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Careful Drafting of Commercial Leases Avoids Future Ambiguity and Confusion

January 7, 2014

Proper drafting of any commercial lease demands attention to every detail, even as to issues whose resolution seems, on first glance, to be self-evident. For example, specifying the commencement and ending dates of the term of the lease, the rent commencement date and any interim “event dates,” such as when options may be exercised, may be simple in some circumstances but highly complicated in others. You can read about the factors which must be considered, and suggested resolutions, by following the accompanying link.

Commencement Date: Residential leases almost invariably begin on a specific date – usually the first day of a calendar month – and end on an equally definable date, often specified in the text of a “fill-in-the-blanks” form lease. Such is often not the case with commercial, retail, warehouse or industrial leases, especially if the leased premises requires renovations or fit-out before it is ready for occupancy, whether those renovations are to be performed by the landlord or the tenant.

Suppose, for example, a landlord is undertaking new construction, such as a build-to-suit building for a single-user commercial tenant; how can the parties determine what the commencement date of the term will be at the time the lease is executed, when the premises may or may not even exist? Similarly, a landlord in an existing retail strip shopping center or a commercial office building may be required to erect new demising walls or, depending on the nature of the tenant, to install a certain level of improvements ranging from rough plumbing and utility connections for industrial or some retail users to finished flooring, fixtures and wiring for high-end commercial office tenants. Likewise, after the landlord completes its work, a tenant may then be required to install its own fixtures or finishes before commencing business.

In any such case, the commencement date of the lease term may range from the date the landlord delivers the premises to the tenant with the landlord’s work having been completed to the date the tenant actually opens for business to the public, the latter frequently occurring in the context of retail tenants and often subject to an outside “drop-dead” date for the term to begin so as to force the tenant to complete its own work on a timely basis. A well-drafted lease will clearly define what events constitute “turn-over” from the landlord to the tenant, how much notice of the turn-over date is required, whether there is an outside date after which, if the landlord has failed to complete its work, the tenant has rights to terminate the lease after a certain notice period, and whether, if the tenant has its own fit-out to perform, the lease term begins on the turn-over date or on a later date. We suggest landlords and tenants sign a memorandum setting forth the above dates once they occur because no specific dates are – nor can they be – recited in the lease itself and an executed memorandum provides each party with certainty and clarity.

End Date: Once the tenant takes occupancy, the end date of the term of the lease should likewise be confirmed in a signed memorandum of critical dates. A flat “ten year” term of the lease, if the turn-over date or commencement date of the term is mid-month, would likewise end mid-month, often creating practical problems with transition periods. To address this, a lease term may be defined as a fixed number of years “and until the end of the month in which the __ year anniversary of the term occurs.”

Options to Renew: If a lease contains options to renew, those dates should likewise be carefully drafted and should be easily determined by reference to the commencement or termination dates of the term. For example, a tenant may negotiate a five year lease with a two year renewal option. That option must be exercised a certain period of time before the end of the term, so a properly drafted lease will define whether, for example, that option date is simply “x” number of days or months before the end of the term or may be exercised only between two dates, such as no earlier than six months but no later than three months before the end of the term. The more specificity up-front as to when the term begins and ends, the less likely confusion will arise when the critical dates approach for exercise of an option to renew.

“Term” v. “Rent” Commencement Date: Finally, non-residential leases often distinguish between a “term” commencement date and a “rent” commencement date. Perhaps a tenant will successfully negotiate a “free rent” period; perhaps, if the tenant has its own fit-out or fixturing period after the landlord delivers possession, the tenant will pay only utilities and other “common area” charges during that time. Once again, defining the rent commencement date and setting forth its relationship to the term commencement date should be addressed with as much specificity and clarity as possible.

Every lease and every negotiation takes on its own characteristics depending on the nature of the relationship between the parties, their relative duties and obligations before and after possession is given to the tenant, whether the lease is for an industrial, commercial office or retail user, whether the lease is for a space within a larger building or is for an entire building, and so on. Addressing basic lease issues in a thorough and thoughtful manner allows both landlords and tenants to review their document three, four or ten years after its execution and to ascertain the answer to the above issues and many other similar questions which we will address in future newsletters.

For questions about your leases, whether you are a landlord or a tenant, please feel free to contact Kenneth Fleisher, Esq., Chair of Zarwin Baum’s Real Estate Practice Group, at 267-765-9610, kjfleisher@zarwin.com.


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