Probably the biggest difference between commercial leasing and residential leasing is one that most people are unaware of. In a residential lease transaction, there is no presumption that the tenant understands what she is signing.
As a result, there is a rigid common law and statutory framework prescribing what a residential landlord can and cannot do, and the courts have historically invalidated provisions in such leases that are either overly one-sided or incomprehensible to anyone other than a lawyer. This is not the case with commercial leases.
In the commercial leasing world, the landlord and tenant are assumed to be either experienced with how commercial leases are drafted and interpreted or savvy enough to retain an attorney to assist them. With the fledgling business owner, however, this is rarely the case, particularly where the parties are dealing with a (non-lawyer) leasing agent that has promised to assist them with “translating the lease into English.”
As a result, outrageous provisions are routinely written into commercial leases. Here are some examples of commercial lease provisions that often appear:
- Bait and Switch. Many commercial leases contain a provision (generally stuck in the back of a 30+ page lease) that gives the landlord the right to force the tenant, after its has moved in and begun operating its business, to move to a difference space, frequently on short notice and with little or no contribution toward moving expenses. While this may seem harmless, it is not. Take this hypothetical: The tenant has just signed a multi-year contract obligating her to pay thousands or even hundreds of thousands of dollars in rent over the lease term−a daunting prospect, but if the space is highly visible and conveniently located she may think it is worth the risk. Unfortunately, she later finds out that the landlord is having trouble getting the less attractive space at the far end of the shopping center rented. Guess who is going to be moving to the far end of the mall, to the less attractive space at the same rent? The tenant. So much for visibility and location.
- Operating Expenses. The tenant is usually required to pay a proportionate share of expenditures made by the landlord to maintain the building in which the leased space is located. These expenditures are generally referred to as “operating expenses.” However, commercial leases often include expenses within this definition that are clearly not for building maintenance, such as expenses incurred to advertise vacant space within the building, make new improvements to the landlord’s property or pay the salaries of landlord’s offsite employees. Some provisions even attempt to include the taxes landlord pays on the rents he receives as “operating expenses.” In other words, the landlord is trying to make the tenant absorb the landlord’s overhead.
- Overbroad Landlord Indemnity. Virtually all commercial leases require the tenant to “indemnify” or protect the landlord from claims arising out of the tenants operations in the leased space. For example, if the tenant fails to clean up a spill in the leased space and someone slips, the tenant is responsible for any damages. Other commercial leases, however, require the tenant to “indemnify” the landlord for things that happen outside the leased space. For example, if one of the tenant’s customers starts a fight in the parking lot on the way to his car, resulting in injury to a third party−the parking lot for which it is the landlord’s responsibility to provide security service and tenant has no control over−the landlord may try to hold the tenant responsible. After all, it was the tenant’s customers that caused the damage, right? Long story short, these types of provisions attempt to make the tenant responsible for the landlord’s negligence.
- Turnover Deadlines. Leased space often needs to be put into a usable condition by the landlord before the tenant can move in. As a result, commercial leases sometime provide for a delayed effective date, with the lease commencing when the landlord completes work on the space and turns it over to the tenant. The problem, however, is that commercial leases frequently either lack a deadline for completion of the landlord’s work, or include one that is ridiculously far out (many times a year or more after the date on which the parties sign the lease). That means that the tenant gets to sit around and wait−potentially for months, a year or more−before she is able to start business. Worse, there is often an incentive for the landlord to delay performance in the work: The landlord often has other leasable space to unload, and his efforts will probably be mostly focused on doing so. After all, the landlord has already got the tenant locked into a long-term lease, right?
- Tenant Termination Rights. Commercial leases frequently do not include any (or contain only very limited) tenant termination rights. What if the landlord consistently refuses to meet its obligations under the lease, such as by failing to property maintain the building or parking area? Without a termination right, the tenant will probably be stuck with trying to prove damages to his business as a result, which is very speculative and, thus, difficult, expensive and time consuming. What if half of the leased space burns down through no fault of the tenant? Without a right to terminate, the tenant will be lucky to get a reduction in rent proportional to the area damaged. Never mind that having half of the leased space destroyed may make the operation of tenant’s business impossible….
These are just a few examples of provisions that landlords may try to sneak into a commercial lease…and hold their breaths hoping tenants do not catch. Any one of them can spell ruin for the unwary business owner. The lawyers at Folkestad Fazekas Barrick & Patoile, P.C. have decades of experience with negotiating, drafting, reviewing and revising commercial leases. We know the tricks, and know how to write around them. Let us help you with your commercial leasing matter today, call us to discuss how we can help.