Checklist for Reviewing or Drafting Commercial Leases

• Publication year: 1992
• Pages: 7
• Citation: Vol. 5 No. 2 Pg. 7

Checklist For Reviewing or Drafting Commercial Leases Vol. 5 No. 2 Pg. 7 Utah Bar Journal February, 1992

Gregory S. Bell, J.

In Section I, this article discusses important issues in negotiating and drafting a typical commercial occupancy lease. Section II discusses issues which will concern a lender in a project developed on ground subject to an unsubordinated ground lease.

Section I - Commercial Leases

1. LEASE DATE. The date of the lease can become very important in determining the commencement of the term, commencement of rent, the commencement of occupancy, the timing of rights to extend, and the date of expiration of the lease. It is good practice to list an execution date and a date on which the Lease will become effective, if different from the execution date. Consider carefully the interrelationship of the various effective dates in the lease: for example, a tenant will usually be distressed to find that its rent commences before its right of occupancy.

2. PARTIES TO THE LEASE. Non lawyers often brush over the actual identity of the parties, and sometimes, in form leases, even omit the name of the parties. Some corporate officers have signed leases without a clear recitation of their capacity and have been held personally liable for the performance of the lease. This is such a basic part of any lease that false assumptions are sometimes made and this most essential element of the lease is not specified.

It should go without saying that those involved with a credit lease must be certain that the tenant is actually the party whose credit is being relied upon, and not a subsidiary or sister corporation with lesser credit.

A common problem which is discovered in connection with a sale or financing of a property is that the lessor under the occupancy leases will differ from the owner of the property. Of course, this raises a question as to the validity of the lease if the landlord did not own the leased premises at the date of the lease.

In connection with a sale of the property, all leases should be assigned to the buyer. The tenants should be notified of the assignment of their leases to the new landlord, and it is recommended that the tenants acknowledge the assignment and recognize the new landlord as the holder of the landlord's interest under their lease.

3. GUARANTY. If a lease is guaranteed, care should be taken to see that the guaranty is broad enough to allow for future amendments to the lease to avoid the guarantor's approval of future amendments, although most lenders require such approval anyway. Lenders often require corporate resolutions evidencing the corporate authorization for the guarantor to enter into the guaranty. The guarantor should acknowledge subsequent amendments or assignments of the lease and should re-affirm the effectiveness of the guaranty in light of the amendment or assignment of the lease.

4. EXECUTION. It also should go without saying that a lease should be executed; however, unsigned copies of leases are often used for review purposes, and actual execution of the lease if not later verified. Insist on working with originals or copies of original signed leases.

5. DEFINITION OF PREMISES PROPER.

The leased premises must be carefully defined. A metes and bounds legal description is best. For an existing building, a cross-hatched depiction of the premises on a site plan or building floor plan is acceptable within limits. However, if the lease or a lease memorandum is to be recorded, a legal description must be attached. The cross-hatching or outline may be insufficient if the building in which the premises are located is not existing; rather it is suggested that a site plan be used which is prepared by a surveyor showing the surveyed metes and bounds description of the demised premises together with the proposed building limit outlines describing the premises to be built.

6. APPURTENANCES TO PREMISES. There are many rights and benefits which make up part of the tenant's leasehold estate which may not be literally included in the description of the demised premises.

(a) Access and Amenities. Every tenant obviously needs access to and from the leased premises to public streets and parking lots. In multi-tenant properties, this is most typically handled by the lease granting the tenant a nonexclusive easement or license to the use of common drives, parking, walks, lobbies, corridors, elevators, hallways and rest rooms. Such easements or licenses will be part of the leasehold estate and terminate upon termination of the lease. If the tenant expects access to other amenities on landlord's property which are not included in the leased premises, such as lunch rooms, equipment rooms, roof equipment, etc., these rights must be described in the lease. Moreover, the lease should specify to whom and for whose benefit these easements or licenses are extended: tenant, tenant's employees, tenant's invitees (suppliers, etc.) and tenant's customers.

(b) Common Areas. The lease should specify the common areas to which tenant, its employees and invitees will have access. If there are to be restrictions on employee parking locations or if there are to be reserved, assigned or restricted parking stalls, the lease should so state.

(c) Signs. The location, maintenance and appearance of signs should be a carefully detailed element of any lease where the tenant will want to have one or more signs. Landlords will want the right to approve the design, lighting, height and location of all exterior signs.

7. MEASUREMENT OF RENTABLE FOOTAGE.

Obviously, the square footage on which the rent is calculated is an important fact. Thus the method of measurement is critical. Merely leaving the measurement to an architect may postpone the problem. By far the best solution is to set forth the agreed square footage in the lease. However, in to-be-built situations, this may sometimes be impossible. It is the more critical, therefore, to describe the method by which the square footage will be calculated when the premises are completed.

8. RIGHT OF EXPANSION. Many tenants will seek to have a right of expansion of their premises, and landlords will want to keep a long-term tenant happy and committed to the premises. However, this can be very difficult for the landlord to accommodate. First, the right to expand into existing space restricts the leasability of the expansion space. For instance, if the tenant has the right to expand at any tim6, the expansion space can only be leased on a month to month term. Second, if the expansion space is not yet constructed, the problem of determining rents vis-a-vis construction costs must be confronted. Moreover, the landlord will most likely need to finance the cost of the expansion construction. It is nearly impossible to have the...