Here are some of the most frequently asked questions about lease obligations, covenants, and clauses, as well as, timely answers to them.
What are the owner’s basic obligations?
The owner’s basic obligations to the tenant are:
- covenant of quiet enjoyment
- covenant of possession
- warranty of fitness
What are some owner obligations to the tenant?
Owners also have certain duties to tenants. These include the duty to:
- disclose dangerous conditions
- inspect and repair public use premises
- maintain common areas under the owner’s control
What is the covenant of quiet enjoyment?
The covenant of quiet enjoyment assures tenants that they will have peaceful possession of the property, free of interference from the acts or claims of the owner or certain third parties claiming rights through the owner. The tenants are protected from title disputes between the owner and anyone claiming superior title. Generally, even without a specific covenant, quiet enjoyment is implied in any owner/tenant relationship. Condemnation of the leased premises is generally not a violation of the owner’s covenant of quiet enjoyment. Furthermore, a covenant of quiet enjoyment does not require the owner to repair leased premises.
What is the covenant of possession?
Provided the tenant is not in default, the covenant of possession gives the tenant exclusive possession and control of the premises. An owner cannot enter the tenant’s property unless the owner reserves specific entry rights in the lease. Ordinarily, the lease states that the owner can come onto the property to accomplish owner obligations, such as to complete any required repairs, without disturbing the tenant’s business. In addition, the owner may specify the right to enter the premises near the end of the term to show the premises to potential tenants. Without these kinds of specifically drafted exceptions, the landlord usually has no right to enter the premises, make repairs, or curtail a nuisance.
What is constructive eviction?
Constructive eviction enables the tenant to break the lease if the owner interferes so much with the tenant’s use of the premises—such as failing to provide utilities—that the tenant is forced to leave.
What is the warranty of fitness?
A warranty of fitness ensures that the leased premises are suitable for the purposes anticipated by the tenant. If this warranty is included in the lease by the owner, then its application becomes a matter of contract interpretation. Unlike a warranty of habitability, which may be implied in residential leases, a majority of jurisdictions have found that there is no implied warranty of fitness in leases of property for commercial purposes.
What are the tenant’s obligations?
The tenant has duties and liabilities including:
- paying rent
- not disturbing other tenants
- maintaining leased property
What are the tenant’s rent-paying obligations?
One of the hallmarks of an owner/tenant relationship is the obligation of the tenant to pay rent by a certain time of the month. Rent is distinguished from other amounts that the tenant may have to pay to the owner, such as:
- security deposits
- late fees
- penalties
- CAM (common area maintenance) charges
- the tenant’s share of utilities
Leases should generally anticipate changes and circumstances that may affect rent payment. Well-drafted leases contain provisions ending, or abating, rent in case of partial or complete destruction of the leased premises, for example. Many leases (at least in the commercial context) also contain provisions that accelerate future rent obligations if a tenant defaults.
Many multi-year leases also include provisions that increase rent according to inflation. (For example, some rent rates are tied to the CPI [Consumer Price Index].) In addition, many shopping center commercial leases have percentage rent. (That is, rent is paid to the shopping center landlord based on the gross sales volume of the tenant.)
What does the tenant obligation not to disturb other tenants mean?
Not disturbing other tenants means a tenant’s business should not cause any problems for neighbors, such as:
- noise caused by employees or business processes
- clutter in common areas and hallways
- solicitation of business
- violation of building rules
- violation of local ordinances
- general nuisances
How must a tenant care for and repair a leased property?
A tenant’s care and repair duties depend on the terms negotiated in the lease and on the nature of the leased property. Under a long-term lease for an entire building, the duty to repair usually falls to the tenant because the tenant is in the best position to do the repairs. On the other hand, in a multi-tenant building, a landlord is usually obligated to make repairs to the common areas, roof, and building exterior.
What is a lease clause?
Leases are composed of sections of words called clauses, which cover specific subjects. Some clauses in a lease are boilerplate, or standard.
Some examples of these standard boilerplate clauses include:
- indemnification
- severability
- governing law
- attorney’s fees
- entire agreement
- condemnation
- eminent domain
- destruction
What is a lease audit clause?
A lease audit clause specifies how and when a tenant may conduct an audit of lease elements such as operating expenses and CAM charges. The following are some issues a lease audit clause should address:
- Specify the number of days after receiving the annual statement within which the tenant must give reasonable, written notice to the owner of intent to examine books and records.
- Specify the number of times a tenant can perform an audit. Owners can prevent the same tenant from auditing every year by permitting audits only every two years.
- If the tenant finds a discrepancy and wants to challenge the expenses, a notice stating this fact must be given to the landlord within a specific number of days. (Again, the procedures for this process should be detailed in the lease.)
- No matter what the issue is, the lease should state that the tenant is still liable for paying the rent and expenses while the dispute over expenses is being resolved.
- The audit clause should also state how and when your records will be accessible and a procedure for making your staff available to answer questions.
- If the audit turns up significant differences, try to settle and avoid going to court. No owner wants to be known as a cheater. Include wording in the lease—such as an arbitration clause—to open the way for negotiations and a settlement.
- Require a nondisclosure clause to prevent the tenant’s auditing firm from using the results for marketing purposes.
When it comes to operating expenses and CAM charges, courts in some jurisdictions have found that tenants have an implied right to audit the owner’s books with respect to operating expenses. Savvy tenants require an audit clause during negotiations and will later hire an outside firm that specializes in lease audits to check expense charges. To regulate the scope of this right to audit, the clause needs to specify the details governing an audit. Include a limitation on how far back in time a tenant’s audit can reach; this should be the same as the statute of limitations (about four years, unless fraud is proven).
Deal in a straightforward manner with tenants when it comes to their audit rights. The owner who recognizes the tenant’s right to audit has a powerful retention tool at lease renewal time. Tenants want to know what they are being billed for, so you must keep accurate records.
This article is excerpted from BOMI International’s Leasing Reference Guide. The guide can be purchased by calling 1-800-235-2664, or by visiting www.bomi.org.