Meeting Your Company's Needs
and Exceeding Your Expectations

LEGAL ISSUES IN BUSINESS LEASES

 The Importance of a Good Business Lease 

            A well-negotiated, well-drafted, lease can be an enhancement to your business, and one of your most important business assets. A poorly drafted lease that does not adequately protect you can undermine your business and put it at risk.

A well-negotiated lease should focus on and resolve key areas of concern to your particular business. For example, negotiating a low rent may not make a lease "well-negotiated," if rent forms only a small part of a company’s overall costs. Location may be critical for one business, while length and flexibility of the lease term may be vital for another. For some companies, successful design and build-out, or room for future expansion, may be key. Other companies may feel that the most important issue is protecting the business owner’s personal assets by not guaranteeing the lease personally.

As a business owner, you have to decide which issues are important from a business perspective and focus on them in order to get the best terms possible.

An attorney experienced with leasing can help you set your leasing priorities from both a business and a legal perspective and help you map out an appropriate course of action. An experienced attorney can also help line up other key professionals to work with you: brokers who know the market trends and can locate potential space, architects and contractors who will inspect the prospective space, and design and construct your build-out, and lenders who will help finance the build-out and other expenses including moving to the new location.

What You Think You Agreed to Compared to What is Actually in the Written Lease

As a tenant, you or your lawyer may negotiate favorable terms with the landlord only to receive, soon after, a standardized lease with provisions which you don’t remember agreeing to, which may flatly contradict what you did agree to, and which may even  undermine your business. In reviewing the proposed lease, an experienced attorney will flag those provisions and help you obtain a written lease that does not (1) disturb your business operations or force your company out of its location; (2) impose added costs and risks on your business; and (3) deprive you of the right to sue and recover damages caused by the landlord’s misconduct or breach of the lease. 

            I will discuss each of these three classes of lease provisions. 

1.    Provisions Which Make It Easy for the Landlord to Force You Out of Your Space and Interrupt Your Business. 

            There are several clauses which can allow the landlord to evict you from the space you are occupying. These include default clauses which can provide in several situations, that if you are in default under the lease, you may be subject to eviction. Almost all leases provide that you are obligated to pay the fixed monthly rent on time without any special notice, and that you are in default if you do not. Non-payment of rent is a material default and gives the landlord the right to evict you.  Other provisions in the lease commonly define rent to include other monetary obligations, such as taxes, repairs, common area costs, and operating costs.  Failure to pay those items puts you in default for non-payment of rent and renders you potentially subject to eviction. It is wise to provide in the lease that you have a ten to fifteen-day grace period for the payment of "rent” after the due date, before you are in default. 

            In addition to rent, there are a host of non-monetary defaults, usually for not performing certain obligations in the lease, such as: failure to maintain insurance, keeping explosive and flammable materials on the premises, engaging in illegal behavior, damaging the premises or the building. In contrast to the fixed rent that you know when it has not been paid, you may be totally and innocently unaware that you are in violation of other provisions of the lease. It is entirely reasonable to ask for prior written notice and then up to thirty days to cure the violation before the landlord can declare you in default. 

            Another set of clauses which can disturb your tenancy and force you out of the space you have leased are the casualty clause, eminent domain and renovation clauses. Very often the occurrence of a  fire, casualty or taking gives the landlord the right to terminate your lease and force you out, regardless of the fact that the damage to the building or to your space may not be that severe, and despite the fact that you may not want to leave, or may need time to relocate. If the building or your space is destroyed, the situation is clear and unavoidable, although it can be catastrophic to your business. The problem arises when your space or the building you are in is partially damaged. The landlord may think it is substantial, while you may think that it is not serious enough and can live with the disruption - which is less than if you had to suddenly move somewhere without notice or preparation. The opposite situation can also take place: you may want to move out because of the disruption to your business, but the landlord wants you to stay and will only abate the rent you pay - which is clearly not enough. In this case, you are stuck: you can't operate your business yet you can't move and can only get a rent reduction. There is also the landlord's renovation clauses, which gives him the right to terminate your lease and force you out with all the other tenants so that he can renovate the entire building and lease it out at a higher rental. There is also the subordination clause. The subordination clause subordinates your lease not only to the existing lender, but to future lenders on the building, so that if a bank forecloses in the building they can force you out even if you are in total compliance with the terms of your lease. This can be traumatic or even catastrophic to your business, and it happens mostly in down economic times. A non-disturbance clause aims to protect you by saying that as long as you have paid your rent and are in total compliance with your lease, the foreclosing bank has to recognize your lease and accept you as a tenant. It is hard to get this clause, however. Banks don't like to have their hands tied. But if you are leasing the whole building or have leverage with the landlord, it is worth asking for. 

            2.    Provisions Which cost you money or impose risks on your business. 

            There is a second class of provisions which cost you money or impose risk on you. One such clause is the indemnification clause that is often one-sided: you indemnify the landlord for things you might do wrong, but the landlord often does not indemnify you for things that he might do wrong. The clause can also be drawn so broadly that you become responsible for people and events which are really beyond your control and should not be your responsibility.

    Another such clause is the damages clause where in case of eviction the landlord seeks to make you immediately responsible for the entire rent for the unexpired portion of your term – similar to an acceleration clause in a promissory note. But a lease is very different from a promissory note. With a lease, you in effect exchange your monthly occupancy for the corresponding monthly rent payment. You do not owe a future month's rent until you have occupied the space for that period.  Related to the accelerated damages clause are clauses which try to take away the landlord's duty to mitigate damages – that is, re-rent the premises and take reasonable actions to reduce your liability for future unpaid rent. 

            Another such clause may make you warrant that as of the time you move into your space, the non-visible or external building systems (electrical wires, plumbing)  - which the landlord has in fact been maintaining - are in good condition. This removes from the landlord any liability for bursting pipes, stoppage of heat or air-conditioning, or electrical black-out caused within the building – even though these events may be the landlord's fault or under his or her control, and which if broken, may severely impact your business. 

3.    Provisions Which take away or limit your ability to claim for damages or reimbursement when the landlord would otherwise be liable. 

            A third class of provisions either exempts the landlord from liability to you or removes or hinders your right to recover for legitimate claims against the landlord. One provision that always bothers me but which I am not always successful in removing is the little and often unnoticed phrase “without offset or deduction". For example, you promise to pay your rent to the landlord without offset or deduction. This means that even if you have a legitimate claim or offset against the landlord, you cannot deduct the amount from the rent without being in default for non-payment of rent. Instead, you may have to go to court and pursue your claim separately - not a very attractive or practical solution for smaller but significant claims. In any event, it puts the landlord in a strong position of leverage against your claims. It is not easy to remove this phrase from the lease, and nearly impossible in leases of big buildings where the building lender may be relying on the uninterrupted cash flow from rents to service its bank loan to the landlord. Another clause provides that the landlord will not be personally liable for any breach or wrong, but the tenant shall look only to the property in which you have leased space. It is not entirely what this clause means, but at the least, it severely cuts down your ability to recover or collect large monetary damages from the landlord, since "looking only to the property" means that you are trying to collect from an illiquid and often highly encumbered asset – such as the building you occupy. Finally, I will mention provisions which limit your right to inspect and audit the records and the landlord's basis for charging you the operating cost pass-throughs which usually increase every year and can, over the long-run, be quite costly. The limitations include a short time to audit records or your rights are waived, and some sort of penalty if you cannot show that the operating cost charge to you was incorrect.