Landlords: Beware of “Silent Issues Lurking in Standard Commercial Leases
It's far too often the case that, after negotiations between a landlord and prospective tenant over the business terms of a commercial lease, the landlord rushes to sign a lease. In an effort to close the deal as quickly as possible, the landlord uses a standard form lease that hasn't been updated to reflect the transaction's distinct features or recent developments in leasing law.
Using a standard commercial lease without careful review and customization can be fraught with unforeseen risk. As a landlord, should you find yourself in a conflict with a commercial tenant that reaches the courtroom, you don't want to be in a position where the judge states, to your detriment, that they cannot infer obligations or prohibitions in leases. If something is not expressly stated in the documents signed by the parties, it's not part of the deal.
"Silent" issues – the gaps and omissions in a standard lease – can wreak havoc for the landlord. Avoiding these potential landmines requires taking the time to work with a knowledgeable real estate attorney to draft a lease that equips you with the fullest protections possible.
Here are some common silent issues that landlords should think about before signing off on a commercial lease:
1. Alterations to the Property
If you allow a tenant to make alterations outside the leased premises (HVAC equipment installations, back-up generator, or fuel storage and transmission), the tenant should be held to the same removal and restoration requirements applying to interior alterations. One option you may want to consider is performing all exterior alterations yourself, but at the tenant's expense.
The lease should require all tenant alterations to comply with the Americans with Disabilities Act and all applicable laws on disabled or handicapped access. The lease should allow the landlord to block any alteration, even within leased premises, that would require significant changes outside the leased premises to comply with laws.
Reserve the landlord's right to install security cameras, scanning devices, and any other security technology in common areas. Require the tenant to waive any right to object to such devices and any right to sue the landlord over privacy, labor, or workplace issues arising from their use.
2. Assignment and Subletting
If you allow assignment or subletting, prohibit the tenant from accepting an assignment of any other tenant's lease or subletting any other tenant's premises without your consent.
Prohibit assignments or sublets that compete with the landlord. A lease assignment or sublet could create conflict with the landlord if it is:
- For less than fair market rent or the present rent.
- If the landlord has available space.
- To existing tenants in the building or any other building that the landlord owns within a specified area.
- To entities with whom the landlord or its affiliate is actively negotiating or has recently negotiated.
Prohibit assignment or sublet to any entity with whom the landlord or its affiliate is in litigation.
The lease should expressly state that the new occupant will be bound by any use clauses in the original lease. While this might seem self-evident, courts may infer some unintended flexibility on use if the parties negotiate a right to assign or sublet.
3. Tenant's Bankruptcy
If the tenant provides a letter of credit in lieu of a security deposit for more than one year's rent, make sure that the letter of credit expressly allows the landlord to draw on it if the tenant files for bankruptcy.
If a tenant is leasing multiple locations from the same landlord, structuring the transaction as a single combined lease for all locations could protect the landlord in the event that the tenant files for bankruptcy. This could reduce the likelihood of the bankruptcy judge "cherry picking" from the various leases.
4. Compliance with Laws
If the tenant uses the leased premises as a "public accommodation" or any other use to which the Americans with Disabilities Act applies, the tenant should pay for all work needed to fulfill the legal requirements. These should include common areas such as parking lots, entrances, lobbies, or public corridors.
Require the tenant to perform all alterations required by law. For required alterations that apply to the building as a whole, the tenant should pay their proportionate share.
Make the tenant financially responsible if they cause your property to become non-compliant with the law. For example, if the code allows the landlord to maintain an old fire alarm system but requires you to upgrade if anyone performs a certain amount of construction work in the building and the tenant plans to undertake that work, the landlord should require the tenant to pay for the fire alarm systems upgrade.
Require the tenant to certify they are not a terrorist or other party with whom you're not legally allowed to do business. The tenant should indemnify the landlord against any loss, including attorney fees, resulting from the tenant being a terrorist or engaging in any activity that creates legal liability for the landlord, such as money-laundering.
5. Environmental Compliance
You may want to have the tenant provide an environmental assessment at the end of the lease term and require them to remedy any conditions that are the responsibility of the tenant under the lease.
Require the tenant to indemnify the landlord against any harm resulting from the tenant's use of the leased premises and the property. This should include all environmental issues and should extend beyond the expiration or termination of the lease.
If you seek to comply with LEED or other environmental certification, you may need to include language in the lease to ensure that every tenant in your building complies with the requirements of the environmental certification.
6. Landlord's Liability
Limit the landlord's liability to their interest in the property or whatever equity they would have had in the property had they entered into a mortgage securing financing equal to 80 percent of the property's value. The landlord should not be personally liable, nor should their partners, members, managers, officers, directors, affiliates, and the like.
The lease should include a statute of limitations under which the tenant forfeits the right to file a claim against the landlord after a short period of time has passed after the tenant became aware of the facts supporting the claim.
The current landlord should not be held liable for the previous landlord's acts.
WHAT TO DO NEXT:
Just as every piece of property is unique, each instance of litigation for a piece of property is unique - and not every lawyer has experience handling such litigation. Using the legal process to achieve your strategic objectives involves much more than paper pushing. It requires an understanding of how New York City and New York State law is applied to your specific case.