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Understanding the difference between landlord leases and tenant leases
Most every business has a lease on its property, unless it’s lucky enough to have paid it off and
owns the property outright. But not every business knows the difference between standard landlord leases and tenant leases.
This is not unimportant stuff, says Alexa Woods, a partner at Taft Stettinius & Hollister LLP in Indianapolis who concentrates her practice in the field of commercial real estate as well as corporate law and business transactions, especially when it comes to disputes that may have to be settled in a court of law.
Smart Business spoke with Woods about the finer points businesses need to know about their commercial real estate leases.
What’s the difference between standard landlord leases and standard tenant leases?
In landlord form leases, landlords almost always provide that the tenant has to pay rent right away or after the free rent period and doesn’t get much of a chance to inspect the landlord’s work, if any. These leases almost always require that the tenant take the space ‘as is’ without any representation or warranty. The tenant’s use will be limited to a specific permitted use, and the tenant will not be permitted to change its use without the landlord’s permission. These leases also typically state that the tenant is responsible for all maintenance obligations except for those specifically delineated as the landlord’s obligation, and these are typically narrowly defined as structural maintenance obligations.
Landlord form leases will not state in what manner the landlord is required to maintain the premises or larger building such as in ‘good condition and repair’ or in accordance with similar premises in the area. These leases also make the tenant responsible for compliance with all laws, including the Americans With Disabilities Act, which is a structural requirement. These leases will typically make their operating expense provisions overly inclusive and include capital expenditures (even if the landlord
doesn’t usually charge for certain items). The landlord’s statement of the same will be deemed final, and the tenant will not be given any audit rights. They also provide broad indemnification obligations from the tenant for injury to persons and hazardous materials but will rarely provide reciprocal language.
With a standard tenant lease, the tenant usually demands that the landlord make representations and warranties with respect to the landlord’s work and the condition of the premises. Often, the tenant will ask the landlord to represent and warrant that the premises can be used under applicable law for tenant’s intended use. The tenant will require that it can change its use to any lawful use. Also, the tenant will often require a walk-through to make sure the premises are acceptable, and commencement of the rent will hinge on this.
What are the critical economic and legal issues at stake in each clause of the lease?
The critical economic issues are payment of rent, rent commencement date, operating expenses (what’s included,
what’s not), calculating the tenant’s proportionate share of expenses if applicable, holdover rent and maintenance obligations.
The critical legal issues are indemnification obligations, ability to assign the lease, what happens in the event of a casualty, status of tenant upon holding over (everyone wants to be careful here to say that the tenant becomes a tenant from month-to-month), what kind of insurance is required and who pays for it, what happens in the event of a default, the cure period and what constitutes a default.
What are some important considerations in negotiating termination rights, rights of first refusal, exclusives and other provisions?
With respect to termination rights and rights of first refusal, it’s important to make it clear exactly what triggers these rights. If it’s a termination right and a tenant is allowed to terminate after the third year, it needs to be clear when it must give notice. The same thing goes for a right of first refusal how much time does the tenant have to exercise it and what information must it be provided to determine if it wants to exercise this right? It should be clear that if the tenant fails to exercise the right within the allotted time period, it becomes null and void.
With exclusives and co-tenancies, all terms should also be clear. If it’s an exclusive, what constitutes a violation? Can another tenant sell 10 percent of what the exclusive provides? Are all other tenants prohibited from selling chicken or takeout Mexican food? The lease should also provide the landlord with a time to cure and the tenant with a definite remedy, whether it’s reduced rent or the right to terminate. <<
Partner, Real Estate and Business Groups Taft Stettinius & Hollister LLP
ALEXA WOODS is a partner at Taft Stettinius & Hollister LLP. Reach her at (317) 713-3481 or firstname.lastname@example.org.
Insights Legal Affairs is brought to you by Taft Stettinius & Hollister LLP
Smart Business Indianapolis | August 2008 20