Monday, July 25, 2016

Tenants Beware of Commercial Lease Boilerplate

Commercial leases are tough for clients to read. And even the best of clients usually skip over the legal boilerplate. Everything in a commercial lease is important, and the long expanses of unreadable legalese are written to protect the landlord and not the tenant. Ignoring the "small print" in commercial leases can really put your company at risk.

Indemnification & Subrogation

A typical commercial lease usually requires a tenant to reimburse and hold its landlord harmless from losses from the tenant’s own negligence. Consider where a landlord carries property insurance on its building, paid for by the tenant's common area maintenance charge. Where a tenant’s employee accidentally causes a fire, the landlord will use the insurance proceeds to repair the building. However, without a waiver of subrogation rights, the insurance company can “step into the shoes” of the landlord and sue the tenant under the lease indemnity clause.

Tenant Relocation

Under a lease relocation clause, the landlord can require the tenant to move to another space. This gives the landlord flexibility to combine vacant space and attract new tenants. Relocation can be very expensive and inconvenient for existing tenants, causing an interruption in business operations and a host of unexpected costs. At a very minimum, the landlord should pay the tenant’s moving expenses and incidentals if the tenant is forced to move.

Subordination, Non-Disturbance & Attornment

A tenant subordination clause says that the tenant's lease rights are junior to the rights of the landlord’s bank. Among other things, this allows the bank to evict the tenant in a foreclosure suit against the landlord. With a non-disturbance clause, the bank agrees to not to evict the tenant in foreclosure. The attornment clause is the tenant’s agreement to recognize any new owner of the building after a foreclosure as the new landlord. Where all three clauses exist in a lease, the mortgage holder can foreclose with a clean title, the bank will not evict the tenant during foreclosure proceedings, and the tenant will recognize the new building owner as its new landlord.

Assignment & Subletting

Economic circumstances change, and a struggling tenant that is two years into a five year lease may find itself needing to get out of its existing lease. With an assignment, the original tenant transfers its lease to a new tenant, and it is a matter of negotiation whether or not the original tenant remains liable to the landlord under the lease. With a subletting, the original tenant leases its space to a new subtenant, while the original tenant continues to be primarily obligated to the landlord. Usually the landlord has the right to approve the new occupant. A subtenant should consider signing a side agreement with the landlord in order to preserve the subtenant's lease rights should the original tenant default under the lease.

Landlord Obligations

Finally, some commercial leases don't contain any obligations at all for the landlord other than to collect rent. This can really become a problem when the roof leaks, the sewer backs up, the parking lot needs repaving or snow removal, or the building needs repainting. Because commercial leases in Kentucky are almost pure creatures of contract, the lease should always spell out in detail what maintenance obligations the landlord is required to perform for the building and surrounding land.

Read the Boilerplate

Clients tend to think that most of their seventy page commercial lease is unimportant "boilerplate." To the contrary, most of these provisions have been specially written to protect the landlord, and can create substantial expense for a tenant at the worst possible time. Tenants need to read, understand, and negotiate their commercial leases before they sign them. Ignoring what looks like ordinary boilerplate can put a tenant’s company at serious risk.
*An earlier version of this article appeared in Business Lexington.