Samantha McDonald is a partner in Bowditch & Dewey’s real estate group, concentrating on business and property law.
Updated: September 30, 2024
Know How
With commercial leases, the devils are in the details
By Samantha McDonald
Do-it-yourself leasing is risky business in the commercial space, where leases vary tremendously. There can be additional charges for taxes, operating expenses, and other costs. Unlike residential leases, little in commercial leases is governed by statute. Review the lease with a savvy attorney, and the consider the following ideas carefully:
• Don’t ignore worst-case scenarios. Nobody expects a lease default. But it happens. Understand and negotiate default provisions. Tenants should require landlords to mitigate damages by re-renting the property in the event of a default. Otherwise, they will typically be responsible for all rent due under the lease.
• Consult your insurance agent. Have your agent review the insurance and indemnification provisions. Get the required coverages to comply with the lease and to protect yourself. Understand whether you are responsible to pay rent – and for how long – if you can’t use the property because of a casualty loss. Do you need business interruption coverage to pay the rent?
• Pay attention to legal formalities. If you sign a lease on an entity’s behalf, make sure your signature indicates your representative capacity, or you risk personal liability. If you are a landlord, make sure the tenant entity is registered with the Commonwealth of Massachusetts.
• Check the financials! Landlords, make sure any proposed tenant is financially solvent. Consider getting a personal guaranty. Tenants required to pay operating costs under the lease should review the last three years of such costs. Expenses can vary, so looking at a few years will give tenants a feel for potential liabilities.
• Know landlord and tenant responsibilities. Landlords are often responsible only for maintaining the building’s structural components, leaving tenants with costly surprises. Beware if the leased premises has its own heating and air conditioning system. If tenants are responsible for systems that solely serve the leased premises, they could be on the hook for repairing or replacing expensive components. Review what can be included in operating expenses. If landlords are responsible for HVAC maintenance, can they charge tenants to replace a defunct unit? HVAC systems can cost six figures. Do capital expenses need to be amortized?
• Do a thorough property inspection before signing the lease. Tenants typically accept the premises as is and need to understand the expected lifespan of anything they might have to repair or pay for through operating expenses.
• Check on certificate of occupancy responsibilities. If premise use differs from prior use, clarify who must get a new certificate of occupancy from the municipality.
• Choose a savvy broker to help with negotiations. Good brokers and attorneys can help you get the best deal possible. They can help identify and negotiate the lease’s critical details. Some possibilities: Ask to only pay for tax and operating expense increases, rather than the share of total taxes. Negotiate a decreased security deposit. Consider getting expansion rights, extension rights, or termination rights.
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