Lease Clauses Often Overlooked by Tenants
When entering into a new lease, tenants often rightly focus on the basic terms of the lease: rent, duration, renewals, tenant improvements, etc. However, several provisions, some of which are often characterized as “standard” or “boilerplate,” can pose a trap for an inexperienced tenant. It is the job of a good real estate lawyer to alert clients to these provisions which could come back to haunt a tenant at a later date. Below is a discussion of some provisions which are often overlooked by tenants, and which, if not properly negotiated, can lead to significant costs and headaches.
The Use Clause
The “use clause” specifies the uses that are permitted in the leased space. The description of the permitted use may seem innocuous; however, a landlord oriented lease will often limit the use of the leased premises to a very limited type of use, often specifying the types of products and services that can be sold or style of food that can be served. In the case of retail leases, the use provision often provides limitations on percentage sales attributable to certain ancillary uses, and always precludes uses which are exclusive to other tenants. Of course certain tenants with significant bargaining power may have obtained very broad exclusive language from the landlord which would impose significant limitations on the other tenants.
When negotiating a lease, a tenant must be cognizant of the broadest range of use which they might make of the premises. Some common examples of ancillary uses which should be enumerated in the use clause include:
- Hair care products being sold at a salon;
- Cooking classes offered at a culinary supply store;
- T-shirts, bags and jewelry with trademarked symbols sold at restaurants, athletic footwear stores, etc.; and
- Snacks, health food or apparel sold at a spa or health club.
The tenant must be careful to cast as wide a net as possible to include both currently anticipated uses and those that may become common in the future. Many companies evolve over time and a broader use clause should take that into consideration initially and at the time of a lease renewal.
Further, a tenant must be cognizant of the need for an exit strategy if the location does not work out as planned. For example, even if the tenant has successfully negotiated a broad assignment/sublease provision, the right becomes much less useful if the use provision is unique or too closely tailored to the initial tenant’s use. In such a case, it may be difficult or even impossible to find a replacement tenant who comports with a very limited permitted use. After all, if your business struggled in that location, it may be hard to convince a similar business that the location is right for them. A more limited use clause thus allows the landlord even greater latitude to continue to collect rent from an existing tenant while holding out for its ideal replacement tenant.
Landlord’s Standard of Care for Maintenance and Repair
Leases typically provide great detail as to the standard to which a tenant must maintain, repair and replace the leased premises. Often the landlord will require approved service contracts and list detailed requirements regarding the frequency of maintenance. Landlords may also require a regular update (new paint, carpet, etc.) at fixed intervals to “maintain the standards of the facility.” However, the tenant is often left at the mercy of the landlord when it comes to the maintenance and repair of common areas, including the building exterior, parking lots, elevators, etc. Even if maintained, a structure can become dated over time.
In negotiations, the landlord will often claim it is incentivized to maintain the highest standards to keep its tenants and bring in new ones. However, during an economic downturn or other financial difficulty, a landlord may determine that it cannot obtain the quality of tenant and level of rent needed to justify a continued high standard of appearance. At that point, the facility may fall into disrepair.
In order for a tenant to protect itself, it should, if it has the bargaining power, insist that landlord abide by a reasonable standard, akin to the standard applicable to the tenant, in connection with maintenance and repair of common areas. However, if this is not an option, the tenant can at least attempt to provide a general standard such as the standard of maintenance and repair applicable to “first class office buildings” or “regional malls” located in the area in which the building is located. While the latter standard does not provide specific obligations for the landlord, it may be sufficient to permit a tenant to claim a default and either compel some action on the part of the landlord or provide a sufficient basis for termination.
The Surrender Clause
Tenants can be surprised at the end of the term that simply leaving the premises vacant and “broom clean” may be insufficient. The surrender clause, which describes the condition that the premises must be left at the lease termination, is often overlooked because it deals with a situation far in the future. These provisions often require a tenant to return the premises to the condition existing at the time of the signing of the lease, subject to normal wear and tear. If any work, even if not substantial, was done to fit out the premises for the tenant, a landlord may claim the cost of returning the space to whatever condition existed upon signing the lease. This could entail the removing walls, flooring and specialty equipment (such as lighting) and utilities.
A tenant can protect itself from these costs in two ways. First, in the lease itself, the terms can expressly state that the initial build out becomes part of the premises and that upon termination and surrender of the premises these improvements need not be removed. Second, when a tenant makes alterations to the premises (which often requires landlord’s consent) the tenant also has an opportunity to obtain landlord’s consent to allow the alterations to remain at the premises at the end of the lease term. In any event, the tenant should document any agreement as to which substantial alterations must be removed by tenant at the end of the lease, as well as what alterations belong to the tenant and may be moved to another location. The tenant should also photograph the premises at the lease commencement and lease termination in order to preserve a clear record of the conditions at these crucial points in the lease.
Subordination and Attornment
It is very common in leases, and usually required by the landlord’s lender, that a tenant be required to subordinate the lease to any present or future mortgage on the property (i.e. make the lease subject to the terms of the mortgage) and to attorn to, or treat the lender as the owner, if the lender takes control of the property. This is done to protect the interest of the lender in a foreclosure of the property by the lender. Typically the tenant is required to execute a document confirming to the lender that it has agreed to such subordination and attornment.
To protect itself, a tenant should require that a non-disturbance provision be included in this section. The non-disturbance provision will state that the subordination and attornment are conditioned upon the lender executing a document (usually contained in the subordination and attornment document and called a subordination, non-disturbance and attornment agreement or “SNDA”) that provides that as long as tenant is complying with the terms of the lease, the lender, if it takes control of the property, will not disturb tenant’s rights under the lease. This prevents a lender from simply removing a tenant in order to sell the property.
In most landlord “form” leases the provisions regarding tenant default receive significant attention while the provisions regarding a landlord default receive little or no coverage. This position is often justified by arguing that the tenant has many more obligations to fulfill than does the landlord. However, once the building structure, utilities, parking, landscaping and common areas are considered, this argument may not be justified.
While in a lease that does not address a landlord default the tenant retains common law and statutory rights upon a landlord default, it is important, nevertheless, to cover certain basic terms, including notice and cure periods, an enforcement mechanism and attorney’s fees and costs. Further, one of the most important reasons to insert a landlord default provision is to keep the landlord honest. For example, if the landlord insists on a long cure period for a non-monetary landlord default, it would be difficult for that landlord to justify an insistence that the cure period be any shorter for the tenant. One can readily see how the same principle of mutuality applies to notice, cure and enforcement rights throughout the document. It can also easily be applied to many one-sided provisions with the effect of forcing a landlord to take a more reasonable approach since the landlord’s rights and obligations are then on the line.
Please note that the scope of this article is limited and that it deals with only general principles applicable to some of the many issues that can arise in lease negotiation and enforcement. As with all significant legal documents, the advice of a competent attorney experienced in the particular area of law is recommended. Further, each lease will address unique legal and business issues and a full discussion of all potential issues is beyond the scope of this article.