Avoid Pitfalls in a Commercial Lease

Posted on Friday, August 24, 2018

At some point, most companies encounter a need to consider a commercial lease -- even if they predominantly own their properties and plan to lease just a portion of the space they need.

Here are some pitfalls to look out for:

Describing the "leased premises." The description should be very specific and always accurate. Many business executives are surprised to find that this aspect of the lease is easy to botch, particularly when larger, intricate urban properties are involved.

In some cases, companies have entered into leases in which the premises were defined in a way that no party -- including a judge -- could agree on the location, size, measurement, condition of delivery, services and equipment provided. And in some litigation, the description was so poor that the parties weren't even sure which building or which particular floor of a building the space was located in.

Defining "possession, occupancy" or "control." Sometimes, this can start prematurely if an architect or other service provider is allowed to enter the building for a prospective tenant.

Your lease should address what constitutes accepting control or possession of the premises, thus triggering occupancy or a demising. This is relevant in leases when the rent or term commencement begins when a tenant takes possession -- or when there is just a right to take possession, such as being given the keys or sending an architect in to take measurements.

Occupancy usually means going into the premises. For the purposes of conducting the tenant's business, it 

Commercial leases can be very complex. In many instances, they can be drafted to appear attractive to a negotiating party, when in fact their terms may be less than favorable or downright unfair.

means entering the premises and beginning even low-scale or start-up business operations.

Possession on the other hand can be as simple as accepting the keys, sending an agent, contractor or employer into the premises for purposes other then conducting business, or actually sending contractors to begin work. Any of these actions may take the lease out of the initial negotiation or contract period between the parties, may trigger liability, and may accelerate rent or other payments. It may also have a direct impact on tort liability provisions in the lease.

Watch out for the term "use." Your use of leased premises can be permissive, excluded, exclusive, mandatory, specific or general. It can also be difficult, expensive or impossible, depending on how the lease is drafted.

For example, the space "shall be used only for making glass on Thursdays between the hours of 3 and 6 p.m." and "drying and painting glass on Fridays between the hours of 2 and 5 p.m." Or "the space shall be used by the tenant herein and above named only and for no other purpose whatsoever." This really means no other use during any other time or by any other occupant.

More permissive terms might say the leased premises "may be used for any lawful purpose." It does not say when, how or by whom. This is the best option; however, if there is a particular use that you require and you need to know that the building, zoning, and other service needs will be met, including certificates of occupancy and sufficient electricity. This eliminates the requirement to continue paying rent if the tenant is unable to use the premises for the specific stated purposes.

These are just a few of the terms that may present complex and contentious issues if you enter into a commercial lease. By their very nature, commercial leases are often long, detailed, and require a significant amount of sophisticated negotiation and understanding. Therefore, before entering into one, you should consult with counsel.

Posted in Tax Topics For Individuals

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

"Bruner Dental has been with DWD for well over 15 years. The entire team at DWD has been helpful in many ways. From simple questions day to day, to audits, payroll needs, and much more; they…"

Rondell Nelson

Bruner Dental