repair all aspects of a building – including its structure. It may be appropriate for a tenant to limit its repair and maintenance obligations to interior surfaces, and possibly to plumbing, HVAC and electrical. Wear and tear and items covered by the landlord’s insurance should be excluded.

4. Operating expenses – Sometimes, the operating expenses are straightforward – taxes, insurance and maintenance costs, ie. a “triple net” lease. In other leases, a landlord might try to impose all kinds of costs and fees on tenants: structural repairs to the building, management salaries, the depreciation of machinery and equipment, a percentage of the operating expenses of a vacant lot, the landlord’s legal and accounting fees, a management fee; the list goes on. Depending on the landlord, the building and the market, some of these items may be negotiable.

5. Arbitration – The arbitration clause will often provide that if you cannot agree on the rent for the renewal or extension term, rent will be determined by three arbitrators. Three arbitrators cost a lot more than one, so the threat of arbitration by three arbitrators might be enough to make a tenant accept a higher rent than they might otherwise be comfortable accepting. For smaller premises, one arbitrator is likely enough.

6. Relocation – A relocation clause allows the landlord to relocate the tenant to other premises within the building. This clause should either be deleted or the tenant should ensure that it can only be relocated to a comparable location and that the landlord has to pay for all expenses related to the relocation, including the cost of moving the business and installing tenant improvements.

7. Removing leasehold improvements – Sometimes a landlord will try to make you responsible to remove the leasehold improvements at the termination of the lease. Doing so could result in significant expense and distraction at a time when you are setting up business elsewhere and wishing to focus your attention and resources there. You may want to try to negotiate to a clause that would obligate you to remove fixtures only and to leave the suite in a clean condition.

8. Insurance – A landlord will generally ask a tenant to waive subrogation. The landlord should do so as well, otherwise the landlord’s insurance company could pursue you for a claim covered by the landlord’s insurance company. Also, if the landlord asks you for an indemnity, you should ask for a statement in your indemnity clause that your indemnity will not relieve the landlord’s obligation to insure the property. Another thing to consider is that a tenant’s commercial general liability policy should have a cross-liability endorsement. Otherwise you could be in a situation where you want to sue your landlord but cannot do so because your policy forbids it.

9. Non-disturbance – Many leases have an attornment clause, which grant subsequent mortgage lenders priority over the lease. If a lease has such a clause, and the landlord defaults on its mortgage and the bank forecloses, the bank may not be obligated to recognize the tenancy. It may be possible to modify this clause to obligate the landlord to obtain a non-disturbance agreement, which would obligate the bank to recognize the tenancy in the event of foreclosure.

10. Tenant Remedies – If there is a problem, the tenant should be able to repair the premises if the landlord fails to within a reasonable time, and deduct the cost from rent.

These are only some of the pitfalls that might be found in a commercial lease. We can assist you by reviewing your lease to identify issues and can also help you to negotiate revisions.