Commercial Lease Terms: More Issues to Cover

As for subletting the leased premises, it is common for the lease to include language whereby the landlord receives a portion of the “profit” the tenant receives from subletting the leased premises. The question remains as to what is considered the amount of the profit, and how much of it the landlord is entitled to. These questions should be dealt with as thoroughly as possible in the lease document.

Irrespective of the formalities surrounding assignment and subletting, most leases contain a provision allowing the landlord to recoup legal fees and related costs when dealing with a proposed lease assignment and sublease situation. As a compromise, the parties to the lease may agree to a flat amount that will be due to the landlord any time there is a proposed lease assignment or subletting of the leased premises.

7. Options

The parties must determine what happens after the initial term of the lease expires. Most leases include a right of the tenant to renew the lease term for an additional term of a specified period of time. Such a renewal right is commonly conditioned upon the tenant being in good standing with its obligations under the lease at the time the tenant exercises this renewal right, and at the time of commencement of the additional term.

The question remains: When must the tenant exercise this renewal right?

There are clearly competing interests here. The tenant would like the opportunity to exercise renewal rights as close to the expiration date of the then-preexisting lease term as possible, in order to preserve the tenant's options with respect to the leased premises and other properties under consideration. On the other hand, the landlord would like to know as quickly as possible of the tenant's intentions, as the landlord will need a sufficient period of time to market the leased premises to a replacement tenant.

The other issue pertaining to these options is how rent is determined for the renewal term. The parties could agree to a predetermined amount at the time of lease execution, or they could agree to a mechanism whereby rent is determined at the time the option is exercised, at the then-fair rental value of leased premises.

Especially when the tenant has agreed to personally pay for a substantial amount of improvements to the leased premises, the tenant may also insist on the right to purchase the property containing the leased premises. Again, the option to purchase the property could be predetermined at the time of lease execution if the parties could agree to a mechanism whereby the purchase price is determined by the then-fair market value of the property at the time the tenant exercises this purchase right.

With regard to options to purchase the property, the parties could also agree that, if the landlord ever markets the property for sale, the tenant will have the right to match any legitimate offer being made by a third party to purchase the property.

Moving to a new location is never an easy thing, so the tenant should consider the future when leasing a space. Certainly, the tenant may only wish to lease that space which the tenant requires at the time of lease execution. Over time, however, the tenant may want the option to expand the leased premises, as business volume and operations increase. As such, the tenant should consider including a provision in the lease giving the tenant the option to take additional space in the building containing the leased premises, which may or may not be occupied at the time of lease execution. For this additional space, the parties could predetermine the term of the lease, the base rent for each year of the lease term, and address whether any work to the additional or preexisting space will be included if the tenant elects to exercise this option

8. Default and Remedies

The provisions of the lease regarding default must be carefully negotiated.

A tenant does not want a technical lease default to empower the landlord to evict the tenant from the leased premises. This being the case, it is essential, from the point of view of the tenant, to allow the tenant to cure any alleged lease defaults before the landlord may exercise any of the landlord's rights and remedies under the lease.

As for remedies, almost all leases contain a provision imposing legal fees and costs when there is a breach of a term or condition of the lease. The tenant should ensure that the tenant would equally be entitled to the reimbursement of legal fees and costs from the landlord for the landlord's breach of the lease, as well as in the event the tenant ultimately prevails in litigation initiated by the landlord under the lease.

In addition, the lease commonly includes a provision allowing for the imposition of interest and late charges assessed against a defaulting tenant. The tenant may look to limit the amount the landlord may collect for these matters.

Finally, and most importantly, the tenant must look at whether there is any obligation on the part of the landlord to mitigate damages if the tenant is ultimately evicted from the leased premises due to a breach of the lease committed by the tenant. The law of the place of contracting may help the tenant in this regard, but that is not always the case. In Pennsylvania, for example, there is no duty on the part of a commercial landlord to mitigate damages and, technically, the commercial landlord can literally keep the leased premises unoccupied during the course of the lease term and collect unpaid rent from the defaulting tenant. The tenant may wish to contractually impose such a mitigation-of-damages responsibility on the landlord under these circumstances.

9. Collateral

If the tenant is a corporate entity (and especially when the tenant is a new business without much of a track record), the landlord will likely request additional security to ensure the tenant's compliance with the terms and conditions of the lease.

First and foremost, with regard to closely-held businesses, the landlord typically requests that the principals of that business personally guarantee the obligations of the tenant under the lease.

If the landlord does demand the inclusion of personal guarantees as part of the lease arrangement, the principals of the tenant should seek a limited guaranty for a period of time, either: 1) from the commencement of the lease term through a specified period of time thereafter; 2) for a period of time through the course of the lease term (i.e., guaranteeing monetary obligations for a period of time of one year); or 3) in the form of a “good guy” guaranty, in which the personal guarantors guarantee the monetary obligations of the tenant until the moment the tenant relinquishes possession of the leased premises.

In addition, the commercial tenant will be asked to provide a security deposit. The security deposit tends to be based upon the initial base rent due under the lease. A landlord could ask that the tenant increase the security deposit to account for the increased rent over the course of the lease term.

If the landlord asks for a substantial security deposit at the time of lease execution, the parties could agree that a portion of the security deposit is returned to the tenant as time passes by, so long as the tenant remains in good standing under the terms and conditions of the lease.

Other forms of security deposit are also options. For example, the tenant could provide for a landlord to take a security interest in the tenant's personal property that is located at the leased premises. Or, if the lease is for a bar or restaurant space, the tenant could provide the landlord with a lien interest on the establishment's liquor license.

10. Relocation

In some leases, the landlord has the right to relocate the tenant to another part of the building containing the leased premises. If the tenant cannot dissuade a commercial landlord from omitting such a provision from the lease, the tenant should demand that this provision of the lease also obligate the landlord to cover all moving and related expenses, and provide the tenant with a comparable space and location in the building. The question of just what constitutes a “comparable space” should be spelled out as clearly as is possible. For example, while size might be of primary importance, so might proximity to the parking lot, availability of natural light, and distance from anchor stores or from tenants with competing businesses.

Conclusion

While the considerations we have discussed are not new to tenant and landlord representatives, it is not uncommon for details to slip through the cracks during negotiation and execution of commercial leases. Keeping these 10 considerations in mind will help commercial leasing practitioners stay organized when looking out for the best interests of their clients.

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