In the Spotlight: When Drafting Leases, Substance Matters

What's in a name? Nothing. A poorly drafted lease, by any name, is a poorly drafted lease. Commercial leases often use the phrase “net” to describe the scope of the parties' respective duties. The references vary (e.g., Net Lease, Net-Net Lease, Net-Net-Net Lease, Triple Net Lease, Absolute Net Lease), but are always premised on the goal of shifting owner-related duties and expenses to the lessee. However, drafters of (and all parties to) commercial leases should be aware that just using a magic phrase, such as “triple net,” is probably insufficient to automatically alter the parties' otherwise express rights and duties.

Terms of Art

Every practitioner knows that the actual language of a lease controls the parties' respective rights, duties, and obligations. Too often, however, contracting parties rely on terms of art. Using commonplace phrases can help in negotiations, but their meaning should be spelled out in the eventual lease. Parties frequently assume that they share a common understanding of the terms of art they use. Yet that is rarely the case. Courts, academics, and practitioners often differ in their interpretation of commonly used phrases. According to one source, a net lease is “[a] lease in which the lessee pays rent plus property expenses (such as taxes and insurance),” while a triple net lease is “[a] lease in which the lessee pays all the expenses, including mortgage interest and amortization, leaving the lessor with an amount free of all claims.” Black's Law Dictionary 721 (7th ed. abr. 2000). Other professionals assume that “triple net” means taxes, insurance, and utilities.

One treatise acknowledges, “gross, net and triple net leases ' are not yet considered to be 'words of art' having fixed meanings.” Michael A. Dean, Frederick M. Nicholas and Robert Caplan, Commercial Real Property Lease Practice ' 1.5 (1976). Although this specific treatise was published in 1976, the subsequent body of case law only underscores the lack of a unified definition. Case books are replete with disputes over terms of art, idioms, and catchwords. So, what are owners, tenants, and their agents supposed to do?

Basic Principles

Regardless of the terminology, it is a basic principle of contractual construction that specific provisions always control over more general ones. Similarly, many commercial leases contain provisions stating explicitly that captions do not limit or control the document's specific terms. Certainly, captions and titles can help to clarify vague provisions or emphasize the parties' intent, but they will rarely be able to alter an otherwise clearly expressed contract.

It is important to remember that “there is no such thing as a standard or typical form of net lease. Each lease, whether it be gross or net, must be 'tailor-made' to fit the requirements of the particular business transaction.” Levitz Furniture Co. v. Continental Equities, 411 So. 2d 221, 224 (Fla. Dist. Ct. App. 1982). This tailoring requires parties and their attorneys to shun buzz words such as “triple net” and instead employ specific terms and provisions that accomplish their individual goals. While clich' phrases may produce a more succinct lease, they also inject ambiguity and can lead to unnecessary problems when it is time to perform. Too many cases could have been avoided had the parties employed express language rather than ambiguous terms of art.

Specifics

“In order to shift the burden to the tenant of what would naturally fall on the landlord there, should be something specific in the lease.” Kaufman v. Shoe Corporation of America, 164 N.E.2d 617, 620 (Ill. App. Ct. 1960). Generally, any agreement, which arguably decreases a landlord's normal obligations, will be construed strictly against that landlord. Thus, landlords and their representatives should ensure that the lease terms are explicit and unambiguous. As some courts have explained,

The landlord's argument of this being a net lease, and that such a concept subsumes the tenant paying all the taxes, insurance and maintenance, and that maintenance includes everything from cleaning smudges to jackhammering the parking structure, is fallacious. This attempts to create a legal effect in the lease because of what it is called rather than what it does. Mobil Oil Credit Corp. v. DST Realty, Inc., 689 S.W.2d 658, 660-61 (Mo. Ct. App. 1985) (emphasis supplied); Levitz Furniture Co., 411 So. 2d at 224.

Conclusion

Landlords, tenants, and their representatives must all take care to focus on what the language of the lease really says and ensure that the language comports with the parties' intent. The parties should not assume that they share the same definition of any phrase, no matter how commonly used. Rather, the rights and responsibilities of the parties should be expressly set forth in the written lease agreement. Doing so will not only help the parties to enforce the lease in the event of a dispute, but it may also avoid a dispute all together.

Richard D. Williamson is an attorney with Robertson & Benevento in Reno, NV.

What's in a name? Nothing. A poorly drafted lease, by any name, is a poorly drafted lease. Commercial leases often use the phrase “net” to describe the scope of the parties' respective duties. The references vary (e.g., Net Lease, Net-Net Lease, Net-Net-Net Lease, Triple Net Lease, Absolute Net Lease), but are always premised on the goal of shifting owner-related duties and expenses to the lessee. However, drafters of (and all parties to) commercial leases should be aware that just using a magic phrase, such as “triple net,” is probably insufficient to automatically alter the parties' otherwise express rights and duties.

Terms of Art

Every practitioner knows that the actual language of a lease controls the parties' respective rights, duties, and obligations. Too often, however, contracting parties rely on terms of art. Using commonplace phrases can help in negotiations, but their meaning should be spelled out in the eventual lease. Parties frequently assume that they share a common understanding of the terms of art they use. Yet that is rarely the case. Courts, academics, and practitioners often differ in their interpretation of commonly used phrases. According to one source, a net lease is “[a] lease in which the lessee pays rent plus property expenses (such as taxes and insurance),” while a triple net lease is “[a] lease in which the lessee pays all the expenses, including mortgage interest and amortization, leaving the lessor with an amount free of all claims.” Black's Law Dictionary 721 (7th ed. abr. 2000). Other professionals assume that “triple net” means taxes, insurance, and utilities.

One treatise acknowledges, “gross, net and triple net leases ' are not yet considered to be 'words of art' having fixed meanings.” Michael A. Dean, Frederick M. Nicholas and Robert Caplan, Commercial Real Property Lease Practice ' 1.5 (1976). Although this specific treatise was published in 1976, the subsequent body of case law only underscores the lack of a unified definition. Case books are replete with disputes over terms of art, idioms, and catchwords. So, what are owners, tenants, and their agents supposed to do?

Basic Principles

Regardless of the terminology, it is a basic principle of contractual construction that specific provisions always control over more general ones. Similarly, many commercial leases contain provisions stating explicitly that captions do not limit or control the document's specific terms. Certainly, captions and titles can help to clarify vague provisions or emphasize the parties' intent, but they will rarely be able to alter an otherwise clearly expressed contract.

It is important to remember that “there is no such thing as a standard or typical form of net lease. Each lease, whether it be gross or net, must be 'tailor-made' to fit the requirements of the particular business transaction.” Levitz Furniture Co. v. Continental Equities , 411 So. 2d 221, 224 (Fla. Dist. Ct. App. 1982). This tailoring requires parties and their attorneys to shun buzz words such as “triple net” and instead employ specific terms and provisions that accomplish their individual goals. While clich' phrases may produce a more succinct lease, they also inject ambiguity and can lead to unnecessary problems when it is time to perform. Too many cases could have been avoided had the parties employed express language rather than ambiguous terms of art.

Specifics

“In order to shift the burden to the tenant of what would naturally fall on the landlord there, should be something specific in the lease.” Kaufman v. Shoe Corporation of America , 164 N.E.2d 617, 620 (Ill. App. Ct. 1960). Generally, any agreement, which arguably decreases a landlord's normal obligations, will be construed strictly against that landlord. Thus, landlords and their representatives should ensure that the lease terms are explicit and unambiguous. As some courts have explained,

The landlord's argument of this being a net lease, and that such a concept subsumes the tenant paying all the taxes, insurance and maintenance, and that maintenance includes everything from cleaning smudges to jackhammering the parking structure, is fallacious. This attempts to create a legal effect in the lease because of what it is called rather than what it does. Mobil Oil Credit Corp. v. DST Realty, Inc. , 689 S.W.2d 658, 660-61 (Mo. Ct. App. 1985) (emphasis supplied); Levitz Furniture Co., 411 So. 2d at 224.

Conclusion

Landlords, tenants, and their representatives must all take care to focus on what the language of the lease really says and ensure that the language comports with the parties' intent. The parties should not assume that they share the same definition of any phrase, no matter how commonly used. Rather, the rights and responsibilities of the parties should be expressly set forth in the written lease agreement. Doing so will not only help the parties to enforce the lease in the event of a dispute, but it may also avoid a dispute all together.

Richard D. Williamson is an attorney with Robertson & Benevento in Reno, NV.