Ten Lease Provisions That Get No Respect

Vol. 28 No. 2

By

Jerald M. Goodman is a partner and Sharon D. Brown s an associate at Drinker Biddle & Reath LLP. Stephen J. Messinger is a partner at Minden Gross LLP.

 

Boilerplate provisions address important legal underpinnings and, if improperly drafted, can have significant legal and financial consequences. A heightened degree of care and respect toward crafting these provisions can help the parties avoid surprises.

1. Force majeure. Occurrences defined as force majeure events excuse parties for nonperformance of their obligations under the lease. Generally, the party with the most performance obligations will want an expansive definition of force majeure events. In many cases, the determination of whether an event of default has occurred can turn on whether the cause for nonperformance is within the definition of a force majeure event as set forth in the lease.

Depending on the relative bargaining power of the parties and the allocation of performance obligations under the lease, applicability of the force majeure provisions may be expressly limited to one of the parties. Adding a notice requirement to a force majeure provision is another means of limiting the applicability of the provision.

2. Limiting liability exculpatory provisions. Landlords typically require that their liability for claims under the lease be limited by exculpatory provisions. Judicial treatment of exculpatory clauses varies from state to state. Some courts have held that an exculpatory clause in a commercial lease “must be construed strictly against the party seeking its protection.” Nebraska has applied general contract law to exculpatory clauses, considering whether the provision was clear and unambiguous, whether there was disparity in bargaining power between the parties, and whether the provision contravened public policy.

3. Notices. A vague or unclear notice provision can prevent the parties from efficiently enforcing critical rights and remedies under the lease. Notice provisions should specifically identify the acceptable methods of delivery and clearly specify when notices will be deemed to be given.

If hand delivery is an acceptable means of providing notice, the parties should consider whether that method is likely to be effective under their particular circumstances, taking account of the size of the entities involved and other practical considerations. In addition, the hand-delivery method must expressly require an acknowledging signature, receipt, or other documentation to evidence the actual delivery.

The parties should also consider whether to allow notice given by the more convenient methods of facsimile and e-mail, which will depend in part on the term of the lease—facsimile numbers and e-mail addresses will likely change over time.

4. Integration provisions. An integration provision states that all prior oral agreements and representations are integrated into the final signed lease. In general, integration provisions are interpreted by the common law plain meaning rule: “When a contract contains an integration clause, extrinsic evidence may not be admitted to prove different or additional terms in the contract, although such evidence may be admitted to interpret ambiguous terms of an integrated contract.”

Typically, the parties will provide that the exhibits are incorporated into the integrated document even when the exhibits are attached or finalized after full execution of the lease.

5. Surrender. Lease surrender provisions describe the physical condition of the premises required at the time of surrender by the tenant. If the lease is silent, the standard at surrender is generally that the “lessee is under a duty at common law to return the premises in substantially the same condition as when they were received, reasonable wear and tear excepted.”

When surrender provisions are litigated, a court will likely interpret the surrender provision in the context of the lease as a whole, especially in conjunction with the maintenance provisions contained in the lease. Depending on the scope of the tenant’s maintenance obligations during the term of the lease, the tenant may be liable for repairs or replacements at surrender that are not apparent from a reading of the surrender provision alone.

In drafting a lease, counsel should be sure to address the disposition of tenant’s specific personal property or fixtures on lease surrender.

6. Waiver provisions. By including waiver provisions, the parties expressly agree that specific acts and omissions that could constitute a waiver will not be deemed a waiver. In some leases, waiver provisions also can address conduct of parties other than landlord and tenant. For example, a waiver provision that is applicable to a defined category of “Landlord’s Parties,” which expressly includes “independent contractors,” will likely be held by its plain meaning to apply to the landlord’s construction subcontractors.

Another basic function of waiver provisions is to “give a contracting party some assurance that its failure to require the other party’s strict adherence to a contract term . . . will not result in a complete and unintended loss of its contract rights if it later decides that strict performance is desirable.”

7. Compliance with laws. Compliance with law provisions can shift liability to one party for the costs of making the leased premises compliant with government-ordered alterations or repairs. In addition, these provisions typically make a tenant’s criminal or tortious use of the property an event of default.

In general, except when the party that has assumed responsibility for legal compliance has much less bargaining power than the other party, in a commercial lease a court is likely to enforce a provision shifting the risk and expense of government-ordered alterations and repairs. A blanket requirement in the lease, however, stating that the tenant is responsible for all government-ordered repairs and alterations may not be effective to shield the landlord from all liability.

8. Estoppel certificates/status statements. Over the term of a lease, estoppel certificates will be required if the landlord seeks to sell or refinance the property. Similarly, large commercial tenants also may require estoppel certificates in the event of a transfer or refinance. The party that seeks the estoppel certificates will want assurances that the other party will promptly execute them, whereas the other party will want to ensure that the form of certificate and turnaround period are not onerous.

In view of the potential for significant monetary damages in the event a party is unable to complete a contemplated transfer or financing because it is unable to produce the necessary estoppel certificate, the lease provisions requiring that the other party furnish this detailed estoppel certificate are of paramount importance.

9. Holdover. When a tenant fails to vacate the leased premises at the end of the lease term and the landlord continues to accept rental payments, the common law presumption is that the parties have agreed to extend the lease on a month-to-month basis, subject to the original terms of the underlying lease.

Lease holdover provisions can clarify that the tenant’s failure to vacate the leased premises is not an extension of the original lease but rather creates a special, separate agreement. Lease holdover provisions also can delineate distinctions from the otherwise applicable common law.

10. Defining common areas and facilities. Tenants typically pay as additional rent a proportionate share of the real estate taxes, insurance, and maintenance costs for areas that are defined as common areas and facilities. Accordingly, the obligations of the tenant can vary widely depending on whether areas are included as part of common areas or part of the leased premises.

If a tenant assumes maintenance or insurance obligations for a portion of the common area, the lease should expressly require the tenant to maintain insurance covering the specific areas.

 

FOR MORE INFORMATION ABOUT THE REAL PROPERTY, TRUST AND ESTATE SECTION

-This article is an abridged and edited version of one that originally appeared on page 47 of Probate & Property, July/August 2010 (24:4).

- For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.

- Website: www.abanet.org/rpte.

- Periodicals: Probate & Property, bimonthly magazine; Real Property, Trust and Estate Law Journal, quarterly journal; and the e-Report, bimonthly electronic newsletter.

- CLE and Other Educational Programs: Watch out for RPTE’s monthly CLE teleconferences; for more information, please visit our website.

- Books and Other Recent Publications: The Insured Stock Purchase Agreement: With Sample Form, 2d ed.; From Handshake to Closing: The Role of the Commercial Real Estate Lawyer, 2d ed.; Education Planning: Taxes, Trusts, and Techniques; Real Estate Opinion Letter Practice; Green Building and Sustainable Development; A State-by-State Guide to Construction and Design Law, 2d ed.; The Law of Trustee Investments; An Estate Planner’s Guide to Life Insurance, 2d ed.; Foreclosure Law and Related Remedies, 2d ed., three chapter bundles now available; A Practical Guide to Commercial Real Estate Transactions, 2d ed.  

 

Advertisement

  • About GPSolo magazine

  • Subscriptions

  • More Information

  • Contact Us