Intro to Lease Clauses: For the Tenant

Last week, I discussed commercial lease clauses that I think are important from a landlord’s point of view. I also posed the question, “Why are manhole covers round”? This week, I want to address leases clauses that I think are important from a tenant’s point of view. I’ll also answer last week’s question.

As a starting point, tenants should realize that in any negotiation with a prospective landlord, the tenant needs to apply the maxim “buyer beware.”

If the landlord is going to provide leasehold improvements prior to commencement of the lease, it is important that the tenant and landlord have a clear understanding of what those improvements will be and how they will be paid for. If the landlord is providing a fixed allowance for the construction of improvements, the tenant needs to independently determine if the allowance will be sufficient to complete the job as anticipated and, if not, whether any excess will be affordable.

This determination needs to be made prior to execution of the lease. I recently represented a tenant who relied on the landlord’s architect’s estimate of how far the landlord’s allowance would go. After lease execution, when the project was bid, the landlord’s estimate was off by more than $36/sf. Having already signed the lease, the tenant had little bargaining power to address this shortfall.

If the tenant’s rent is going to also include a portion of the building’s common area maintenance (CAM) and real estate taxes, the tenant should carefully review the items that will be passed along to tenants.

If the building is going to include a management fee and the manager will be an affiliate of the landlord, the lease should expressly specify that the fee will not exceed management fees charged by third-party managers of buildings similar in size, quality and location to the building in question.

In any such event, the landlord should not also be entitled to include an additional “administrative fee.” However, if that battle is lost and an administrative fee is included, it should be capped by an outside benchmark such as “administrative fees charged by landlords of buildings similar in size, quality and location to the building in question.”

A commonly included clause regarding CAM is a pet peeve of mine. It states that when the tenant is paying its pro rate share portion of CAM, the tenant loses certain rights if its negligence causes damage to either the premises or the building.

For example, a lease might provide that, following a casualty that prevents the tenant from using the premises, the tenant is entitled to rent abatement unless the tenant’s negligence caused the casualty. CAM charges always include the landlord’s casualty insurance premiums so, in essence, the tenant is paying for its share of the insurance and should get the benefit of the protection afforded by the insurance even if its negligence caused the casualty.

Think of this analogy: when a driver negligently causes an accident, it is the collision insurance that the purchased which pays for the repair of his own vehicle – and it is the driver’s liability insurance which pays for the damage to the other driver’s vehicle.

In negotiating the “permitted use” clause, tenants should seek general, comprehensive uses as opposed to limiting clauses such as “the operation of a law office.” A narrow clause can be used to justify denial of a proposed assignment or subletting.

If the lease includes a landlord’s lien, it should expressly exclude personal property of the tenant’s employees, as well as confidential client files. Any landlord’s lien should be expressly subordinate to bona fide lenders providing financing to the tenant secured by the tenant’s furniture, fixtures and equipment.

The tenant should not agree to any “self-help” provision (for anyone not familiar with legal terms, this is a provision which allows the landlord to evict the tenant without a court order) and should affirmatively obligate the landlord to use commercially reasonable best efforts to mitigate its damages. This requires the landlord to re-let the premises following a lease default.

Now for those of you who care, manhole covers are round because they are the only geometric shape that cannot fall in upon themselves.

Next week, I’ll discuss lease clauses that are mutually beneficial to the landlord and tenant and … for next week’s puzzler, ask you from whence the term “saved by the bell” (and no, it is not from that tweener Saturday morning show of the same name).