In our years of experience, we have seen many different versions of commercial leases. Some are drafted to favor the landlord or the tenant. Some are a mix of copy and pasted provisions taken from Google searches. With all the different versions of leases out there, what should be in a commercial lease?
Here is the checklist that we use.
Definitions - There should be a section defining key terms of the lease. If you don't have a definition, a judge will try to figure out what it means by applying the plain and ordinary meaning of the words. If the judge can't figure it out (i.e., it is ambiguous), then there will be a trial and the judge will hear testimony to try to figure what the parties meant.
Description of the Premises - This is also a key section. Especially if the lease is only for part of a building or a parcel. We don't just like to use an address because that could be changed during the lease. The best description is a legal description from a deed. However, if the premises that is leased is less than the entire property that may not work. Maps are always helpful. Again, the point here is to make sure a judge can figure out what is leased.
Description of the Improvements - This will include any buildings that are currently on the property. If the landlord or tenant will build on the property after the lease is signed, there should be a good description what will be built.
Rent - This one is simple. The lease should say how much rent the tenant will pay and when the tenant will pay that rent. You would be surprised how often this gets messed up. For example, in multi-year leases where rent is "waived" for the first 3 months, when does the rent increase? Is it at the beginning of year 2 (i.e., 9-months after the first rental payment is due) or the 2nd year anniversary from the date rent was paid (i.e., the 15-month anniversary of the lease)? The point being make this as clear as possible.
Additional Rent - If there are any items of additional rent, the lease should state exactly the amount of or how the additional rent is calculated. These are typically CAM charges. It is important to call these additional amounts "rent". Because in the event of an eviction, if rent is paid but additional amounts owed under the lease are not, then a quick eviction may not be possible. Eviction actions proceed quickly only for the non-payment of rent. If other amounts under the lease are not paid, those amounts must be collected through a breach of contract action.
Permitted Uses - The lease should state how the premises can be used. If it doesn't, then there is be no restriction other than those under law.
Utilities - The lease should address who pays for the utilities. In some cases, the tenant or landlord pays all the utilities. In other cases, the tenant pays certain utilities or a certain amount up to a cap. It's important this is spelled out in the lease. The lease can also state that the landlord has no liability if the utilities are interrupted. This comes up if the utility service is cut off for non-payment or some other reason. The tenant may have a claim against the landlord for damages if this happens and lease is silent.
Insurance - The lease should address the types and amounts of insurance the landlord and tenant will be required to carry. These include general liability insurance, property insurance, worker's compensation insurance, etc. Often the lease will state that the policies must be issued by companies with a certain insurance rating. It's also to important to consider who will be named as additional insured on the policies.
Environmental Considerations - The lease should address hazardous materials that are allowed or prohibited to be used on the premises. The landlord may want to reserve the right to audit the use of the property if hazardous substances are going to be present. The parties may want to negotiate indemnification if an environmental claim is raised.
No Waste or Nuisance - The lease should state that there will be no waste or nuisance by the tenant. One key point is to define what constitutes a nuisance.
Maintenance - The lease should state how the property will be maintained. This clause can be hard to make clear, so it should be carefully drafted. If it is drafted sloppily, there is a possibility of ambiguity that can result in disputes between the landlord and tenant down the road.
Alterations to the Premises - The lease should address whether the tenant can make alterations to the premises. If the alterations are allowed, does the landlord need to sign off on them? If the landlord must sign off, is it required for all alterations or just those above a certain dollar amount?
Payment of Taxes and Assessments - The lease should provide who pays property taxes and assessments, such as local improvement district levies. Often those come about after the lease is signed and neither party anticipated them. If the lease doesn't address it, it could be ambiguous and cause a fight.
Landlord Access - What kind of access is the landlord allowed to have during the term of the lease? If the landlord is allowed access, how much notice must be given before the landlord can enter the premises?
Encumbrances - This clause will deal with liens placed on the premises by the tenant. In most cases, the tenant isn't supposed to allow liens to encumber the property or the tenant's leasehold interest.
Assignment and Subletting - Is the tenant allowed to assign the lease or sublet the premises? If so, does the landlord need to give its written consent? Can that consent be withheld for any reason? These items need to be addressed in the lease. If they aren't, then assignment and subletting will be deemed okay.
Signs and Advertising - Is the tenant allowed to put signs up? Most landlords will have some specific requirements for signs. Those should be addressed in the lease so there is no ambiguity.
Sounds and Lights - The lease should address how the tenant may use the premises, including noise and light restrictions (if any). If it is not addressed, then the tenant is deemed to be able to use the premises in any lawful way.
Subordination - Landlords will typically want the tenant to agree to subordinate the lease to any lender. This allows the lender to get a lien on the property without having to worry about the tenant claiming an interest in the premises ahead of the lender.
Obligations of the Landlord - The duties of the landlord should be clearly spelled out. This can be as simple as who plows the parking lot in the winter or who replaces the HVAC.
Damage and Destruction of the Premises - If the premises are damaged or destroyed, does the lease terminate? Is the rent reduced? How long does the landlord or tenant have to repair the property? Who has to repair the premises? These are all questions that should be answered in the lease.
Condemnation of the Premises - If the property is condemned, the payment of compensation will typically be made to the landlord and the tenant. However, the lease could provide some other splitting of the proceeds.
Indemnification - This clause spells out when the landlord must indemnify the tenant and when the tenant must indemnify the landlord. This is a key clause because it determines who has to pay attorney fees, costs and, ultimately, an award of damages.
Default by Tenant - When the tenant is in default, the remedies of the landlord are to sue for breach of contract, evict the tenant, take possession, and/or find a new tenant for the premises. The landlord is typically damaged because it loses rent. The lease should state how the lost rent is calculated.
Surrender of the Premises and Holdovers - When the term of the lease is over, the tenant needs to turn over the property to the landlord. The lease should state the condition the premises must be in at the point in time it is turned over. This clause should be clear or it will be fertile ground for a fight to spring up. Also, if the tenant stays over beyond the term of the lease, the amount of rent that must be paid should be spelled out.
Attorney Fees - Since a commercial lease is a commercial transaction, attorney fees will typically be awarded under Idaho law. However, a well-drafted lease will typically state that a winning party in a lawsuit will get attorney fees and costs.
Authority of Signors - If the landlord or the tenant is an LLC or corporation or other type of entity, the lease should represent that the persons who sign the lease for those entities actually have the authority to sign. It is also prudent to get a resolution appointing signors as well.
Binding Effect - The lease should state that it is binding on the parties. Though this is presumed, it doesn't hurt to state the obvious.
Broker's Fees - The parties should state who will pay any broker's fees. In most cases, the landlord will pay the broker's fees, but this can be negotiated. If there is no broker, the lease should state that each party agrees there is no broker and each will indemnify the other from any claims by a broker.
Entire Agreement - This is known as a merger clause. In a lease, it is necessary for to state there is no side agreement or oral agreement. It is the entire agreement of the parties.
Exhibits - The lease should list the exhibits that are incorporated by reference to the lease.
Force Majeure - This clause states that if there is some superseding cause (act of god, war, etc.), the lease will be terminated. There isn't a breach.
Governing Law and Venue - The governing law and venue of any dispute should be included in the lease. If it is not, it will be the state law of the premises and the county where the premises are located are deemed to be the governing law and venue.
Joint and Several Liability - If there is more than one landlord or tenant, the lease should state that each one is jointly and severally liable for any breach of the lease. What this does is it makes sure the damages paid to the injured party are paid regardless of how fault is split between the other parties.
Memorandum of Lease - A memorandum of lease is recorded letting the world know that the tenant has an interest in the property. If one will be recorded or allowed, the lease should state as much. If it is prohibited, the lease should state that no memorandum of lease may be recorded.
Waiver - If there is a breach of the lease and the non-breaching party doesn't do anything about it, it can be considered a waiver of that clause of the lease. In other words, the parties agreed that the clause isn't really important. A lease should state that if a party doesn't do anything, it isn't a waiver of that clause in the lease. There are business reasons to allow certain breaches to slide. But, that shouldn't mean the clause is waived.
Notices - The lease should state where notices are to be sent and how.
Mediation and Arbitration - If there is a dispute, often the parties want to try to resolve it before litigation. Mediation is a process where the parties meet with a third-party who helps them try to find a settlement of the dispute. The process is not binding. In other words, the third-party can't make a decision that the parties have to live by. After mediation, the parties can go to court or, if required or agreed to, arbitration. Arbitration is like court but the decision is made by a third-party that the parties select. The question of whether to go to arbitration or court is one that hotly debated. It all depends on the preferences of the parties.
Relationship of the Parties - The lease should state that the relationship of the parties is that of a landlord and tenant. The landlord and tenant are not partners or joint venturers.
Severability - This clause says that if a part of the lease is found unlawful, it is cut out of the lease but the rest of it remains. The alternative is a court may throw out the entire lease if one part of it is found to be unlawful.
Survival - After the termination of the lease, there may be some clauses that should remain binding on the parties. For example, indemnification clauses may need to remain enforceable to protect the landlord or tenant. Those clauses should be specifically called out. If they aren't, they may be deemed to have terminated with the lease.
Interpretation - A court will typically interpret a lease against the drafter. This means, the party that drafts the lease is deemed to have created a clear document. If it doesn't, the ambiguity is interpreted in the favor of the other non-drafting party. This clause states that the court should not interpret the lease against either party, but interpret it as if both parties drafted it.
Time is of the Essence - Performance of the lease needs to be prompt. This clause simply says that is case.
Waiver of Jury Trial - It has been said that jurors are unpredictable and can be influenced by things that are not material to a dispute, like whether they like a certain lawyer or not. In commercial leases, it is typical for the parties to agree that any dispute in court will be heard only by a judge. It is believed that the judge will take the time to understand complex issues and will not be swayed by immaterial things, like who had a better lawyer. This clause waives a jury trial.
There are other terms of a commercial lease that should be included, but this is a fairly detailed list of what we like to see in any commercial lease.