Commercial leases can be complicated. New terms, technological changes such as utility deregulation, and court decisions interpreting lease language can make it difficult even for experienced professionals to keep up. The document itself can easily range from 10 to 50 or more pages when all the agenda, affidavits, guarantees, agreements, and exhibits are included.
Here are some of the most commonly asked questions about commercial leases, as well as timely answers to them.
What are the first three steps in the lease drafting process?
- Define the lines of communication: The lines of communication between attorney, property manager, and property owner need to be clearly established in the beginning of the lease development process. In addition, you must define responsibilities early on. If the property manager is to do all the negotiating, all parties must clearly understand this. Keep in mind that this is a team operation, yet someone has to be the captain; defining everyone’s responsibilities at the beginning is important.
- Discuss preliminary issues: After the lines of communication have been defined, discuss various preliminary issues such as improvements, rental rate, term, expense adjustments, and so forth. Once these preliminary issues have been settled, draft a letter of intent.
- Draft a letter of intent: If both sides find the terms and conditions in these early negotiations acceptable, they will draft a letter of intent, or an offer to lease, covering the basic business terms. This document is signed by the prospective tenant and property owner.
What is a lease?
A lease is a legal document that includes facts, obligations, and responsibilities of the owner (lessor) and tenant (lessee). This document is written in a language that is enforceable in court.
Leases are composed of elements (facts) and covenants (promises). Traditionally, covenants in a lease do not depend on each other. For example, a tenant might enforce lease terms that benefit the tenant even if the rent has not been paid. Similarly, if the landlord breaks its covenants to the tenant, the tenant is still liable for rent and must comply with all other duties to the landlord. Of course, a well-drafted lease should anticipate these problems by including language that makes the covenants dependent to avoid unfair or absurd results.
Although there are many different types of leases, nearly every type of commercial property lease addresses similar issues. A typical lease contains provisions describing the following elements and covenants:
- Parties to the contract
- Rent amount
- Term and extension (if any)
- Premises description
- Tenant improvements
- Assignment and subletting
- Landlord’s agreement to repair and/or improve
- Lease provisions limiting liability
- Methods for resolving disputes
- Insurance coverage
The owner’s covenants usually require the owner to:
- Permit the tenant’s use of the property
- Make certain repairs
- Furnish certain utilities (because of utility deregulation, the lease may also make the owner solely responsible for selecting the building’s electric and telecommunications service providers)
- Provide a variety of other services, such as maintenance
The tenant’s covenants include:
- Paying rent
- Using the leased premises in a specified manner
- Not subletting the space
- Giving up the space in good condition at the end of the agreed term
The lease may also impose other conditions such as:
- Paying taxes
- Paying insurance
- Paying utilities
- Allocating liability for repairs
What are the facts needed in a lease?
Leases need to contain a significant number of facts that must be presented in certain ways, including:
- Name of parties: The names of the landlord and tenant must be correct and properly spelled. Formal corporate names must be used, not “trading as” or “doing business as” names.
Signature blocks: There must be signature lines for the landlord and each tenant. Signature blocks must be set up correctly with a signature date. After the lease is signed, make sure each signature has been dated.
Blanks: All appropriate blanks must be filled in. “None” or “not applicable” can be inserted where necessary.
Deletions/amendments: All parties must initial every deletion and amendment.
Attachments: All the attachments that are referenced in the main body of the lease agreement must be attached. These documents must be clearly identified exactly as they are referenced. For example, if the body of the lease agreement refers to an “Addendum,” the attachment should not be called an “Amendment.” (Different types of attachments include addenda, amendments, exhibits, and riders.)
Accompanying documents: Documents referenced in the lease, or required by the landlord, must be included with the lease. These documents can include a lease guaranty, the tenant’s financial statement, or a lease summary sheet.
Lease date: The lease must be dated. In addition, the rent commencement date and the length, or term, of the lease must be clearly defined.
Legal description: The lease must contain a legal description of the property and a common name and/or address of the property.
Rental rate and other terms: The lease agreement must clearly identify the rental rate and the basic terms of payment, escalations, CAM fees, expense stops, and all other monetary matters.
Special provisions: Any special provisions or amendments must be included in the lease.
Federal, state, and local requirements: The lease agreement must comply with all specific requirements of federal, state, and/or local laws, codes, and regulations, as well as any recently enacted or promulgated amendments. Your attorney may know about certain local lease laws to which the lease must conform. Depending on the situation, the lease may need language dealing with OSHA (Occupational Safety and Health Administration) hazardous material disclosure or the ADA (Americans with Disabilities Act) compliance.
Social security number, federal ID number, and SIC (Standard Industrial Classification) Code: These numbers must be in the lease to track personal or company dollars, as well as any environmental infractions.
Who are the parties to the lease?
There are two parties to a lease: the owner and the tenant. Sounds simple, right? What may sound simple contains deeper issues that carry far-reaching legal consequences. For example, unless the right questions are asked when naming the tenant in a lease, the lease may be faulty and unenforceable right from the beginning. The lease may name the wrong corporate entity or an entity that is not legally recognizable. Depending on the nature of the parties to the lease, different issues may arise. Entities that can be party to a lease include:
- Corporations
- General partnerships
- Limited partnerships
- Limited liability companies
- Partnerships
- Co-tenants
- Co-owners
This article is excerpted from BOMI Institute’s NEW Leasing Reference Guide. The information-rich resource provides critical information on the complexities of commercial leases. The guide covers key aspects of leasing including lease development, lease negotiation, and lease administration, and can help you and your employees navigate their way through the commercial lease process. BOMI’s Leasing Reference Guide can be purchased for $49.95, plus shipping and handling, by calling 1-800-235-BOMI (2664), or visiting www.bomi-edu.org.
