on April 19, 2016
We recently posted articles about rental provisions and the interplay of the parties in a commercial lease setting. This week, we address common issues involving the description and usage of a commercial space.
Commonly overlooked, but critically important to both tenants and landlords, are commercial lease provisions pertaining to the description of the premises, the condition of the premises and who must maintain it, and how the premises may be used. Depending on the intended use and the size of the commercial space, these clauses often vary greatly depending on the location of the commercial property. For example, leases in downtown Boston may restrict the use of the premises more than leases on the perimeter of Cambridge. Regardless, the landlord and tenant should always consider how the tenant plans to operate within the premises to ensure that clauses relating to the premises carefully address any issues that may arise over time.
Contents of the Premises.
All commercial leases should contain a clause that, at a minimum, identifies the space the tenant will be occupying. This clause will commonly list the street address, property identification number and sometimes a legal description. If the tenant is occupying a particular portion of the premises, a precise description of the portion of the building the tenant is leasing will also be identified. The premises clause should also set forth how the parties intend to address access to storage areas, common areas, conference rooms, parking, utility facilities, or other areas of the building for which the tenant would need access.
Condition and Maintenance of the Premises.
Typically, commercial leases will provide a description of the current condition of the premises and outline which party is responsible for maintenance and repairs throughout the duration of the lease. Maintenance clauses will commonly place most of the responsibility for repairs and maintenance on the tenant, with exceptions for “reasonable wear and tear” and structural repairs. A “prudent” or “reasonable” tenant or landlord are commonly used standards for repair and maintenance obligations; “prudent” or “reasonable” meaning the tenant or landlord is obligated to operate in a way that would be sensibly expected in similar circumstances. Maintenance standards may also include references to industry standards (e.g. BOMA), to operation manuals, or direct the tenant to follow the recommendations of a qualified contractor. The lease may also set timelines for specific maintenance tasks, which can have dramatic implications if missed.
“Repair” and “maintenance” are separate, but related, aspects of a commercial lease. “Maintenance” covers actions to avoid deterioration of the premises and its systems by taking preventative and corrective measures. Maintenance commonly includes painting, cleaning, servicing equipment, clearing drains and gutters, and replacing light bulbs. “Repair” work covers actions needed to fix a damaged portion of the premises. The tenant is commonly, and obviously, responsible to repair damage they or their agents cause, but a dispute may arise where equipment or portion of the premises wears out or is damaged without fault of any one party. It is important to carefully craft the lease provision addressing repair work in anticipation of such an event.
Landlords are commonly responsible for “reasonable wear and tear,” meaning the tenant is exempt from fixing components that wear out over the course of reasonable use, depending on the use of the premises. For example, reasonable wear and tear will vary greatly depending on whether the premises is leased for industrial use or for office use. Furthermore, coverage by the landlord is generally contingent on the tenant maintaining proper maintenance of that component. Regardless, if further damage is likely to result from the wear and tear, the tenant, and not the landlord, is responsible for repairs to prevent further damage. The landlord’s obligation to cover structural repairs will depend on the type of structure involved. Unless a structural element is specifically identified in the lease, it will commonly be considered an element which is necessary to hold the building together (e.g., walls, foundation, roof, and floor structures). Elements that are necessary only for use of the building (e.g., non-load-bearing walls, windows, and stairwells), “decorative” aspects (e.g., flooring and fixtures), and mechanical systems (e.g., HVAC and plumbing) are generally not structural and will be an obligation of the tenant to maintain or repair.
Description of Use.
Commercial leases often contain a clause setting forth the “permitted use” of the premises. Depending on the intended use, this description may be simple and straightforward, or it may involve a lengthy and detailed list of requirements and limitations.
Use descriptions may be as straightforward and simple as a clause for “general office use” where the tenant will be operating an office. Conversely, use descriptions for industrial or retail leases may need to be more detailed and commonly describe specifically how the tenant may or may not use the premises as it may be necessary to address specific issues, such as the maximum weight the floor can support, hours of operation, storage capacities, sprinkler requirements, and other stipulations that must be met to comply with local code requirements. In restaurant and other retail uses, the “permitted use” is often limited to the tenant’s business (e.g. if the tenant sells Italian food, it will only be permitted to use the premises as an Italian restaurant).
Landlords of multi-use or shopping centers commonly grant certain tenants exclusive rights to operate their particular kind of business or sell their specific product. For example, tenants who will operate a sandwich shop or a watch repair center would not want other tenants to operate a competing business. If the landlord wants to grant an exclusive right to the sandwich shop tenant or the watch repair tenant, the lease must contain a clause granting them the sole right to operate their type of business. Additionally, the leases of every other tenant in that shopping center must contain a provision prohibiting them from operating a sandwich shop or a watch repair center. As you can imagine, such provisions can become very lengthy and detailed depending on the size of the shopping center. Moreover, the landlord and tenant need to carefully consider and draft the scope of the use prohibitions. Would a jewelry store that offers repairs for its products, including watches, interfere with the watch repair shop? Could a restaurant that offers a full service menu be permitted to sell sandwiches?
Use restrictions may also exist where the Landlord has concerns over the kind of business conducted by the tenant or has an aversion to certain kinds of business activities. For example, commercial buildings owned by a college may permit tenants to open a convenience store but may want to prohibit that tenant from selling alcohol or cigarettes. Rules and regulations for how the premises may or may not be used are commonly non-negotiable for the tenant. Nevertheless, it is important to make sure the rules are attached as an exhibit to the lease to ensure the tenant is on notice of the restrictions.
The above is a simplified summary of different approaches to “premises” provisions for a commercial space. 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. Harvard Square). As such, it is critical that both landlords and tenants speak with a Boston commercial real estate attorney before executing a commercial lease.