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Boilerplate or not What you dont read can hurt you
You’ve read the terms for your new commercial real estate property. You understand the rent, term of the lease, location and other basics. End of story, right?
Not so fast.
Many lease agreements are presented to a tenant as the landlord’s “standard” agreement and are set forth with the most important, most heavily negotiated provisions at the outset of the lease, in a “basic terms” section that acts like an executive summary for the deal. We all know that the devil is in the details.
This executive summary is not a detail, though. Those same terms are usually again set forth in the body of the lease, with more detail and more traps for the unwary. And this is where the “gotcha” can happen. So, after you have closely read the executive summary, grab a cup of coffee and be sure to re-read those and the boilerplate provisions in the laborious body of the lease.
You’ll most likely be glad you did. Here a just a few of the many “gotchas” to be ready for:
- Assignments and sublet provisions — exit strategy or not. The lease will spell out what tenants can — and can’t — do if they want out of their lease early. Can you get someone else to step in and take over this space for the balance of your term? Read the assignment and sublet provisions. But, are there certain uses not permitted for your space, thus limiting who could step into you space? You have to flyspeck the “use” section, and verify with the landlord any other lease or use restrictions impacting your space. On the landlord side of the equation, you want this control over who can be where, which is known as the “tenant mix.” Be certain to draft your lease with tight restrictions, then you can control who your next tenant will be.
- Relocation provisions. You rented your space, clearly defined in the executive summary, and you will be there for the duration — that was the deal. Note, however, that a landlord’s form agreement will very likely contain a provision that permits it to move you around the shopping center. So a tenant might start out with a great spot facing 28th Street, but the landlord could opt to shift a business to a less-desirable side street to make room for a higher profile tenant. This is a definite red flag provision for a tenant, often found deep in a lengthy lease agreement (back in what is often called the boilerplate). Don’t assume. Be sure to know the lease details.
- Extensions. Happy in your current five-year lease and want to extend it? The executive summary says that you have a couple of extensions on your term. Most forms will define a window of time during which the option has to be exercised, or it is lost, and these details will not be set forth up front for easy review. If you think you want to extend your lease, be sure to do so within the proper timeframe.
- Early termination rights. Similarly, you may have heavily negotiated an exit strategy, permitting you to terminate a five-year lease in year three. So there is your out, if needed. Is it that simple? Does your lease also contain, in another section, an operating covenant, requiring that you are open for business for certain hours and a certain duration? That could be a condition impacting your straight-forward exit strategy, found elsewhere in the lease. Landlords also may want an early termination provision to fix tenant-mix issues, so be on the lookout for it in the boilerplate.
- Damages. From the tenant side of the equation, don’t gloss over the specifics detailed under the lengthy provisions spelling out potential damages for breach of the lease. A new entrant usually means a personal guaranty from the business owner to support the lease’s payment obligations. Less obvious can be the definitions of certain damages available to the landlord with a breach. If the form provides for “accelerated rent,” tenants who breached can be held responsible for the rent that would be owed over the entire duration of the term of the lease. Combine that with a personal guarantee and big dollars can add up. Be sure you read and know what can happen if the bottom falls out before you sign.
Robert J. Nolan is a partner at Warner Norcross & Judd LLP. He concentrates his practice in commercial real estate leasing and development transactions.