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Lease Agreement Legalities: Tread Carefully
Richard Lang

Commercial leases may be exciting to attorneys, but there is probably not a more mind-numbing document to the business person.  The stakes are often very high, though.  People think in terms of monthly rents, like the $16,000 a tenant might pay to rent a 7,000 square foot office.  Assuming that to be base rent plus pass-throughs under a five-year lease, the total rent during the term is almost a million dollars, not counting potential interruption of business and loss of improvements if there is a problem. This post will discuss three of the important clauses business people should understand in a lease of already built space. If the building or space has not been built, the risks are exponential.

Most leases do not represent that the tenant’s intended use is legal in the zoning district, nor do they represent that the available parking is adequate under the zoning law.  If the use is not permitted or the parking is inadequate, the tenant will not be able to open for business, but has no legal excuse for not paying the rent.  Tenant got everything the landlord promised.  To avoid easy come-easy go to that million dollars, tenant must independently verify zoning and parking before signing the lease, as well as requesting that landlord make the representations.

Leases and mortgages have legal priorities.  Generally, the first in time will prime the other. So if tenant signs a lease in a building with a mortgage, the tenant’s lease can be wiped out in a foreclosure, regardless of the fact that the tenant is performing its obligations.  That is very bad news for the tenant who has invested several hundred thousand dollars in wiring, improvements, printing and such, only to be thrown out as early as a few months into the lease.  The lease should require, as a condition of its commencement, that the landlord’s lender deliver a non-disturbance agreement to the tenant, which says if the lender forecloses and the tenant is not in default, the lender will honor the lease.  In a financing after the lease is signed, a lender will still want priority and will insist on a subordination from the tenant, which most leases would require the tenant to give.  In a properly negotiated clause, both lender and tenant will get what they want, because subordination and non-disturbance will both be required.  The document delivered pursuant to the lease in such cases is called a Subordination and Non-Disturbance Agreement (“SNDA”).

Leases always require the tenant to carry various types of insurance.  The lease should also require the landlord to maintain insurance, especially insuring the full replacement cost of the building, and to apply those proceeds in the event of a casualty to repair of the building.  The application of proceeds clause is often problematic, because most mortgages allow the lender to take the proceeds to pay down the loan.  Either way, the tenant is better protected if the landlord carries insurance.

Leases are important, complex legal documents and tenants are advised to consult experienced counsel before entering in to them.

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