Commercial Lease Review Part One

COMMERCIAL LEASE REVIEW
By: R. Scott Alagood

The holidays and new year are busy times for businesses which may be locating or moving into leased retail, office, or industrial space. These businesses spend extensive time and resources choosing the right broker, location, and tenant mix. Finding the right location is not the end of the endeavor. Before occupying the leased space, a commercial lease will have to be negotiated.

The lease will establish how the parties deal with default and termination. The lease will supply the base upon which the business operates for years to come. It is important that the tenant understand the terms contained within the lease and how the lease will impact its business.

Commercial leasing is a complicated process which involves hundreds of business, practical, and legal considerations. This article will address just a few of the legal issues which are typically found in a commercial lease and shed some light on how they may apply to a tenant.

Parties, Legal Description, and Term

Most commercial leases will be for a term in excess of a period of one year. As such, the statute of frauds requires that the lease be in writing, signed by the party who is to be bound, contain an identifiable legal description of the property being leased, and contain all material terms between the parties. Absent these requirements being met or an exception, the lease will be unenforceable.

The tenancy may be for a fixed term or periodic. For reasons of certainty, most commercial leases are for a fixed term. Periodic tenancies may arise where the lease does not provide for a fixed term, but is for a period to period at the will of the parties. A month to month lease is an example of a periodic tenancy. Where a lease allows either party to have a right of termination, a periodic tenancy is not created so long as the lease is otherwise specifies a definite term.

Execution, Delivery, and Recordation

For a lease term in excess of one year, it must be signed by the parties to be enforceable. The person signing the lease must have authority to do so. Representatives of a business entity should have a resolution or minutes from the governing authority. A common mistake is made where an individual signs a lease on behalf of a business being conducted under an assumed name or “DBA” (doing business as). An individual cannot bind a DBA entity because a DBA is no more than an assumed or trade name of that individual and has no separate legal existence. Also, where an individual signs a lease on behalf of a business entity that is not in existence or fails to indicate the capacity or position in which the individual is signing, the individual may become personal liable for the lease obligations.

Delivery is an essential element to bind the parties to the lease. No particular act or words are necessary. Typically, delivery will be shown by the parties’ actions in conformity with the lease regardless of whether physical delivery has occurred.

Recordation is not a necessary element of an enforceable lease. Recordation is simply a method of providing actual or constructive notice to third parties of the tenant’s leasehold interest. So long as there is physical evidence of the tenant’s occupancy, recordation is unnecessary. If the lease will be effective prior to the tenant’s physical possession, it may be advisable to file a memorandum of lease in the county real property records.

Rent

Rent appears self-evident. It is the compensation received by the landlord for allowing the tenant to use and occupy the leased premises. In a commercial lease the tenant typically has other financial obligations such as paying the taxes, insurance, and maintenance costs. The term “rent” does not necessarily include these other financial obligations unless those payments are determined to be part of the rent.

Permitted and Exclusive Use

The landlord will control the use of the leased premises. This is particularly important where the leased premises is a part of a larger commercial development. The landlord will control the “tenant mix” through the use restrictions contained in each lease. The landlord may also create restrictive covenants applicable to the entire commercial development. Tenants must ensure that its intended business operations do not violate the lease or covenants.

Tenants may want to ensure that other tenants within the commercial development are not allowed to operate similar businesses. This is done through exclusive use provisions. Care should be taken that appropriate remedies are provided for a breach of an exclusive use clause. Otherwise, a tenant may find themselves in litigation over the tenant’s intended and specified use.

R. Scott Alagood is board certified in Commercial and Residential Real Estate Law and can be reached [email protected] www.dentonlaw.com.