© 1991
by Jay B. Itkowitz and Barry Gottlieb
This is an instance where an ounce of prevention is worth a pound of cure.
Frequently, premises can be simply described in a lease with little difficulty
(i.e., "Room 714 of the building known as..." or "the entire 6th
floor of the building known as..."). However, where the premises include space
that is not clearly comprehended by such a simple description (such as basement
or other storage space not directly attached to the main portion of the
premises), the description of the premises in the lease should describe with
particularity the additional space. When in doubt, prepare a diagram of the
premises, and make it part of the lease as an exhibit.
By the terms of the use clause, the landlord has the important right to regulate
the tenant's use of the premises, and the landlord should make full use of this
right. The use clause should not only set forth the purpose that the tenant has
represented he will use the premises for, but also prohibit the tenant from
using the premises for any other purpose. By the use clause, the landlord may
also obligate the tenant to use the business name which the tenant has
represented he will use while doing business on the premises.
Allocation/Application: When a tenant who is in arrears makes a payment
which is insufficient to bring the tenant current, the landlord has to determine
which unpaid charges the payment should be applied to. The best practice is
probably to apply such a payment to the oldest arrears first, in part because a
very old charge of unpaid rent may be deemed "stale" in a non-payment
proceeding, and recovery of payment for such a charge may therefore be barred.
30-Day Window to Contest Escalations: Almost all commercial leases
contain provisions whereby the ever-increasing costs of maintaining a building
are passed through to the tenant. However, tenants sometimes contest the
computation of such charges, and it is in the landlord's interest to require the
tenant to contest such computations promptly, and to limit the tenant's right to
contest such computations as much as reasonably possible. Courts have upheld
lease provisions requiring tenants to contest escalation within 30 days of the
landlord's notice.
Minimum Rent to Increase upon Tenant's Subletting or Assignment: When a
tenant sublets all or a portion of the premises, or assigns the lease, the
tenant frequently profits from such subletting or assignment. The easiest way to
make sure that the landlord benefits from such a windfall is to provide for an
automatic increase in minimum rent upon such subletting or assignments.
Increased Security upon Tenant's Subletting or Assignment: If the
tenant's minimum rent is increased as set forth in paragraph D(3), the landlord
should also require the tenant to increase the tenant's security by the same
percentages.
Security Should Be Held in a Non-Interest-Bearing Account: A lease
providing for a tenant's security to be held in a non-interest-bearing account
insures that the landlord, and not the tenant, has the effective use of the
security, and relieves the landlord of additional bookkeeping duties as well.
Replacement of Security: Most commercial leases require the tenant to
replace any portion of the tenant's security taken by the landlord pursuant to
the lease. However, some leases do not set forth a specific deadline for the
tenant to do so; setting such a deadline in the lease makes the tenant's
obligation crystal-clear, and prevents problems later on. Moreover, any lease
provision regarding the replenishment of the tenant's security should make clear
that the obligation to replace security is an obligation to pay additional rent,
so that if the tenant fails to replace the security, the landlord may seek its
replacement in a non-payment proceeding, rather than a full-blown civil lawsuit.
A primary purpose of lease clauses concerning assignment is to make sure the
landlord has continuing control over the use and occupancy of the premises.
However, particularly in the case of corporations, various tenant transactions,
such as a transfer of the tenant corporation's stock, may have the same effect
as an assignment: substituting a new occupant for the original tenant.
Accordingly, it is useful to include in the lease a provision defining
"assignment" so as to comprehend other instances where a new occupant is
effectively substituted for the original tenant.
While this principle has recently come under attack, it is still the law that
the tenant's obligation to pay rent is independent of the landlord's obligation
to provide services. Lease clauses dealing with services to be provided to the
tenant should confirm this rule; generally, lease provisions setting forth
services to be provided by the landlord should include the condition "so long as
the tenant is not in default of its obligations under this lease."
Litigation over water damage can be costly and protracted. Accordingly, a lease
should provide insofar as possible that the landlord is not liable for damage
from water leaks and like causes.
Unfortunately, a landlord's attempt to insulate himself from liability due to
accidents on the premises by appropriate language in the lease is sometimes
defeated by the courts. In one fairly recent case, a landlord was found liable
for personal injuries suffered by a tenant even though the tenant was obligated
to maintain the premises in safe condition under the lease. Accordingly, the
landlord should make sure that the lease requires the tenant to obtain and
maintain insurance in an amount sufficient to save the landlord harmless from
tort liability in connection with the premises, and the tenant should also be
required to maintain business interruption insurance in a sufficient amount.
Termination of lease: The right to terminate the lease upon the tenant's
default in paying rent is one of the most powerful weapons in the landlord's
arsenals, and a provision giving the landlord this right should be included in
commercial leases whenever possible.
Rent Acceleration: The right to accelerate the rent (i.e., make all the
rent due under the lease immediately due and owing) upon the tenant's default in
payment is another useful device whereby the landlord can exert added pressure
on the defaulting tenant. It is especially useful in situations where the tenant
is planning to quit the premises before the end of the term.
A no-waiver clause is essential for every commercial lease, as it insures that
the landlord will not unintentionally give up any of its rights vis-a-vis the
tenant by the acceptance of late or partial payments, or otherwise.
It is standard in any commercial lease - or should be - that the tenant waive
trial by jury, and that the tenant waive its right to assert counterclaims
against the landlord in any non-payment proceeding. The jury trial waiver
insures that if the landlord and tenant litigate, the case will not be decided
by a panel of tenants who are antagonistic to landlords and incapable of
correctly applying the complicated law in landlord-tenant cases; moreover, jury
selection is a time-consuming and therefore costly part of any jury trial, which
increases the expense of litigation. The tenant's waiver of counterclaims in
non-payment proceedings cuts off the tenant's right to litigate his complaints
about services, the condition of the premises, etc. in the nonpayment
proceeding, thereby causing delay.
It is desirable for any commercial lease to provide for the disposition of
personal property left on the premises after the lease ends, whether by
expiration of the full term or otherwise. Many commercial leases simply state
that any personal property left on the premises after the tenancy expires shall
be deemed abandoned and may be disposed of by the landlord at his sole
discretion. However, it may be better to explicitly give landlord the right to
store the property for the tenant at the tenant's expense, so that the landlord
may not be deemed to have taken possession of items in which a third party has
an interest, or items to which some liability may otherwise attach.
Typically, commercial leases set out how the parties shall be required to give
notices, bills, statements, etc. to be given under the lease. The mode is
usually certified mail, return receipt requested, and such a clause generally
states where such mailings should be sent. Obviously, such a clause should be
carefully written; it should not fail to make clear that notices are to be
deemed given when mailed.
The modern corporate form was designed to insulate the corporation's principals
from personal liability. This enables a corporation to divest itself of assets
and default in paying rent, knowing that if the landlord gets a money judgment
against the corporation, there will be no assets in the corporation, and the
landlord will have no recourse against the principals of the corporation as
individuals. However, landlords can address this problem by requiring one or
more principals of the corporation to execute a personal guaranty of the
tenant's performance of its obligations under the lease.
Publications
Key Clauses for Commercial Leases
DESCRIPTION OF PREMISES
USE CLAUSE
RENT AND SECURITY
SECURITY
ASSIGNMENT
SERVICES
WATER LEAKS, ETC.
INSURANCE
REMEDIES UPON TENANT'S DEFAULT IN PAYING RENT
NO-WAIVER CLAUSE
WAIVER OF JURY TRIAL AND COUNTERCLAIMS
PROPERTY LEFT ON PREMISES AFTER LEASE ENDS
BILLS AND NOTICES
THE PERSONAL GUARANTY