You’ve read the first ten pages of the proposed commercial lease and are satisfied that it reflects the deal points. And then you get to the last three pages and the section titled “Miscellaneous.” Your eyes glaze over and you consider pouring that fourth cup of coffee. Or, you think, these are just “common lease clause” terms and you don’t really need to read them.
This would be a mistake. Commercial leases are important contracts that must be read thoroughly in order to be fully understood. While most people read the important contract clauses such as rent amount, term, and escalations, some people ignore the common lease clauses such as force majeure or jurisdiction. However, since these common lease clauses can and do vary, it’s also important that they are read thoroughly and understood, in addition to the rest of the contract. In this article we’ll take a closer look at 10 common lease clauses commercial and their components with examples and items to look out for.
How can you terminate the lease? How can you renew? How and when can rent be increased? While the right to do any of these may include many conditions, one will almost always be that you gave proper notice to the other party. Failure to follow the terms of the notice provision can thus deprive you of a right you would otherwise have, or subject you to an obligation you wished you did not have.
A typical notice provision will include (1) to whom and where notice must be addressed, (2) by what methods must it be sent, and (3) when notice is deemed received. Here is an example Notice provision:
“Notice. (a) Form of Notice. All notices provided for under this Lease must be in writing and addressed to the following: (i) Landlord: John Smith, ABC Company, 1234 Main Street, City, State, (ii) Tenant: Jane Smith, XYZ Company, 5678 State Street, City, State. (b) Method of Notice. Notices must be given by (i) personal delivery, (ii) a nationally recognized, next-day courier service, (iii) first-class registered or certified mail, postage prepaid. (c) Receipt of Notice. A notice will be effective upon receipt by the party to which it is given or, if mailed, upon the earlier of receipt or the fifth business day following mailing.”
Notice Clause: What To Watch For
Email: A common modification will allow for notice by email. To avoid the loss of an email to a spam filter (or simply overlooked because of the massive amount of email one receives in a day), a notice provision may also require that hard-copies of the notice be provided along with the email. Where this is the case, the section should clarify when the notice is deemed received (e.g., receipt of the email or receipt of the hard copy).
All Communications: Often a notice clause refers to “notices provided for under this Agreement,” but it may be wise to broaden the clause to include all communications between parties. While this may take a little more effort to comply with, it can reduce arguments as to what qualifies as a “notice.”
Specificity of Time: Because notices must be received by a certain date, it is important to clarify when that date ends. At the end of the business day? At midnight? What if the parties are located in different time zones? Specificity is your friend (e.g., “Notices must be received no later than 5:00 p.m. CST on [date].”)
Language: With an increasing number of commercial leases occurring between parties of different nations, it may be appropriate to state that all notices will be in a certain agreed-upon language.
2. Attorneys’ Fees
Most commercial leases include an attorneys’ fees provision that provides that where a lawsuit is brought relating to the lease, the party that prevails in court may recover its attorneys’ fees from the losing party. In the absence of such a clause, the general rule will apply, meaning that each party will bear its own litigation costs, win or lose. Here is an example attorneys’ fees provision:
“If either Party brings legal action to enforce its rights under this Lease, the prevailing party will be entitled to recover its expenses, including reasonable attorneys’ fees, incurred in connection with the action.”
Attorneys’ Fees Clause: What to Watch For
What Suits are Subject to the Clause: This clause can be written to cover all or only specific types of suits. For example, does the clause state fees are recoverable for “breaches” of the lease, or all claims “related to” or “arising from” the lease. The broader language could include non-contract based claims such as fraud.
Do Both Parties Have the Right: Although generally leases with an attorneys’ fees provision will grant each party the right to recover litigation costs if it prevails, some leases may allow only the landlord to recover its fees.
What Kind of Suits are Likely: What kinds of claims are you most likely to make, and for what amounts? If the amount of potential recoveries is small, and thus less than potential attorneys’ fees, then in the absence of a prevailing party clause the other party may simply ignore the claim, believing you won’t sue for less than your costs. Accordingly, if small damage claims are likely, a prevailing party clause would be beneficial.
What Costs are Covered: Many clauses grant not only attorneys’ fees to the prevailing party, but all litigation costs, expenses, court fees, etc. Additionally, one should check to see if the clause relates only to litigation, or if it also applies to other dispute resolution processes (e.g., arbitration, mediation).
3. Merger/Entire Agreement
Right before you sign the lease you ask the other party to confirm an email they sent that morning, “you’re paying for all HVAC repairs, right?” They agree. Or, you hand them a piece of paper stating that they’re responsible for these costs, they agree and place the paper in their briefcase. The lease is then signed, the HVAC dies, and you look to them to fix it. Must they? Maybe. Maybe not. Look at the lease. If the lease included a merger clause (also called an entire agreement or integration clause), and if the lease states that you are responsible for such repairs, then that conversation, that email, and that briefcased piece of paper may not help.
The merger clause provides that all agreements, representations, warranties, etc. regarding the lease are set forth within the “four corners” of the documents. Any terms outside of the lease are of no force or effect. Put simply, the words in the lease overrule any other agreements you think you had.
The purpose of the clause is to ensure that all of the agreements between parties are contained in one place, and give certainty to the terms of a contract. An example clause is as follows:
“This Lease and exhibits attached hereto constitute the entire agreement between the parties concerning the subject matter of the Lease. All prior agreements, discussions and representations are merged herein. There are no agreements, discussions or representations, express or implied, between the parties except those expressly set forth in this Lease.”
Merger Clause: What to Watch For
Multiple Agreements: One common issue is where parties have multiple agreements relating to the same subject matter. Where this clause appears, it may have the unintended consequence of ignoring or conflicting with some of the terms of the prior agreements. For example, where a lease is in place, a new issue arises, and a separate agreement relating to the property is executed with this clause, will a court recognize terms in the lease? Maybe, maybe not. To avoid this issue, prior agreements can be referred to in, and attached as exhibits to, the new agreement.
Attach Everything: Because the merger clause means all agreements outside the lease are unenforceable, the most important practice is to make sure every agreement, whether it established in an email, conversation, or a separate document, is included in the body of the lease or incorporated as an exhibit.
4. Choice of Law/Governing Law
A choice of law provision establishes what law will be used to interpret the lease (e.g., the laws of the State of New York). Because laws vary from state to state (or country to country), this gives the parties clarity as to how the lease will be constructed, and how it is likely to be interpreted. Here is a sample choice of law provision:
“The provisions of this Agreement shall be governed by and construed and enforced in accordance with the laws of the State of __________.”
Choice of Law/Governing Law Clause: What to Watch For
Know the State Law: Not every state interprets leases the same way. There are different presumptions, standards of review, and calculations and limitations on damages. So understanding how your lease would be interpreted under the chosen law will help you not only assess the risks under that law, but also understand how to write the lease to minimize those risks.
Many corporations elect to use Delaware law in their contracts’ choice of law clause. While there are a number of reasons for this (the State regularly updates its corporate laws for clarity, and has a special court for corporate law issues), one of the primary benefits is that Delaware’s laws have been well-parsed, removing some uncertainty as to how a dispute will be resolved. Of course, selecting Delaware may not be the right fit for your lease, and some courts may require a connection to the state before allowing the choice (e.g., if one of the parties is incorporated in Delaware), but it is a good example of companies understanding the importance of which law will govern an agreement.
5. Jurisdiction/Forum Selection
The jurisdiction (or forum) selection clause stipulates where suits relating to the lease must be brought. Selecting a single forum reduces the time and cost that would otherwise be spent arguing over where an action should be filed, as well as preventing two simultaneous actions in different jurisdictions. A simple forum choice clause is as follows:
“The Parties agree that all actions or proceedings arising in connection with this Lease shall be tried and litigated exclusively in the state courts located in the County of __________, State of __________, and that each Party is and shall continue to be (i) subject to the jurisdiction of the state courts in the County of __________, State of __________, and (ii) subject to service of process in the County of __________, State of __________.”
Jurisdiction/Forum Selection Clause: What to Watch For
What Suits are Subject to Clause: The above language requires that “all actions or proceedings arising in connection” with the agreement must be litigated in the chosen forum. However, as with the attorneys’ fees clause, some leases will use less encompassing language, such as “actions regarding the breach of the Lease.” This narrower language could then allow a non-breach actions (e.g., fraud), to be brought in a different jurisdiction.
What are the Costs: If you agree to forum in a state other than your own, be aware of the practical costs that will arise if litigation occurs. You may have to find local counsel who is familiar with the state’s laws and local courts. And of course, consider the time and cost of traveling out-of-state for what could be an extended period of time.
6. Force Majeure
A force majeure clause (meaning “superior force”) provides that a party is relieved of its obligation to perform a certain act when it is prevented from doing so by a circumstance beyond its control. A typical force majeure clause provides:
“In the event that either Party is delayed or prevented from the performance of any act by reason of strikes, lockouts, unavailability of materials, failure of power, restrictive governmental laws or regulations, riots, insurrections, war or other reason beyond its control, then performance of such act shall be excused for the period of the delay and the period for the performance of such act shall be extended for a period equivalent to the period of such delay.”
Force Majeure Clause: What to Watch For
Are All Obligations Subject to Force Majeure: A party may want to carve out some lease obligations from the force majeure clause, meaning that these duties must be performed regardless of external forces. One common carve-out is a tenant’s obligation to pay rent.
What Duty is Required if a Delay Occurs: Even when an unforeseeable event prevents or delays a party from timely performance, it should not simply throw up its hands if there is some way mitigate the delay. Some courts may require that the party made reasonable efforts to perform its duty despite the event. For example, if there is a material or labor shortage in the area preventing a timely build-out, the party may have to look to other areas to see if similarly-priced options are available.
In leases dealing with construction, one should pay special attention to the force majeure language regarding labor and materials to ensure it is not to broad or narrow for their interests.
Catch-All: Many clauses will list numerous specific events that will qualify as a force majeure, and then end the list with a catch-all phrase to the effect of “and all other unforeseeable events beyond the Parties’ control.” Because some courts have held that where there is a specific list followed by a catch-all, the catch-all will not be enforced. This does not mean a catch-all shouldn’t be used, but rather reinforces the need to make sure the clause reflects the specific events you would want to excuse timely performance.
7. Definition of Premises
The definition of the leased premises not only identifies where the tenant will conduct its business, but may also be used to determine tenant costs under the lease. Understanding the precise boundaries and dimensions of the premises can reduce confusion and unnecessary litigation. The following is a sample boundary description:
“The Premises, located at __________, and legally described on Exhibit __________, consists of __________ square feet, calculated by measuring: (i) from and to the interior midline of the interior walls, and (ii) from the ceiling tiles to the top of the slab, the perimeter boundary of which is outlined on Exhibit __________. The Premises shall not include the exterior walls or roof of the Building.”
Definition of Premises Clause: What to Watch For
Approximations: Because the lease will likely tie certain tenant costs to the square footage of the premises, the lease should state a specific square footage verified and agreed to by both parties.
Common Areas: If the tenant will be leasing or have the right to use common areas, interior or exterior, these areas, and what rights and obligations the tenant has to them, should be included in the definition of the premises. For example, if the tenant has a duty to repair carpeting in the premises, does that include carpeting in common areas.
CAM: Many CAM charges will be based on the tenant’s proportionate square footage of the total leasable area. Accordingly, the parties will want to establish that other tenants’ premises within the total project area are measured in the same way.
8. Dispute Resolution
Disagreements happen, and this provision outlines the steps each party must take to resolve the disagreement. A common progression (referred to as a multi-tiered dispute resolution clause) is (1) informal negotiation, (2) mediation, (3) arbitration, and then (4) litigation. The benefits of such a provision is that if the first steps can resolve the issue, it will reduce the time and cost involved in a lawsuit, and hopefully allow the parties to maintain a cordial commercial relationship. The following is a sample clause:
“Any dispute relating to the Agreement which cannot be resolved by negotiation between the parties within __________ days of either party giving notice to the other party that a dispute has arisen shall be submitted to mediation pursuant to the mediation rules of the __________, and failing settlement of that dispute by mediation within __________ days thereafter, the dispute shall be submitted by any party for final resolution by arbitration by __________ arbitrator in accordance with the arbitration rules of __________, and failing settlement of that dispute within __________ days thereafter, the dispute shall be submitted by any party for final resolution by the courts of __________ County, __________ State.”
Dispute Resolution Clause: What to Watch For
Time-Sensitive Issues: Because some disputes will need a fairly quick resolution, one of the benefits of this approach is that a party has options other than filing suit. Litigation can be a very slow process, and thus not effective where time is critical.
Abuse by Delay: Although the tiering can allow for quick resolution, where one party has no intention of changing its position absent litigation, and it believes that it will benefit from a delayed resolution, a poorly drafted clause can allow them to drag the other party through all the steps. The best way to avoid this issue is simply to be very clear in when one of the tiers begins (e.g., within five days of notice), when it ends (e.g., within 30 days of the mediation beginning), and what time is allowed for each step.
Optional or Mandatory: The clause should specify whether the steps are optional or mandatory. If you agree that they are mandatory, then understand that suit can’t be brought until the other steps are taken first, otherwise a court may be without jurisdiction to hear your claim.
9. Tenant Self-Help
Because landlords may not always perform their duties as quickly as possible, a self-help provision allows a tenant to take corrective measures in an emergency. A landlord may not want to include this provision because it risks the tenant making repairs instead of the landlord, and gives the tenant control over the costs. A sample self-help provision is as follows:
If Landlord shall default in the performance of any agreement of this Lease, and Landlord shall not cure such default within thirty (30) days after notice from Tenant, Tenant may, at its option, at any time thereafter cure such default, and Landlord agrees to reimburse Tenant for any amount paid by Tenant in so doing. If Landlord fails to reimburse Tenant for any amount paid by Tenant, this amount may be deducted by Tenant from the next or any succeeding payments of Rent.
Self-Help Clause: What to Watch For
Can Tenant Still Sue: The above provision states that the tenant can offset rent due if the landlord doesn’t reimburse them. However, simply getting paid back for repairs may not make the tenant whole. For example, where the landlord is responsible for access to tenant’s store, the access is damaged and preventing customers from patronizing the store, and the tenant is forced to repair the damage, a reimbursement for repair will not reflect lost sales. Accordingly, a tenant will want to ensure that self-help doesn’t waive their right to pursue damages for breach.
When Does Tenant Get Reimbursed, and for What: Again, specificity avoids conflict. The provision should state not only that the landlord will reimburse the tenant for its self-help costs, but also (i) specify what costs are reimbursable, (ii) when repayment must occur, (iii) and if a penalty or interest charge should arise if timely payment is not made.
What if There is no Self-Help Provision: If tenant doesn’t have an express right to self-help, and does so anyway, it risks (among other things) not being able to recover its costs and opening itself up to a claim for improper repair from the landlord.
10. Parties/Signature Blocks
The parties to a lease are typically set forth at the beginning of the lease, and then again in the signature blocks. The named parties are the ones responsible for performing the duties outlined in the lease, and the parties against whom recovery can be sought. Accordingly, it is critical to ensure the right parties are named.
Parties/Signature Blocks: What to Watch For
Is the Right Company Named: This is mostly self-explanatory, other than to note that where companies are often divided into many entities, one should verify that the correct entity is named in the lease. Of course, it doesn’t hurt to verify that the named landlord actually owns the property being leased.
Authorized Signatories: Where a business entity is the responsible party, the individual signing the lease must be authorized to bind the company. This may require a formal act of the company. Further, to avoid personally binding the person signing on behalf of the company, the signature block should include the entity’s name, state of formation, and the signator’s title. Some states have mandated the proper form for signature blocks by statute.
What should be clear from this article is that there are no true “boilerplate” provisions. Rather, there are concepts (e.g., attorneys’ fees) common to many leases, but what the parties agree to regarding these concepts can vary widely depending on the language used. Accordingly, it is vital that these “miscellaneous” provisions be read carefully, and where necessary, modified with the help of an attorney to meet the parties’ expectations. As always, this article should not be taken as legal advice and on all legal matters you should consult with a qualified real estate attorney.