WITH COMMERCIAL LEASES, IF IT’S NOT IN WRITING, IT DOESN’T EXIST!Posted October 26, 2015
WHILE there are many consumer protections for a residential lease, the commercial lease is largely unregulated. The relationship between the commercial tenant and the landlord is generally governed solely by the terms of the written lease. This is why it is so important that the parties make sure that all of the terms negotiated are in the lease before it is signed. If any terms are changed, the changes must be in writing and signed by both parties. Oral agreements between landlord and tenant, whether prior to the signing of the commercial lease or during the term of the lease, are usually unenforceable.
SOPHISTICATED landlords and tenants know the importance of getting lease changes in writing. Some will do everything they can to persuade, cajole, or even subtly threaten the other party with abandonment or termination, in order to get a desired change in writing. For example, in 2010 a landlord was leasing his property to Jiffy Lube International, Inc., which operated an automotive service center on the premises. Although the lease was at the end of its initial 10-year term, the lease clearly stated that Jiffy Lube had an option to extend the term for 5-years more years at a fixed lease payment rate of $4,800 triple net. This was an increase from the $4,200 per month Jiffy Lube was currently paying under the lease. To exercise the extension option, all Jiffy Lube had to do was to notify the landlord in writing at least 4 months prior to the lease expiration of its desire to exercise the option to extend the term. Of course, Jiffy Lube wanted to pay less in rent. So Jiffy Lube hired a real estate broker, Grubb & Ellis, to write a letter to the landlord suggesting that the lease rate was over-market and that the location was under-performing. The letter further hinted (without specifically saying) that unless the landlord agreed in writing to a significant reduction of rent (to $3,000 per month), Jiffy Lube might close the store. Undoubtedly such efforts are sufficient to scare some landlords into agreeing to the modification, for fear of losing their tenant. In this case, the landlord simply ignored the letter. What happened? Jiffy Lube exercised the extension option at the full rental rate, with no reduction. Had the landlord signed the letter, it would have been sufficient to modify the terms of the lease, even without any other consideration being paid or received.
ONE POINT to which a tenant must pay close attention is that the commercial lease will generally require the tenant to maintain the premises and keep it in compliance with all laws. It is very important, in light of such a requirement, that the tenant take possession of the leased premises with a warranty from the landlord that, as of the lease commencement date, the premises is in compliance with all applicable laws, ordinances and regulations. For example, if the premises is not in compliance with the Americans With Disabilities Act on the date the lease commences and the landlord has not warranted that the premises is in compliance with all applicable laws, it would be the responsibility of the tenant, since it is charged with keeping the premises in compliance with all laws, to bring it in compliance during the term of the lease. In terms of the Americans with Disabilities Act and many other laws, such compliance can be costly.
THE LEASE will also define the permitted use of the premises by tenant during the term. It is important that the use defined in the lease adequately describe the business and activities to be conducted by tenant at the premises. A use of the premises not defined in the lease, even if contemplated by the tenant, would constitute a default by tenant under the lease and would expose tenant to eviction and also monetary damages. Closely related to this “use” issue are restrictions in the lease on use of signs and the location of tenants in the same business. For example, if the tenant is occupying space in a retail center or strip mall, it will want to ensure that there is no tenant engaged in the same business in the same center or mall.
PROVISIONS LIMITING LIABILITY need to be carefully scrutinized before signing the lease. Commercial leases also often contain broad provisions limiting the liability of the landlord to instances of its gross negligence or intentional misconduct. The tenant should negotiate with the landlord to broaden the landlord’s liability to include its negligent acts and not just its grossly negligent acts. Additionally, a tenant must be adequately insured with liability, property and casualty insurance and business interruption insurance.
THIS ARTICLE contains a few of the many issues that may arise and must be addressed by a tenant in negotiating a commercial lease. A tenant must carefully review the entire lease and negotiate with the landlord to remove or at least modify the onerous and unpalatable provisions of the lease document. This article is informational only and not intended as legal advice. Speak with a licensed attorney about your own specific situation.