NH Legal Perspective: Commercial leasing -- A tenant's perspective

THEY SAY the devil is in the details, beware of the fine print. Well, in commercial leases, one needs to be aware of what is not in the fine print, what is missing.

For example, most commercial leases provide that the tenant reimburse the landlord for its share (based on square footage of leased premises versus square footage of entire building) of “common area maintenance charges” or “operating expenses,” which are defined broadly as all expenses of the landlord to own and operate the property. Leases where the tenant pays all operating expenses plus taxes and other costs of ownership are sometimes referred to as a “triple net” lease. Does that mean that the tenant must pay for expensive art in the hallways? How about a new roof? What about a management fee to a company owned by the landlord? Legal fees to evict other tenants? The answer is probably yes unless those expenses are expressly carved out of the lease. And does the lease require the landlord to provide a statement itemizing the expenses or give the tenant the right to audit the landlord's books to see if you are being overcharged? No, unless it specifically says so in the lease.

A bit of history might help to explain. Under English common law, a lease was an interest in real estate. It was not a contract. A tenant paid a certain sum of money to the landlord in exchange for the right to use and occupy the land, often for agricultural use. If any house or building burned down or fell down due to lack of repairs, the lease was still valid. The tenant still paid rent and still used the land. The landlord made no promises and had no obligations.

It has only been in modern times that the principles of contract law have applied to leases. With the introduction of contract law came the introduction of a written document to govern the relationship between the tenant and the landowner. Since the landowner wrote the lease and usually had higher bargaining power, leases were written with a bias toward the landlord.

One of the first “concessions” made by a landlord in a lease was the so-called “covenant of quiet enjoyment.” In this clause, the landlord at least agrees with the tenant that the landlord owns the property and that if the tenant pays the rent, the tenant may occupy the property. However, this clause will not protect the tenant if the landlord loses the property through foreclosure.

One trap for a tenant in a commercial lease is a very standard clause requiring tenants to pay their proportionate share of real estate taxes and any tax increases. There are two reasons real estate taxes increase: 1. The tax rate increases, which is beyond the landlord's control, and 2. The assessed value increases, which can be within the landlord's control. For example, the landlord does significant improvements to make the building more attractive or does improvements required by a new tenant, all to such an extent that the town increases the assessed value of the building. In that case, the tenant is reimbursing the landlord a portion of its costs through the increase in real estate taxes, unless, of course, there is language in the lease to protect you.

A lease gives the tenant the exclusive right to use certain space in a building. What about the parking lot? That is usually used in common and the landlord also retains the right to use and develop that area. Can he build another building that eliminates parking? Or block your visibility to your customers? Can the landlord rent to your biggest competitor? The answer is yes unless there is language in the lease to the contrary.

Another potential trap is unequal treatment. If the building is damaged by fire and the landlord has the right to terminate the lease, does he have to terminate all leases? Or can he cherry-pick and use the fire as an excuse to terminate the leases with below-market rent?

Is the premises being delivered “as is” or is the landlord making some representation that the space complies with existing life or safety codes? If not, is the tenant required to bring the space up to code? When your lease terminates, will you be required to deliver the space in good condition? If so, how is that defined? Does it mean updated so that the landlord can easily rerent the space?

All leases will contain a section on tenant defaults and what the remedies of the landlord are in such an event. What about landlord default? What if the landlord does not maintain or repair the building so that it is unfit for occupancy? What if the landlord fails to snowplow so that your employees cannot get to work? What if the landlord fails to maintain the roof, it leaks and your inventory is damaged? Very few leases contain provisions dealing with landlord's default. And, if the lease contains the phrase “independent covenants,” the tenant must keep paying rent despite the landlord's defaults. Can you just fix the roof and sue the landlord for the cost? We successfully defended a landlord in such a case by declaring such an act by the tenant to be a default under the lease because the lease did not contain a provision allowing the tenant to fix the roof. The court agreed that the tenant had no right to fix the roof and ordered the tenant evicted from the premises. Of course, the first step is to be sure that the lease contains obligations of the landlord and then to have provisions giving the tenant remedies if the landlord breaches the obligations.

While the 40-page lease presented to the tenant may appear more onerous due to its sheer size, it very well may be fairer than a 15-page lease. Any lease must be read carefully to see what it says — and, just as importantly, what it does not say.

NH Legal Perspective is a biweekly column sponsored by Sheehan Phinney Bass & Green PA. This column does not provide legal advice. We recommend that you consult an attorney for specific guidance on legal questions.

Monday, August 03, 2020