Commercial Leases: Top Ten Default Areas Require Landlord's Attention

By Jeff Bennett

There is a good reason leases contain a lot of language protecting landlords — and it's not just because landlords usually write the leases. As a practical matter, when things fall apart in a rental arrangement, the landlord must be able to exercise control over both the tenant and the premises. In these situations, a general default clause is often not enough. If the landlord means to protect itself, it needs not only to have limited its own potential for default, but to have provided language in the lease to address the specific ways in which the tenant is apt to default. In our practice, we have learned that certain types of defaults are much more common than others. Here is our Top Ten List of the issues we consider when thinking about possible defaults on a commercial lease:

10. Description of Use

From the point of view of the landlord, the description of the uses to which the tenant may put the property should be as specific as possible. This allows the landlord to identify the impact the tenancy will have on the premises, and reduces the risk of violating exclusive-use provisions of other leases. Use restrictions also integrate with assignment and sublet provisions to permit the landlord maximum discretion to object to new, sometimes objectionable uses.

9. Assignments and Subleases

Landlords rely heavily on the financial condition of their tenants in deciding to whom to rent. A tenant who can freely turn around and sublet or assign its space not only deprives the landlord of the financial benefit of its bargain, but can significantly alter its own commitment to the property and, hence, its financial commitment to the landlord. In turn, an unacceptable assignment can jeopardize the landlord's relationship with its lender. At the very least, a landlord should have the right to approve the assignee's financial condition, proposed use, tenant history and overall business plan for the premises, prior to consenting to all assignments and subleases.

8. Tenant Relocation

Nobody knows what opportunities might arise in the future. To allow maximum flexibility in putting together new deals, the landlord should reserve the right to move tenants (especially small ones) to another space in the same development. Most tenants resist these clauses, but creative approaches can allow both landlord and tenant to achieve their objectives.

7. Self-Help Rights

Self-help clauses can be useful because they allow the landlord to perform the duties required of the tenant, then charge the costs to the tenant against a security deposit or as additional rent. On the other hand, the landlord will not give the tenant an equivalent right to perform the landlord's duties and hold the costs against the rent.

6. ADA Compliance

Premises open to the public must comply with the Americans with Disabilities Act. As to the leased premises and common areas of the building, the landlord is responsible for compliance. But, the landlord commonly achieves compliance through the tenant improvement process. This is true particularly when associated with tenant improvements to non-complying space. The savvy tenant will negotiate to exclude ADA compliance costs from its tenant improvement allowance, except to the extent compliance issues result directly from the tenant's use of the property.

5. Landlord's Failure to Timely Deliver Possession

In the absence of language to the contrary, the landlord has a duty to deliver the premises on the date set out in the lease. This rule obligates the landlord to prevent third parties (such as holdover tenants) from interfering with possession. In order to avoid liability for inability to deliver possession, the delivery date should be the date the premises are ready for occupancy.

4. Continuous Occupancy

Continuous occupancy is desirable for several reasons. First, a going business concern is motivated to pay rent. Second, particularly in retail leases, landlords frequently receive a percentage of income from the space as part of the rent. Third, empty space detrimentally affects building rental rates. Finally, empty space makes the property as a whole more difficult to finance or sell. The law does not require a tenant to actually occupy the space it rents so long as it pays rent. A landlord who wants a tenant to make continuous use of the premises must say so in the lease.

3. Restoration on Expiration

Upon expiration of the lease, the tenant should be required to remove its personal property, restore the premises to their condition prior to the lease, deliver the keys, and peaceably surrender possession to the landlord. If these requirements are unsatisfied, the landlord will suffer unacceptable interruptions in cash flow. In addition, since the landlord does not want to accidentally terminate the lease prior to expiration by accepting the tenant's voluntary surrender, the lease should specify that early terminations be in writing.

2. Tenant Improvements

The lease should specifically state what the tenant improvements will be, who will construct them and who will pay for them. If improvement costs exceed any tenant improvement allowance, the lease must specify when the overage is to be paid. If the tenant is authorized to make improvements, the lease should require the landlord's prior approval of plans, a right to monitor and approve construction (at tenant's cost) and a bond to protect the landlord from potential lien claims. If the parties intend the tenant to retain ownership of any improvements — whether made by the landlord or the tenant — the lease must specifically say so.

1. Maintenance and Repairs

Unless otherwise agreed, the tenant maintains and repairs the premises while the landlord maintains and repairs the structural elements of the building, central building mechanical systems, and common areas. To avoid confusion, the lease should define such terms as "common area," "building," "building systems" and the like. The concept of "replacement" should be addressed to avoid confusion as to what occurs when, for example, an HVAC unit no longer is functional. The lease should state that the tenant is not entitled to reimbursement for performing repairs or maintenance required of the landlord.

Depending on the particular circumstances of your property — and the tenants you have in mind — you should consider language in the lease to cover the potential defaults on our top ten list. But keep in mind, top ten lists, like all rules of thumb, are only as apt as the circumstances you apply them to. They are never a substitute for looking at — and thinking about — individual situations.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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