No matter how small a space or how short a term, a lease can trap even the most seasoned business tenant into unexpected and significant liabilities. Here are a few common traps for any tenant to look out for when reviewing and negotiating a commercial lease:
- Maintenance and Repair Obligations. Watch out for provisions that impose tenant maintenance and repair obligations that are out of line given the nature of the lease. For example, a three-year tenant should be obligated to perform only ordinary maintenance, not maintenance or repair of the building’s roof, HVAC systems, or other systems.
- Overly Broad Indemnity Obligations. Indemnity is an agreement to pay for certain losses and damages suffered by another party. Generally, the tenant’s indemnity obligation should be limited to anything that happens on the premises, and anything the tenant and its agents, employees, contractors, and invitees do outside the premises. Make sure that the tenant’s indemnity obligation excludes negligent and willful acts and omissions of the landlord and its agents, employees, other tenants, and contractors.
- Re-measurement Rights. Landlords often reserve the right to re-measure the premises and/or the building, each of which the tenant should resist. Re-measuring the premises or the building will impact the percentage share of expenses (e.g., common area maintenance fees, taxes, and insurance) the tenant is required to pay each month since a landlord will only re-measure when it benefits the landlord.
- Subordination without Nondisturbance. Watch out for subordination provisions, which require the tenant to subordinate the lease to an existing or future lender’s lien, without a nondisturbance clause. A nondisturbance clause ensures that the lease between the tenant and the landlord will continue under any circumstance (e.g., foreclosure). Unless the lease provides that the tenant’s occupancy will not be disturbed if the landlord’s lender forecloses on the building, the lender will likely have the right to terminate the tenant’s lease. Every tenant should ask for nondisturbance protection.
- No or Limited Cure Periods. Default language in a lease may not require the landlord to give notice of a claimed default and may not permit the tenant a period in which to cure the default. A tenant will want both notice and a cure period. For monetary defaults, a reasonable cure period is five days after notice from the landlord. For non-monetary defaults, the practical ideal is a 30-day cure period after notice from the landlord, with an ability to reasonably extend such period if the tenant is diligently working to cure the default.
- Damage Penalties. Be careful of overreaching damage penalties. For example, a landlord should not be allowed to recover the full rent, plus a separate amount for any free rent, tenant improvement allowance, or other allowances, all of which are amortized over the lease term and are thus already recovered if the landlord recovers the full rent.
Make sure to speak with a knowledgeable attorney to avoid these, and other, common traps lurking in commercial leases.