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Preparing the Landlord-Friendly Commercial Lease

On Behalf of | Apr 6, 2023 | Real Estate

For the landlord of commercial property, the lease is a high-stakes document, because it sets the parameters of a long-term relationship. And unlike a residential lease, there are not many government regulations as to what may be included or omitted.

When our firm receives a call from a landlord, seeking to enforce a lease, we first determine how landlord-friendly the document is. The quality of the lease will greatly influence the legal strategies, and legal strategies will greatly influence the landlord’s net outcome.

So what makes a lease landlord-friendly? Here are some provisions that differentiate an average lease from a landlord-friendly lease:

  • Security interest/lien – Where the tenant has significant hard assets (inventory, equipment), a security interest can ensure that the landlord’s collection process is fruitful. If the tenant owes $50,000, the inventory within a jewelry store can go a long way toward making the landlord whole. However, the lease provision by itself is not enough; it’s critical to perfect the security interest (typically via filing UCC1 in the applicable state office). Before putting all eggs into this basket, a landlord should keep in mind that priority of the lien also matters, and a tenant with bank loans is likely to have already bargained away a first-position on all business assets.
  • Lockout rights – In Ohio, a landlord can change the locks on a tenant, as long as the lease allows it, and there is no breach of the peace. Practically speaking, this short-circuits the formal eviction process, and any appeals that could follow. The lockout, coupled with a security interest, can be an effective move to recoup a large debt.
  • Reimbursement of credits and incentives – The worst-case scenario for a landlord is this: Landlord spends $90,000 to build out a space for a specific tenant, and that tenant fails to perform in the early years of that lease. The landlord needs a concrete plan for recouping incentives such as tenant-improvement allowances and rent credits, both with an authorizing provision in the lease, and some kind of security.
  • Security deposit – Most leases include a security deposit. But the details are often left hazy. A landlord should seek the right, but not obligation, to apply the security deposit to any unpaid rent amounts, and the duty of a tenant to replenish the deposit at any time it is used.
  • Specifics on condition of property upon end of lease – Eventually, the landlord gets the property back, and it is rarely in the precise condition that the landlord hopes. The typical lease requires the property to be in “the same condition, save reasonable wear and tear.” To avoid uncertainty (and perhaps litigation), a lease should precisely detail the condition of the property, as it relates to specific uses of a building (i.e., grease buildup in a restaurant) or fixtures being installed/removed (i.e., bolted-down heavy equipment).
  • Guarantys – Let’s be blunt. The non-paying tenant is normally struggling to pay other bills too. If the landlord has secured a guaranty from the tenant’s owners and/or parent company, then it’s a good bet that the landlord’s rent invoices will be prioritized. Collections against a guarantor can proceed, even where a tenant is in bankruptcy (unless the guarantor is also subject to bankruptcy proceedings). Going a step further, the lease can require that the guaranty obligations be secured by a mortgage of a guarantor’s separate real estate; that may sound drastic, but a commercial landlord should not allow itself to assume undue risk for a low-credit tenant’s business success or failure. Requiring a letter of credit is even better.
  • Attorney fee provision – It’s important for a prevailing landlord to be made whole, by the tenant reimbursing it for all reasonable attorney’s fees incurred during informal enforcement of the lease, litigation concerning the lease, any appeals, and any collections efforts.
  • Default interest/late fees – When the juice is running on past-due rent, the landlord is more likely to be prioritized as a creditor. In the unfortunate event of protracted litigation, default interest will add up.

Attorney Michael R. Rasor assists landlords and tenants in the negotiation and enforcement of commercial leases. Reach him at [email protected].

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