Over the next several months, we will be breaking down many of the standard provisions in a Massachusetts commercial lease. Although every commercial lease is unique, many similar issues arise in every lease regardless of whether the space is used for office, retail, restaurant, laboratory or industrial. As commercial real estate values continue to soar in Massachusetts – particularly Boston and Cambridge – the language in commercial leasing becomes all the more critical for both tenants and landlords. Before exploring the intricacies of a particular lease, the first step is to understand the parties involved.
Who Are the Parties?
Today, it is rare to see a commercial lease between individuals. Instead, both landlords and tenants create legal entities (e.g. corporations, limited liability companies and trusts) for the purpose of executing a lease. From a tenant’s perspective, it is imperative for the tenant to confirm that the landlord owns or has the right to lease the property, is a properly-formed entity and registered to do business in Massachusetts, and has sufficient assets and resources to uphold its end of the lease (e.g. maintain the building). Similarly, a landlord must ensure that the tenant is a properly-formed entity registered to do business in Massachusetts and has assets sufficient to uphold its end of the lease (e.g. pay rent).
The persons signing on behalf of the respective entities must have the power to do so. This should be formalized in of corporate/company resolution stating that the person has the ability and authority to execute the lease on behalf of the entity. Many times, parties are reluctant to ask for such proof, particularly when dealing with larger entities (it may seem odd to ask for proof that Mark Zuckerberg can sign on behalf of Facebook). Nevertheless, for both parties’ protection, they should insist upon documentation showing that the person signing the lease has the actual authority to bind the entity.
If a landlord is skeptical about the tenant’s ability to perform the lease, or has concerns that the tenant is uncollectible, a landlord may ask a tenant to provide a personal guarantee to a lease. In short, this means that if the tenant breaches the lease, the landlord can look to an individual for recovery. Landlords, of course, like personal guarantees because of the added protection. Tenants, as well as their cautious real estate attorneys, are rightfully anxious of personal guarantees. After all, the purpose of creating a legal entity is to avoid personal liability of owners. From either perspective, a personal guarantee may be a walk-away issue for either party.
If you are a tenant, the decision to provide a personal guarantee is both a personal and business decision. Some landlord will refuse to move forward without one. However, there are ways to limit the exposure of a personal guarantee. First, the parties can agree to limit the scope of a personal guarantee. For example, they could agree that the personal guarantor is only guaranteeing a certain dollar amount of the lease. Similarly, the parties could agree that the personal guarantee only applies for a certain amount of time (e.g. if the tenant properly performs for two years, the personal guarantee dissolves). The second approach to limiting the personal guarantee is to offer up something else of value like a larger security deposit or a lien interest in the tenant’s personal property. Both of these subjects will be discussed in greater depth in a later article.
The above is a simplified summary of the entities in a commercial lease transaction. Each situation is different, and often different locations will have differing “standards” for how leases are structured. For example, in the Boston area, the standard provisions for commercial leases in Cambridge often differ from those in Boston. In fact, the standards in different neighborhoods in Cambridge (e.g. Kendall Square) often deviate from other neighborhoods (e.g. Inman Square). As such, it is critical that both landlords and tenants speak with a Massachusetts commercial real estate attorney before executing a commercial lease.