As a member of our Real Estate practice area, I routinely hear from
clients asking me to draft or review leases for them. Whether it is a
physician group looking to relocate their practice, a fitness facility
planning an expansion of their existing space, a large distribution
center considering a new transportation hub, a restaurant interested
in leasing a second location or a small business interested in taking
space in a shopping mall, each client has specific needs that the new
space must fulfill.
Despite the common perception of many clients, leases are not “one
size fits all.” Leases vary widely depending on whether the tenant
is leasing an entire building, a portion of a building, an office suite
or space in a mall. Leasing new space is an event that can have
major implications for any business. If a company leases space that
ultimately turns out to be unsuitable for its operations, or if the
lease does not allow for expansion, the growth of the company can
be hindered. If too much space is leased, the company will end up
wasting its valuable cash resources.
Lease documents can be sophisticated and complicated contracts.
More often than not, the language in today’s leases consists of
dense and frequently poorly drafted “legalese.” It is important to
understand a business’ present and anticipated future needs to
tailor a lease suitable for the client. Many points beyond rent and
square footage can directly and adversely affect a business tenant.
For example, often vague and confusing clauses pertaining to
operating costs and escalations, unless properly limited or capped,
can result in unexpected liabilities. These unquantified amounts,
when added to an otherwise reasonable base rent, can result in a
total rent obligation that is well beyond the tenant’s ability to pay.
A lease review by an attorney who understands the ongoing
economic implications of complicated lease language can be
invaluable. A lease that provides a tenant with the right type of
space and flexibility as the tenant’s needs change can become an
asset and provide a competitive advantage.
To make the lease review process more efficient, I suggest that each
client consider certain key points when they’re thinking about
leasing space. I also suggest they put together a brief list identifying
their particular business needs and wants for new space. This
helps me to understand what is missing from the standard lease
documents they are being asked to sign.
A prospective tenant might want to consider the following matters
when entering into a lease:
The Premises. Do you know exactly what you are leasing? A
precise plan ought to be attached to your lease. The square footage
of the usable premises also should be set forth. In the event future
space needs are indefinite, an option to expand into or a right of
first refusal on additional space should be considered, as well as an
ability to downsize and give back space or reduce the lease term. If
you are leasing a substantial portion of the building, an option or
right of first refusal to purchase the building may be appropriate.
Identity of the Tenant. If you operate your business in a form
other than a corporation or limited liability company (such as a
partnership or a trust), nonrecourse language should be requested.
All efforts should be made to avoid entering into the lease in the
name of an individual. Similarly, personal guarantees should be
resisted whenever possible.
Storage/Parking/Loading. Your lease should identify storage
space (if any) and number of parking spaces, their location, their
additional cost (if any) and whether parking spaces are assigned or
used in common with other tenants. If loading areas are important
to your business, your lease should identify the loading areas, any
restrictions on their use and whether such areas are exclusive to
your space or used in common with other tenants.
Permitted Uses. The permitted use clause, if any, ought to be
broadly drafted so as to permit all contemplated uses of the
premises and incidental uses. These uses should be checked against
local zoning.
Initial Tenant Improvements. Unless the space is to be taken “as
is,” perhaps the most significant item to be explored is the nature,
timing and responsibility for the performance and cost of the
improvements to be constructed. Your lease should also state
whether all or a portion of such improvements can be removed at
the end of the lease term, or whether they become the property of
the landlord.
Operating Expenses. If you are going to share in the cost of
operating expenses for the building, you should try to exclude
capital items or limit your obligation to paying for such items
as amortized over their useful life. You will generally benefit
from operating expenses being determined in accordance with
generally accepted accounting principles with carefully enumerated
descriptions of included and excluded costs. If operating expenses
are to be paid over a base, that base should, if possible, be the first
full calendar year during which the lease is in effect, and the base
should be “grossed up” to reflect full occupancy. Consideration
should be given to negotiating a cap on increases in operating
expenses and rent escalations during the lease term.
Maintenance and Building Services. Your lease ought to include
detailed times and standards for building services and set forth
the additional cost, if any, for off-hours or additional services,
such as weekend or evening air conditioning or heating. You may
wish to negotiate an abatement of the rent or lease termination
right in the event an interruption of services continues for a
specified time period.
Insurance. The lease should include a covenant by the landlord
to insure the building for its full replacement cost and should
include a waiver of claims by the landlord for any damage
covered by insurance, as well as a commitment by the landlord to
obtain a waiver of subrogation from its insurer.
Assignment and Subletting. The lease should allow the tenant to
assign the lease to a related or affiliated entity without requiring
the landlord’s consent. The landlord should not be permitted to
unreasonably withhold its consent to a requested assignment of
the lease or to a tenant’s request to sublet a portion of its space.
Reasonable conditions to assignments and subletting ought to be
spelled out in the lease.
Casualty or Taking of all or a Portion of the Premises. The
tenant should negotiate an abatement of the rent or lease
termination right in the event all or a portion of the premises is
destroyed by casualty or otherwise unavailable to tenant due to a
taking of the premises by eminent domain.
Tenant Default. You should receive written notice of any default
including non-payment of rent or additional rent. The grace
period after notice should be not less than five (5) days for
monetary defaults and 30 days for nonmonetary defaults. The
landlord should only be able to pursue remedies under the lease
after notice and expiration of applicable grace periods.
Title Issues. A nondisturbance agreement should be requested
from each present mortgagee, and the landlord ought to agree
to obtain such an agreement from all future mortgagees if the
lease is to be subordinate to such mortgages. Otherwise, if the
landlord’s lender were to foreclose on its mortgage you might
find your lease terminated by that foreclosure.
In Massachusetts, if the term of the lease including all extension
rights exceeds seven (7) years, a notice of lease must be recorded
to assure protection of the tenant’s leasehold interest from
invalidation by mortgagees or purchasers who have no notice
of the lease.
The experienced attorneys at Fletcher Tilton PC can assist
you, whether you are leasing space for your business or own
commercial space for lease. Let us help you navigate through the
pitfalls of leasing and ensure that your lease is properly tailored
to your business.
