THINGS TO CONSIDER IN NEGOTIATING A COMMERCIAL LEASE
by James A. Burton
Many of our clients get involved on one side or another of a commercial lease at some point in their business lives. And while they may be aware that it is an economically important transaction, not too many stop to think how easily a lease can turn, for better or worse, into one of their biggest dollar commitments. For example, a ten-year lease on a moderate size space (6,000 square feet) at a base rent of $17 per square foot works out to be a commitment of more than $1 million. Factor in escalations, operating cost passthroughs and other additional rent, and that already significant figure can swell further.
In Louisiana, a valid lease requires only the consent of the parties, an identification of the leased premises, and agreement as to the rent. It doesn’t even have to be in writing. Of course, it would be foolish to enter into such an important transaction without a well-drafted written lease agreement.
An initial checklist of provisions typically found in a commercial lease includes at least the following issues:
- Consent and Parties. The lease agreement should include a clear identification of the landlord, tenant, and any other parties (such as sureties).
- Description of the Leased Premises. This need not be a full legal description, but it does need to be adequate to identify clearly the leased premises. Often reference will be made to an attached exhibit containing a floor plan.
- Price. This includes all of the economic elements of the lease: rent and additional rent, including base rent, any applicable breakdown between capital and operating portions of the rent; adjustments, escalations and additional rent; grace periods; notice, penalties and interest, if the rent is paid late; offsets or deductions, and escalations.
- Term. The term of the lease, including the effective date of lease commencement; the termination date; and any extensions and options.
- Security Deposit. This includes the amount; procedure to return; and whether interest is paid on the deposit.
- Use. This section should state the valid uses allowed.
- Services and Utilities. This consists of the responsibility for providing and paying; specifications; limitations and exclusions; and rights and remedies for interruption.
- Tenant Improvements. Work allowances and tenant improvement concessions, including details and schedules; title to improvements; procedures for payment and landlord requirements as to architect and contractor; and completion, certificates of occupancy and punch list conditions.
- Construction. This includes especially payment; responsibilities of the various parties; and the effect which construction delays have on the lease commencement date.
- Repairs, Maintenance and Restoration. This consists of the basic obligations of the parties to make repairs and maintain the premises; and ownership of any improvements upon termination of the lease.
- Alterations. This includes the tenant’s right to make alterations, and the landlord’s rights with respect to tenant alterations.
- Representations and Warranties. Also included are any other special covenants of the landlord and tenant.
- Compliance with Law. Provisions obligating the parties to comply with all applicable laws, including often as separate sections compliance with the Americans with Disabilities Act, and all environmental laws and regulations. The environmental clause should also spell out any special conditions regarding lead, asbestos and other questionable substances in the leased premises.
- Casualty or Condemnation. The scope of the landlord’s and tenant’s rights and obligations in the event of casualty, condemnation or governmental taking of the property.
- Insurance. Insurance obligations of the parties, including amounts required, whether the other party is a named or additional insured; special coverages; and possible waiver of subrogation.
- Indemnity, Defense and Hold Harmless Provisions. A big issue here often is trying to negotiate some mutuality and even-handedness into a landlord’s form lease.
- Cancellation. Any rights of cancellation in favor of either of the parties.
- Relocation. Whether the landlord has a right to relocate the tenant; the tenant’s rights upon relocation; and the allocation of costs and expenses.
- Assignment and Subletting. Limitations on the tenant’s basic right to assign or sublease, and any allocation of profits derived from an assignment or sublease.
- Rules and Regulations. The landlord’s rules and regulations applicable to the property.
- Recordation. A tenant will want to make certain a lease is properly recorded, to protect its rights against third parties.
- Default. Default provisions, including events of default; curative action; notice; and remedies.
- Bankruptcy. Rights of landlord or tenant when the other party declares bankruptcy or becomes insolvent.
- Commissions. Liability of the parties for any brokers’ fees or commissions.
- Estoppel Certificates. Reference to any collateral agreements, including especially the tenant’s obligation to provide estoppel certificates when requested by landlord.
- Quiet Enjoyment. The tenant’s right of quiet enjoyment.
- Subordination. Subordination and non-disturbance of tenant’s right to occupy.
- Termination. Surrender of premises, including the required condition of the premises at the termination of the lease.
- Attorney’s Fees. The right of either party to collect attorney’s fees from the other.
- Force Majeure. Defining “acts of God” and their effect on the obligations of landlord and tenant.
- Applicable Law. Choice of applicable state law.
- Liens. The time to cure liens or other charges against the property.
- Landlord’s Right of Entry. Defining the landlord’s right to enter the premises for emergencies, routine repairs and operations, and to show them to prospective tenants.
- Merger. This section should integrate all prior agreements and negotiations into the written lease.
- Liability. This includes the parties’ responsibility for their negligence and/or for accidents occurring on the premises.
- Definitions. Defining terms frequently used in the lease.
- Arbitration. Any arbitration or other alternative dispute resolution provisions.
- Parking. Any provisions relative to parking or other collateral rights.
- Exhibits. Possibly including descriptions of the leased premises; plans and specifications for initial construction; the rules and regulations of the building or larger property; and any special exhibits dealing with cleaning and janitorial services, signage, and the like.
As the foregoing checklist shows, there are a great many provisions in a modern lease agreement which directly impact both the landlord’s and the tenant’s bottom lines. The economic effect of rent, escalation or other lease provisions is amplified by the relatively long term of many leases, and by the size of the leased premises. Negotiating the best terms can save a tenant (or earn for a landlord) literally hundreds of thousands of dollars over the extended term of a lease. Approaching those negotiations with care and expertise is well worth the effort and expense.
GRETNA SENIOR CENTER PRO BONO PROJECT
The New Orleans Pro Bono Project holds a meeting of its liaisons from each of the major New Orleans law firms once a year in Judge Dennis Bagneris’ courtroom. Judge Bagneris is Chief Judge of the Civil District Court for the Parish of Orleans. During last year’s meeting, a call for help was issued for assistance in staffing regular monthly clinics at the four Jefferson Parish senior citizen centers. The Pro Bono Project had agreed to provide these services for the Jefferson Council on Aging, but was having difficulty in securing sufficient commitments from its volunteers.
Discussions with the Pro Bono Project’s case manager, Hilda Jarboe, confirmed what had been my hope — that the clinics served as a source of general legal counseling for senior citizens on more or less typical “elder law” issues. Having spent many years responding to regular inquiries from elderly relatives and their friends, I thought that the clinics might be a good fit for me, while at the same time filling a pressing need for the Pro Bono Project.
At my recommendation, the firm promptly adopted the Gretna Senior Center. Since that time, John Shreves and I have staffed the clinics that are conducted on the second Tuesday of each month at that facility.
While many of the clinic’s visitors ultimately need to be referred to the Pro Bono Project for counseling on issues too extensive for treatment during the clinics, frequently we are able to respond to the individuals needs that same day or during a follow-up visit the following month. Those needs typically involve questions about the forms of wills, powers of attorney and the like.
In one particular instance, a gentleman was undergoing a medical procedure the next day. He had already secured a medical power of attorney and wanted me to review the document to “set his mind at ease” that it provided his attorney-in-fact (in that case his son) with authority to take other non-medical steps on his behalf. It did not. We were able to prepare a general power of attorney for the gentleman and his son to execute later that same day, before his procedure.
Our experiences at the Gretna Senior Center have been positive, rewarding and, we believe, useful and productive. We look forward to continuing our work there.
TOM HAMRICK NAMED PRO BONO VOLUNTEER OF THE YEAR
Tom Hamrick was recently named Pro Bono Volunteer of the Year by the New Orleans Pro Bono Project, for spearheading the firm’s effort in adopting the Gretna Senior Center as its current pro bono project and providing basic legal services on a pro bono basis to the clients of that center. As stated by the citation honoring Tom “for Distinguished Service as Pro Bono Volunteer of the Year,” “Along with the Assistance of [SPSR Partner] John Shreves, Tom has been diligent in his efforts to provide consistency and quality of service to this wonderful population.”
For Tom’s account of some of the work done at the Gretna Senior Center and the firm’s involvement, see the GRETNA SENIOR CENTER PRO BONO PROJECT story to the left.
SPS&R WELCOMES NEW ATTORNEY
SPS&R is proud to welcome attorney Betty F. Mullin to the firm.
Ms. Mullin is a graduate of Loyola University of the South (J.D. 1977) and is a member of the Louisiana State and Texas State Bar Associations. She is one of six attorneys in this city who is board certified by the Louisiana Board of Legal Specialization and the American Board of Certification as a specialist in commercial bankruptcy.
Her areas of practice are commercial litigation and transactions, creditors’ rights, bankruptcy, real estate, secured transactions, banking, construction disputes, insurance disputes, and professional malpractice litigation. Ms. Mullin has extensive experience in business litigation and in representing creditors involved in major loan transactions and related litigation. Prior to entering private practice, Ms. Mullin was an Assistant District Attorney for the City of New Orleans.
The knowledge and skills of Ms. Mullin will help SPS&R continue to serve our clients well. Welcome aboard Betty!
“SECRET SANTA”
SPS&R participated in an LSBA/LBF Community Action Program to help brighten the holidays for needy children
This past Christmas, the Louisiana State Bar Foundation’s Community Action Committee invited bar members and others associated with the legal community to help make Christmas brighter for the underprivileged children of New Orleans. A team of SPS&R staff and attorneys participated in the sixth annual Secret Santa Project.
The Project identified several agencies that serve disadvantaged children who desperately needed clothing and gifts. Participating in the project was fun and easy for SPS&R. Each participant received a child’s Christmas list and used it as a guide to purchase items for the child they were sponsoring. In early December, everyone brought his or her wrapped presents to the office. The presents for over 35 children were then dropped off to the Louisiana Bar Center, on December 10, 2002 for delivery to the children.
The Project not only provided holiday cheer for the less fortunate, but also helped to improve the image of the legal profession by developing on-going relationships with service agencies that strive to better our community.
Thanks to everyone who participated in this wonderful project!
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