Quarterly Tip for Clients
Top 10 Issues in Commercial Leases
Most small businesses, regardless of their industry, lease office space from a landlord and, as such,
enter into a written lease agreement. In a vast majority of cases, the landlord has a standard lease it
expects the tenant to sign. Not surprisingly, such leases are generally very skewed to protect the
landlord’s interests and very rarely protect any interest of the tenant other than its general right to
occupy the space. In order to help level the playing field, here are the top ten issues a tenant should
look out for when negotiating a commercial lease. (Please keep in mind that this is a very abbreviated
list and not meant to replace the benefit of having an attorney review and negotiate a lease. It is for
general information only.)
1. Use. For most businesses, this is not a major issue because they are simply occupying the
office space for “general office” use. Of course, any specific use requirements should be set out in
the use provision(s) to make sure that the landlord allows the tenant to properly utilize the space.
Further, tenants who need non-traditional office space should pay careful attention to permitted uses.
2. CAM / Operation Expenses. Most commercial leases require the tenant to share in the
expenses of maintaining the common areas and operating the building. Make sure that the tenant’s
portion of any common area maintenance or operating costs is properly proportioned. In other words,
confirm that the percentage is an accurate ratio of leased square footage compared to the total square
footage of the building, complex, project, etc. Landlords will sometimes try to include only leased
portions of the building or project in the equation, which can greatly increase a tenant’s proportional
share of the expenses. Lastly, confirm that shared expenses are limited to those reasonably incurred
for the benefit of the building or project and not other buildings or projects the landlord may own or
operate. (Such expense sharing requirements will generally also apply to taxes as well.)
3. Insurance Requirements. Most leases will set out certain required insurance coverage that
tenants must maintain during the lease term, including worker’s compensation and general liability
insurance. The lease will set out minimum amounts of coverage, and the landlord will often have to be
named as an additional insured. Tenants should verify that they will be able to obtain such insurance
coverage or else negotiate the requirements to a level at which they can.
4. Repairs / Utilities. Tenants should be cognizant of what repairs they will be required to make
during the lease and which utilities it will have to pay. Most commercial leases require that the tenant
make repairs, but complications can arise when multiple tenants share space in the same building or
project. In addition, tenants who are responsible for replacing equipment should be aware of the
potential cost of having to replace major equipment and machinery, especially near the end of a lease
term, e.g. a major HVAC unit.
5. Assignment / Subletting. A majority of commercial leases require consent from the landlord for
the tenant to assign any part of a lease or sublet any part of the space. Tenants should try and at least
require that the landlord not withhold its consent unreasonably. Further, landlords will often place
specific restrictions regarding to whom a tenant may sublease. Common examples are minimum
financial condition, type of industry and parking needs.
6. Destruction / Condemnation. When part or all of leased space is either damaged or destroyed or
“taken” by a public (or quasi-public) authority, tenants should make sure that the rent is so pro-rated.
In addition, it would be wise to include a caveat that if the space is only partially destroyed (or taken),
but normal use of the space is impossible or impractical, that no rent is owed until it is useable again.
7. Default Remedies. Some of the most lopsided terms of a commercial lease are provisions that
dictate what steps a landlord can take upon the default of the tenant. Often, the landlord will try and
impose severe penalties and grant themselves some extraordinary remedies. In Georgia, there are
some rights of a tenant that cannot be waived. One of the most important of which is the duty of the
landlord to go through the dispossessory (eviction) process. This gives the tenant the option to fight
the proposed eviction in court. Often times, leases will have the tenant waive this right as well as
other non-waiveable and important rights, especially when the landlord uses the same lease in other,
less tenant friendly states. Just because Georgia courts may not enforce certain provisions, tenants
should not give the landlord any basis to take such action. Having to sue after the fact is never as
good as preventing the problem beforehand.
8. Governing Law. Ideally, the laws of the state in which the building or project is located would
apply. However, some larger landlords try and make their home state the selected law that governs
the lease and the place where litigation would have to take place. This can be a big disadvantage as
well as an inconvenience for tenants located in Georgia.
9. Substitution Space. Many commercial leases allow the landlord to shuffle tenants around to
different space as long as that space is comparable to the original space. Tenants should make sure
any substitute space will be adequate for their particular needs and limit any increase in square
footage when it is not needed, but will have to be paid for. Also, tenants should try and have the
landlord pay for all reasonable moving expenses incurred due to the substitution.
10. Variable Rules & Regulations. It is common for landlords to have somewhat minor provisions
called rules and regulations that can be modified by the landlord from time to time. Any party to a
contract should be leery of any provision that allows the other party to arbitrarily modify any term of
the agreement at some point in the future. While many of the rules and regulations will be relatively
minor, they may include some terms that may be vital to a small business such as addressing, signage,
and parking. In addition, tenants should look out for soft, amorphous language like “character of the
building” or “reputation of the complex.” These terms have little objective meaning and are too
subjective for a contract.
Finally, tenants should make sure that the lease is in the company’s name and that they sign in their
capacity as an office or manager of the company. Further, tenants should be mindful of personal
guarantees, which can negate the limited liability protection of a company. Of course, there are a
multitude of other issues and concerns that should be considered, and professional advice is always
advisable when entering into an agreement, especially one as potentially complicated and important as
a commercial lease agreement.
© 2008, MacGregor Lyon, LLC
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MacGregor Lyon, LLC Attorneys at Law 7 Lenox Pointe, NE Building Seven Atlanta, Georgia 30324-3171 Phone 404.688.5964 Fax 404.795.0993 info@macgregorlyon.com www.macgregorlyon.com |