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Carefully Drafted Leases Help Avoid Costly Disputes
GRAND RAPIDS — Commercial leases are generally more complicated than are residential leases, and problems arising between commercial landlords and their tenants tend to be more complex.
And because of that, George Pawlowski said commercial leases should be carefully drafted to avoid ambiguities, expressly stating which party is responsible for what in terms of property damages, repairs, maintenance, improvements, taxes, assessments, utilities, lease terms and options, among other things.
Pawlowski, a partner in the local law firm of Murray, Pawlowski & Flakne LLP, explained that in Michigan, there’s a lot of statutory law on residential leases that regulate and restrict what is in the lease, mostly for the protection of tenants.
But in regard to commercial leases, he added, there are virtually no laws governing the landlord-tenant relationship.
“The courts have said, ‘You’re big boys, and whatever you put in your contract is what’s in the contract.’ What it says is what it says,’” Pawlowski explained.
“In other words,” he added, “it’s kind of like a tale of two cities. There are no restrictions on you, but you better know what’s in that contract because you’re going to have to live with it.”
Pawlowski has a significant real estate practice, has published numerous articles on real estate law and is also a real estate investor and developer.
He told the Business Journal that the key to commercial leases is the drafting of the document, the reading of the document and the understanding of the document. It’s all in the drafting.
He said a landlord has to have “good paper”: a lease with language that is plain, simple and clear.
“The guy with the good language in the contract is going to win against the guy who wants somebody to think — or wants the court to think — that the parties intended something other than what appears in plain English,” Pawlowski explained.
He said it’s not the length of the lease document, but its clarity and cogency that count.
Pawlowski said his firm tries to eliminate all the “wherefores,” the “heretofores” and all the other legalese to make it plain and simple.
“We like to attach a drawing of the leased space so that everybody understands exactly what they’re leasing,” he said. “In a multi-use building, for example, you understand where your space begins and where it ends.”
The landlord’s responsibilities and the tenant’s responsibilities can be simply and specifically stated in list form.
Pawlowski said it’s not that hard to do if parties think about what their intent is and what it is they want.
“The lawyers that draft these things are just creating it out of whole cloth,” he said. “We don’t have a clue as to what the parties discussed or what they intend to do. We often find out they didn’t even discuss some of the major issues.”
He said sophisticated landlords understand the importance of spelling things out and usually hire legal counsel to do it.
A less sophisticated landlord may purchase a ready-made, fill-in-the-blank, model lease form to use for all tenants.
“It’s an absolute sure thing that will lead to problems because those forms are one-size-fits-all, and a commercial lease is so different from a residential lease that it can’t possibly serve the intended purpose of the parties involved,” Pawlowski observed.
He said, however, there’s nothing wrong with a model lease if the landlord specifically knows how he wants the lease to read, what he’s going to charge and what his responsibilities are, and then drafts individual contracts separately, he added.
“Obviously, each tenant can negotiate different terms, but the basics can be essentially the same for a given structure or building.”
Unfortunately, a lot of people rush through the initial drafting, reading and understanding steps because they’re anxious to lease; they don’t pay a lot of attention to the contract until a problem arises later.
He said issues that crop up in the commercial landlord-tenant relationship can range from the sublime to the ridiculous.
If the lease is vague, issues may arise concerning who responsibility it is to replace the burnt out halogen bulbs. Sometimes tenants assume the landlord will provide janitorial services, but if it’s not in the lease, it’s the tenant’s responsibility.
The bigger disputes often tend to involve maintenance and repair issues. Who is supposed to fix the leaky roof or take care of electrical problems?
Pawlowski said some leases really don’t specifically deal with those kinds of situations, even though they should. They may be implied or inferred, he said, but are not specifically spelled out in black and white.
A major issue that may crop up after a lease is signed involves what exactly is being leased and what is the exact square footage of the specific areas being leased.
For instance, the lease may contain a general description of the leased space, such as “the second floor of Building A.”
Then the tenant moves in expecting to get 4,500 square feet, but when the space is measured off, it’s only 4,000 square feet.
“They come to find out they’re paying rent on common areas they didn’t anticipate were part of what they were leasing, like lobbies, elevator areas, etc., etc.,” Pawlowski explained.
“There have been lawsuits over that because the tenant finds out he’s paying $16 a foot for 100 square feet of public restrooms. They assumed they were paying just for their space they’re using and not public areas.”
Another serious issue can be the tenant renewal period.
Commercial office leases often contain options for extending the term of the contract and specify option-to-renew periods for tenants.
Typically, the lease will state that in order to exercise the renewal option, the tenant must give written notice within, say, 60 or 90 days before the expiration of the original term.
Sometimes a tenant simply forgets about it and neglects to exercise the option before the lease’s expiration date.
“The lease expires, the landlord has a better tenant maybe, and now you have just 30 days to get out,” Pawlowski explained.
Lease terms vary depending on use of the property.
The typical term for an office lease is five years. Leases for retail space in a mall, for example, could be longer or shorter, and leases for industrial space could be considerably longer, ranging from 10 to 20 years, he said.
One of the best things a landlord can have in his corner is a good commercial real estate broker who knows how to rent space, Pawlowski said.
“I think that’s critical not only for finding good tenants, but because they understand the kinds of issues and problems I just addressed. So they can really facilitate the landlord not winding up either with a bad tenant or a bad lease.”