10 Key Provisions of a Commercial Lease Agreement

RECITALS/DEFINITIONS/PARTIES

  • Define the Parties (e.g. Lessor and Lessee, or Landlord and Tenant)
    • Consider trade names for the parties
  • Define the Effective Date of the Agreement
  • Define the Property or Premises being leased
    • Address and other relevant information about physical address
    • Utilities? Amenities? “Operating Expenses”?
    • Consider referencing any relevant Exhibits with further descriptions of the Property/Premises
  • Define any other relevant terms, including:
    • “Permitted Use” –
      • What is the scope of use of the property?
      • What are prohibited uses of the property?
    • “Default” / “Event of Default” – consider defining in content
    • “Rent” – consider defining in context
    • “Operating Expenses” – costs of running the Property/Premises
    • “Common Areas”
      • What are they? Where are they?
      • Are they available to Lessee?
      • What is the scope and Permitted User of such Common Areas?
      • Who else uses the Common Areas?
      • Subject to Lessor/Management’s sole control?

DUTIES OF THE PARTIES

  • Duties of the Lessor
    • Spell out the obligations of the Lessor, including:
      • Leasing property to Lessee – permitting use, entry and possession of the Premises/Property
      • Maintenance of the property?
      • Utilities? Amenities? Other Services (janitorial, etc.)
      • Compliance with laws?
  • Duties of the Lessee
    • Spell out the obligations of the Lessee, including:
      • Payment of Rent
      • Maintenance of the property?
      • Compliance with Permitted Use?
      • Compliance with laws?
    • Assignment and Subletting?
      • May Lessee assign/sublet? Does this require prior approval of Lessor (not to be unreasonably withheld)? What is the timeline for notices of assigning/subletting, if any? What protocol for assigning/subletting (e.g. CPA analysis of rent profits)
  • Mutual Duties:
    • Permitted use of the Premises/Property (including Common Areas)
    • Maintenance of the Premises/Property
  • Improvements, Modifications and Fixtures:
    • Who handles this?
    • Use of third parties (e.g. contractors)? What is the protocol? Is written notice required? Lessor approval?
    • Keep the Premises/Property free from any claims, liens, etc. (e.g. Mechanics Lien)
    • Who owns such improvements? Typically, the Lessor/landlord (especially fixtures)
  • Damages/Destruction of Property:
    • What notice requirements are between the parties?
    • Who bears the costs and responsibility? Who is at fault?
  • Condemnation
    • What happens if the Premises/Property is condemned? Taken by eminent domain?
      • Lessor/Lessee may terminate the lease.
      • Lessee may take party in any award thereof.

PAYMENT OF RENT

  • Payment of Rent
    • Rent price of the Property/Premises
    • Are utilities included? Amenities? Other Services (e.g. janitorial)?
    • Taxes?
  • Rent Schedule:
    • Consider using an Attachment or Exhibit
    • Frequency of Payments?
    • What happens with late payments?
      • Interest, liquidated damages, attorneys’ fees?
      • Surrender of deposit?
    • Usually works pursuant to the Term/Termination provisions (see below)
  • Deposit
    • What up-front costs on top of rent?

 

TERM, TEMINATION AND DEFAULT

  • Term/Initial Term
    • How long is the Agreement?
    • When does the Agreement start running? Upon the Effective Date?
  • Extension; Renewal Terms
    • Is the Agreement renewable?
    • Does the Agreement extend automatically?
    • Is written notice needed for any extensions or renewals?
  • Termination
    • Are there any specified events where the agreement automatically terminates (e.g. incurable breach vs. material breach)? Is there Termination for Convenience? What about Termination for Cause?
    • What is the timeline and notice required for termination?
    • Is there any period where breaches can be “cured” before termination occurs?
    • What is the effect of termination? Consider ongoing payments.
      • Consider Lessor/Landlord reentry to Premises/Property
      • Do not change the locks on Lessee (could be illegal).
  • Default
    • What qualifies as an “Event of Default”?
      • Failure of Lessee to pay all rent due? Part of rent due?
      • Lessee becomes bankrupt, insolvent, etc.?
      • Lessee materially breaches the Agreement.
      • Lessee’s material misrepresentation
      • Surrender?
        • Lessee does not pay Rent and Vacates?
        • What is the protocol?
    • Timeline to cure?
    • What are the consequences if Lessee defaults? What are Lessor’s remedies?
      • Consider interest, surrender of deposit, attorneys’ fees, liquidated damages, etc.?
      • Consider reentry to Premises/Property
      • Do not change the locks on Lessee (could be illegal).
  • Remedies
    • Consider Lessor remedies if Event of Default occurs (see above)
    • Are remedies cumulative?
      • Lessor may exercise any combination of remedies available
      • Use of one type of remedy does not prohibit Lessor from also using another type

INDEMNIFICATION AND LIMITATION OF LIABILTY

  • Indemnification:
    • How and to what extent to the parties indemnify each other?
      • Does this include officers, directors, employees, agents of the Parties?
      • Is indemnification mutual/reciprocal between the Parties?
      • What are the conditions for indemnification to trigger (e.g. threat of a lawsuit)?
      • Does indemnification include attorneys’ fees?
      • If any of the above representations or warranties turn out to be false, will that trigger indemnification?
    • Consider:
      • Injuries to third parties on the Property/Premises
      • Normal, everyday wear and tear
      • Interruption of use of utilities
  • Limitation of Liability:
    • Are there any types of claims, damages or other causes of action for which one party will not be liable to the other? To a third party? What is the scope of such a limitation (i.e. does it cover tort, strict liability, contract)?
    • What about warranty disclaimers? Consider the following:
      • What warranties are express or implied?
        • Covenant of Quiet Enjoyment – usually cannot be disclaimed
        • Habitability – usually cannot be disclaimed
        • Fitness for a particular purpose?
        • Workmanship?
      • Lessor disclaims responsibility for any liens obtained by Lessee as it pertains to Premises/Property.
      • Are implied warranties disclaimed?
      • Is this provision reciprocal (i.e. does it apply to both Parties)?
      • Is the Property/Premises being accepted “As Is?”

 

INSURANCE

  • Lessee Insurance
    • What sort of policies must Lessee maintain?
      • Fire, water, earthquake, etc.?
      • Comprehensive general liability and Property damage?
      • Dram shop coverage (if serving alcohol)?
    • What is covered?
      • The Premises/Property
      • Fixtures? Improvements?
    • What are the limits of such policies? Consider:
      • The limit for each “occurrence” triggering such insurance; and
      • The total cap (umbrella) limit for all claims.
    • Must Lessee provide Lessor with evidence (certificates) of such insurance policies?
    • Must Lessee provide Lessor with evidence of payments of the policy?
    • Must Lessee name Lessor as an “Interested Party” to such policy?
  • Lessor Insurance
    • Consider all of the above and whether or not it applies to the Lessor

 

SUBORDINATION AND ATTORNMENT

  • Does Lessee subordinate its rights to any creditor (e.g. first mortgagee or beneficiary) of the Lessor/Property?
  • What happens if foreclosure proceedings are brought against the Property? Must Lessee attorn to the purchaser upon any foreclosure sale?

 

GENERAL/MISCELLANEOUS PROVISIONS

  • What are the terms related to Lessor ability to enter and inspect the Property?
  • Memorandum of Lease. Typically executed by Lessor and delivered to Lessee.
  • What sort of notice is required (e.g. certified mail, overnight delivery with tracking)? What are the respective addresses or other contact information of the Parties to where notice must be sent?
  • Entire Agreement (Merger Clause). Does this Agreement reflect the entire agreement of the Parties and supersede any prior agreements (oral or written) between the parties? Are any exhibits, specimens, attachments, etc. to be included as part of the Agreement?
  • Amendments. May the Agreement be amended? If so, how? In writing, signed by both Parties?
  • If one Party fails to enforce its rights under the Agreement, will that count as a waiver of such rights? Typically, the Parties will agree to the opposite. If either Party fails to enforce its rights under the Agreement, it will not constitute as a waiver of such rights or any other rights under the Agreement. Is this a reciprocal right between the Parties?
  • Force Majeure. What events (beyond the control of either Party) relieve the Parties of their respect obligations under the Agreement? Consider such events as: war, floor, epidemic, civil unrest, tumult, etc.
  • Obligations of Third Parties. Does each party represent that its undertaking under this Agreement does not violate any of its contractual obligations, express or implied, undertaken with any third party and that such party has the right and authority to enter into this Agreement?
  • May the Agreement be assigned or delegated in any way? If not, is the prior approval of the other Party required for such assignment? Must such approval be in writing? Does non-assignment apply to both Parties?
  • Governing Law; Venue. Under what laws will the agreement be interpreted and/or governed? What about conflicts of laws? What is the venue for this Agreement? Does this include state and federal courts in that venue?
  • If any part of the agreement is illegal or unenforceable, does that affect the rest of the Agreement? Typically, the parties will agree that any such unenforceability or illegality will not invalidate the rest of the agreement.
  • Headings; Interpretation. Are the headings of the agreement meant solely for information purposes? Do the headings affect the interpretation or enforcement of the agreement in any way? Typically, the parties will agree that the headings do not affect the agreement.
  • Can the Agreement be executed in multiple counterparts?
  • What sort of remedies (e.g. injunctive relief, damages) are the parties entitled to under the Agreement? Again, consider “Cumulative Remedies” (see above)
  • Exclusivity. Is this a non-exclusive vs. exclusive relationship between the parties? Carefully consider this.

 

CLOSING RECITALS/WITNESSETH/SIGNAGURES

  • The parties have caused this Agreement to be executed by their duly authorized officers.
  • The parties understand they are entering a binding agreement.
  • The parties represent and warrant their signing parties can bind them to this Agreement.

 

EXHIBITS (if any)

  • Description of Premises/Property
    • Spell out, in greater detail, the legal description of the Premises/Property
      • The specifics of the Premises being leased
      • Additional specifications related to the Premises, including Permitted and Prohibited Use
      • Utilities?
  • Additional Services
    • List any amenities and/or other Services included, if any
  • Rent Schedule
    • Spell out, in greater detail, the payments, pricing and other relevant specifications related to the Rent
  • Certificate of Lessee
    • Certifies entering the lease relationship
    • Signed by Lessee
  • Signage
    • Approval required?
  • Improvements
    • List, if any, those performed/to be performed by Lessee and/or Landlord

 

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