By Josh Lonon, of counsel, Wyche
An ounce of prevention can be worth a pound of cure, especially in the case of commercial leases. In negotiations, landlords may be focused on the “terms of the deal” concerning their return on investment. These provisions usually occupy the first few pages and are pored over extensively. However, the language in the back pages of the lease should not be ignored, as careful crafting may limit future, potentially ruinous, liability.
Consider the following provisions, which warrant more consideration than they often receive:
Holdover penalties. A South Carolina statute provides for a double-rent penalty where a commercial tenant “holds over,” or continues to occupy the property, for three months after the lease term. However, in absence of provisions otherwise in the lease, until then, the tenant may only be liable for monthly rent. This is despite the tenant wrongfully occupying the property, likely at the landlord’s detriment. As such, language providing for specific, punitive penalties is advised both to fairly compensate the landlord and give the tenant incentive to vacate. The lease should also specifically provide that acceptance of holdover rent shall not serve as a waiver or in any way limit the landlord’s rights.
Estoppel certificates and SNDAs. A tenant estoppel provides its confirmation of the lease and its terms and that the landlord is not considered in default, effectively cutting off claims it may have under the lease prior to its date. If the landlord wants to sell the leased property, an estoppel is usually required by a buyer. Similarly, a lender may require an estoppel if the landlord seeks financing secured by the property. A subordination, non-disturbance and attornment agreement (SNDA) will also be required by a mortgage lender in such case. An SNDA provides that the lease is subordinate to the mortgage, that the lender will not disturb the tenant’s rights (so long as it is not in default), and that it will recognize the lender or a new owner of the property as the landlord in the event of a foreclosure sale. Without a requirement in the lease obligating the tenant to execute these documents, it may refuse, effectively preventing a sale or mortgage. Also, without specifics as to the required language to be included in the estoppel or SNDA, protracted negotiations or a standoff may ensue.
Compliance with laws. What if the property is used in violation of a law or regulation? Which party is responsible for penalties or if a governmental authority orders alterations to the property? It would seem intuitive to a landlord that the tenant should bear responsibility for violations resulting from its use, but a governmental entity may not make such a distinction. A strong compliance with laws provision is advised, providing that the tenant will not use the property in violation of any ordinance, statute, regulation, or order, and that it will indemnify and hold the lender harmless therefor, including resultant attorney’s fees and costs.
Integration. Preliminary oral and written understandings, including a letter of intent, are necessary parts of negotiating a commercial lease. However, if the lease does not include an integration clause specifically providing that the lease fully and completely states the agreement of the parties to the exclusion of those preliminary communications, a court may consider those communications in the event of a dispute resulting from an ambiguity in the lease language.
Notice. Every lease should include, as specifically as possible, where and by what method notices to the parties should be delivered. If these provisions are vague, it could open the door for a technical defense in a dispute. A strong notice provision will provide addresses for delivery, to the attention of a particular person, and acceptable delivery methods — by hand, e-mail, overnight, trackable delivery service, and/or certified U.S. mail (fax provisions are becoming less common). The lease should also provide for proof of delivery in each case, on what day delivery is considered accomplished (e.g. the date of signature, three days after deposit) and that the receiving party shall not refuse acceptance. In the case of e-mail, a provision requiring delivery by another method will assure that the receiving party received it.
Force Majeure. A force majeure clause can protect a landlord (or both parties) from liability for failure to perform or omission of an act resulting from the unforeseen, such as acts of God, terrorism, labor shortages, or new government regulation. Generally, the party with the most obligations would want the most expansive force majeure clause, covering every conceivable unforeseen event. However, if a landlord has a true “triple-net” lease, it may have very few obligations thereunder. In that case, if the landlord has bargaining power, it may seek to limit or eliminate the tenant’s failure to perform resulting from such events.
This list is not intended to be, nor is it, all-inclusive or even comprehensive. An astute landlord, with the help of its counsel, would be well-served to carefully consider these often boilerplate provisions to clarify its lease and limit its liability. Of course, as with all legal matters, each person should seek competent counsel.
Josh Lonon regularly represents developers and others in sophisticated real estate acquisitions, financing, incentives, and leasing involving a broad range of commercial properties. He also has extensive experience in the title insurance industry, as a long-time agent, and as in-house and outside counsel, giving him keen insight on complex title and insurability issues. Lonon serves as a leader in his profession and field, having held various representative positions with the South Carolina Bar and currently serving as chair-elect of its real estate practice council.