10 Categories of Provisions to Consider in any Commercial Lease

Moreover, the tenant should make sure that whatever the permitted use is, it accounts not only for the current proposed use of the leased premises but also for any potential reasonable expansions of that permitted use over time.

The tenant may also want to include a restrictive covenant in the lease prohibiting the landlord from signing a lease with a business in competition with the tenant. Such a lease provision is common with shopping mall leases where, for instance, a gym operator makes sure a competitor gym cannot also open in the shopping center in which it is operating, as well as in any other shopping malls owned by the landlord within a certain vicinity of the shopping center.

3. Additional Rent

In addition to the base rent due under the lease, under many circumstances, the landlord expects the tenant to pay a proportionate share of the other expenses associated with the operation and management of the building.

If this is the case — first things first — the parties must decide what is the tenant's proportionate share of the building containing the leased premises. Sometimes, the proportionate share is based simply on the square footage of the building as compared to the square footage of the leased premises. With regards to mixed-use properties, however, tenants should know that some landlords will insist that the commercial space has more value than the residential portion of the building and will therefore insist that the tenant agree to a higher proportionate share.

Next, the parties must determine whether the tenant is simply responsible for the tenant's proportionate share of the common expenses of the building in any given year; or, alternatively, responsible only for any increases of the common expenses of the building as compared for the year in which the lease was commenced. To illustrate, let's say that the tenant moved into the building in 2017, a year in which the common expenses of the building were $100,000. In the year 2018, however, the common expenses of the building increased to $110,000. If the tenant's proportionate share under the lease is 10% of the common expenses in any given year, then the tenant's proportionate share for 2018 would 10% of $110,000, and the tenant would owe $11,000 in additional rent to the landlord. But, if 2017 was deemed the base year under the lease, the tenant would pay additional rent based upon any differences in the common expenses from the base year — thus, the additional rent the tenant would owe for 2018 would be 10% of the $10,000 increase, or $1,000.

In order to prevent unreasonable increases in what is typically defined as "additional" rent, the tenant may also insist on language in the lease providing that additional rent due by the tenant cannot increase above a certain percentage from year to year. In response, the landlord would likely state that the landlord cannot agree to limitations on increases of such common expenses as real estate taxes or insurance premiums, since the landlord cannot control how much these expenses increase from year to year.

Finally, the question remains: What is included in this "additional rent?" Typically, a lease includes as additional rent: 1) the cost of maintaining and repairing the common areas of the building in which the leased premises are contained; 2) the real estate taxes due on account of the property containing the leased premises; and 3) the premium amount to insure the property containing the leased premises.

The items which are typically debated by the leasing parties are any fees associated with the management of the property and the cost of any capital improvements to the property and building containing the leased premises. A tenant, at the very least, should look to diminish or eliminate any financial responsibility for paying any portion of the cost for capital improvements to the property and building containing the leased premises.

Overall, a tenant should ensure that there is a mechanism allowing for an audit of the alleged costs and fees associated with the common areas of the property.

4. Alterations and Improvements

Typically, alterations and improvements must be made to the leased premises before the commercial tenant may occupy it. But questions remain: Who performs the work and who pays for it?

On many occasions, the landlord performs the requested alterations and improvements on the leased premises and the cost of these alterations and improvements is factored into the rent due by the tenant to the landlord over the course of the lease term. If this is the case, the tenant must make sure that the scope of work is adequately and accurately summarized in the lease. The tenant should also impose a deadline for the satisfactory completion of the alterations and improvements (subject possibly to a force majeure provision). If the work is not so timely completed, a liquidated damages clause should be considered, allowing the tenant to recoup a predetermined amount of money from the landlord under those circumstances.

Furthermore, the lease should contain a mechanism whereby an agreed upon punch-list is prepared by the parties when the work is substantially complete, designating a time frame for the landlord to complete the work in a good and workmanlike manner.

Under some leases, when the landlord is responsible for the completion of the work being performed to the leased premises, the rent commencement date (as opposed to the lease commencement date) and the term of the lease begins when the work is substantially complete. In other words, while the lease becomes effective the date it is executed by the parties, in some situations the tenant has no obligation to pay rent to the landlord until the work is completed.

As an alternative, the landlord can instead agree to contribute a pre-determined amount of money toward the completion of the work to the leased premises and the tenant will be the one responsible for the completion of the work. Under these circumstances, the landlord should include provisions in the lease requiring: 1) prior approval for the work; 2) that all contractors being used by the tenant are duly licensed and insured; 3) that the tenant obtains any necessary governmental approvals and permits prior to the commencement of the work; and 4) that after the completion of the work no mechanic's liens encumber the leased premises.

If the tenant is responsible for the completion of the work, the tenant should also negotiate a predetermined time period under which there is no obligation to pay rent to the landlord while the work is being completed.

5. Property Maintenance

It is of utmost importance to clarify whether the landlord or tenant is responsible for maintaining the leased premises. Although it may seem apparent that a landlord is responsible for maintaining, repairing, and replacing items like structural components in the leased premises, other items are not as clear cut and must be addressed in the lease. For instance, when dealing with a store front in a "mom and pop" building, the parties must address who deals with damage to the glass to the front of the establishment, or who is responsible for snow removal in front of the building.

Part Two, next month, will discuss further considerations for landlords, tenants and their advisers when entering into lease agreements.

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Alan Nochumson, of Nochumson, PC, in Philadelphia, is a member of the Board of Editors of Commercial Leasing Law & Strategy.