Chapter 10 Commercial Leases Introduction Commercial leases have a business purpose Parties have greater expertise and equal bargaining strength Limited statutory intrusion into freedom to contract However courts becoming more proactive intrusive Commercial leases very complex Much greater amounts of involved Much longer terms more possible events condemnation compliance with new laws assignment sublet etc Often customized tenant finishes Greater demands for services utilities transportation etc Much more complicated negotiated terms Gross vs NNN Permitted exclusive uses more complicated Complex issues related to operation of the property with multiple tenants of varied uses and impacts Slide 2 Ch 10 Slide 2 Site selection and representations Many factors in site selection for commercial leases Tenant rep brokers specialize in assisting tenants Retail tenants often have full time in house departments What if a landlord or its agent misrepresents the facts Fraud knowing misrepresentation cf negligent misrepresentation no reasonable basis reliance foreseeable and reasonable damages foreseeable E g landlord s agent s representations re tenant mix Leases often include savings clauses disclaiming reliance on representations not expressly in the lease itself or exculpatory clauses limiting landlord liability i e allocating risk responsibility by contract agreement Courts may may not enforce savings exculpatory clauses far more Slide 3 likely in commercial vs residential leases Ch 10 Slide 3 Puro v Neil Enterprises Facts Landlord s manager agent and tenant handbook represented state of the art security system tenants robbed tenants sued for misrepresentation lease handbook had exculpatory clauses including theft and made tenants responsible for insurance TC summary judgment for landlord Issues Was exculpatory clause enforceable Holding rationale Yes but questions of fact as to misrepresentation intentional fraud or negligent reversed remanded for trial Rule of law While exculpatory clauses in commercial leases may be enforceable they do not bar claims for fraud or negligent misrepresentation This is generally true in contracting parties seldom evade liability for either intentional or negligent acts omissions despite attempts in contract Slide 4 Ch 10 Slide 4 Commercial lease terms Pre leasing before completion of construction Requirement for landlord s financing cf spec Requires detailed description of the Premises Plans and specifications Commencement date issues Completion of entire project or only some portion parking and access amenities signage etc Anchor tenants open or not Seasonal businesses timing Duty to open for business vs simply pay rent Damages Slide 5 Ch 10 Slide 5 Condition of leased premises Traditionally no landlord duty to maintain repair no IWH Express lease provisions terms all important Even breach of express duty doesn t typically permit self help offset of rents cash flows sacred to commercial properties source or debt repayment doctrine of independent covenants Richard Barton Ent s v Tsern Facts LL failed express duty to repair maintain freight elevator Issues Did LL failure relieve tenant of obligation to pay rent Holding rationale Yes duty to pay rent and duty to maintain elevator are mutually dependent covenants Rule of law Significant breach of express covenant by the landlord may suspend tenant s obligation to pay rent equal to loss of value without requiring abandonment no constructive eviction NOTE minority rule but trending even implied duty being imposed Implied Warranty of Suitability as commercial equivalent to IWH Slide 6 Ch 10 Slide 6 Bijan v St Regis Facts Renovation of hotel blocked access tenant claimed actual partial eviction thereby suspending all rent however lease included savings clause giving landlord the right to make repairs etc w out rent abatement Issues Was the closure of access an eviction Competing clauses right to access vs right to make repairs Tenant implied covenant of good faith and fair dealing limits savings clause prohibits landlord s actions Holding rationale No eviction lease permitted repairs inside the premises in addition to outside greater includes lesser Rule of law Express savings clause prohibits claim for damages for actions contemplated by savings clause NOTE This looks more like the norm freedom to allocate risks and responsibilities per lease commercial tenants can t assume anything Slide 7 Ch 10 Slide 7 Rent Gross vs net rents Gross rent tenant pays base rent only landlord s rent is gross and landlord pays expenses Triple net rent NNN tenant pays base rent property taxes N property casualty insurance N common area expenses CAM and all other operating capital expenses N i e landlord s rent ne t of all expenses Nearly all commercial leases some negotiated middle ground E g tenant pays taxes insurance and CAM not capital expenses Calculation of net rents complicated What s included in third N as expenses negotiated Expense stop landlord or cap tenant Allocation and tenant s pro rata share rentable vs rented Est d monthly payment and annual reconciliation audit who pays Slide 8 Ch 10 Slide 8 Percentage rent Circle K Corp v Collins Facts Percentage rent 2 of gross sales minimum rent Natural break point rents paid once sales x min rent Issues Are state lottery sales commissions gross sales How did lease define gross sales Don t gross sales always include cost of goods Holding rationale Only commissions gross sales sale of tickets similar to taxes collected for and paid to state Rule of law Look to express terms parties intentions to decide how to treat unforeseen events What happens if the tenant sublets What are landlord s rights vis vis the sub tenant Whose gross sales What if sublease has its own rent Sublet rents always tricky e g can sub landlord profit Slide 9 Ch 10 Slide 9 Improvements alterations fixtures Tenant improvements TI s customized finishes Commercial leases very different from residential Landlord provides core and shell vanilla shell etc Plus tenant improvement allowance lump sum or sf Negotiable e g financed amortized into base rent loan Tenant alterations Extent material w approval mechanical structural vs nonmaterial w out approval cosmetic unless visible outside Tenant fixtures whose property responsibility Review fixtures trade fixtures Be very specific in lease express intent Need to address rights responsibilities during maintenance taxes insurance etc and upon expiration of lease stay or