There are many issues to be considered when one negotiates a commercial lease. A commercial lease covers a long period of time and the monetary stake is high. We advise our clients to spend sufficient time fully negotiating the lease. Our firm can help you in all steps of contract negotiation.
- Indemnification Issues
In a lease context, indemnification means allocation of risk among landlord and tenant. For example, a party may agree to pay the liability, and in some cases defense costs and damages, of the other party if a claim is asserted by a third party. Landlord may require the tenant to provide the landlord with both indemnification and a defense for claims, liabilities, and damages that arise out of the tenant’s operation of a business in the leased space. Tenants will frequently seek mutual indemnification in which the tenant will generally take responsibility for what occurs in the leased premises and the landlord will take responsibility for what occurs in the common areas.
Because many environmental laws impose strict, joint, and several liabilities on both the landlord and the tenant for costs associated with the presence of hazardous materials on a leased premise, most commercial leases contain representations and warranties, covenants, and indemnification provisions specific to environmental issues.
- Insurance Issues
Commercial leases often require evidence of insurance, but parties should really look into what risks are covered in the policy. There are several types of insurance
- Property insurance, with basic, broad, special coverage
- Business interruption/ Rental Income Insurance
- Liability insurance, e.g., commercial general liability, environmental coverage, automobile liability, etc.
- Builders risk insurance
- Subordination, Non-disturbance, and Attornment Agreement (SNDA)
Subordination allows another’s interest in certain real property to have priority over one’s own interest.
Non-disturbance is an agreement by the mortgage lender that it will not terminate the tenant’s right of possession in the event of foreclosure.
Attornment is essentially the flip side of “non-disturbance”, by which the tenant agrees that the lease will continue in effect following foreclosure, so the tenant will recognize (attorn to) the mortgagee or its successor in a foreclosure sale as the landlord under the lease.
Generally, the landlord’s concern related to SNDA is to get the lease or the loan completed. Thus, the landlord will seek to get the SNDA signed at his earliest ability.
For the tenant, it is a good idea to negotiate and insert the non-disturbance provision into a landlord’s form agreement.
- Holdover Issues
A holdover tenant is a tenant who remains in occupancy of the subject premise after the initial lease term and without the written consent of the landlord. Holdover provisions are enforceable and most commercial leases will have these to deal with holdover tenant. Double or triple rent provisions are generally acceptable as long as it bears a relationship to the landlord’s actual losses.
Landlords usually will seek adequate default and remedy provision to reduce losses when a tenant fails to pay. The following are some common defaulting events in the lease:
- Failure to pay rent or other charges when due
- Breach of other covenants under the lease
- Tenant vacates or abandons the premises
- Repeated defaults under the same covenant or provision of the lease
- Bankruptcy or insolvency type defaults
- Assignment or subletting without the landlord’s consent
- For retail tenants that are franchisees or licensees, the termination of the franchise agreement or license
- Where landlord and tenant are parties to other agreements, there may be cross default provisions that tie in to those other documents or agreements.
Landlords usually will incorporate several remedies in the lease, for example,
- Right to re-entry: allows the landlord to re-enter the premises and take the possession upon tenant’s default.
- Termination right: terminate the lease
- Self-help rights: not used often
- Forcible Entry and Detainer: court action to evict tenant. See more on Eviction.
To recover damage after tenant’s default, landlord will have the right to sue as the rent comes due, but this is ineffective because a lawsuit has to be filed. So the landlord usually will put provisions in the lease to recover losses, for example,
- Parties may apportion damages, as long as such provision is reasonable
- Using acceleration provision: requires the defaulting tenant to immediately pay the landlord all rent under the lease
- Using liquidated damages provision
- Provisions that allow the landlord to recover the difference between the rental stream under the lease (discounted to present value) and the fair market value of the leased premises for the remainder of the term
Defaulting tenant, on the other hand, has limited tactics to deal with the landlord. One important thing is that in Ohio, a commercial landlord has a duty to mitigate absent contrary contract provision. For example, the landlord has to
- Advertise the premises for lease,
- List the premises with real estate brokers,
- Post signs of “for rent,”
- Keep records of calls made by the landlord and response to calls on the property, or
- Stay out of the premises, except to show the premises
Provisions dealing with a landlord’s default are much shorter. Most leases do not have such provisions, but the tenant in strong negotiating position should negotiate such provisions.
To discuss further about the issues listed above or other issues, please contact our firm.