These 10 common problem areas can easily be avoided by paying attention to details.
It's a dangerous world out there. We cannot eliminate all risks. But a well-drafted lease can minimize risk, and a poorly drafted lease can unnecessarily create serious problems for either a landlord or a tenant. Following are instances in which a serious problem would not exist but for a poorly drafted lease.
1. Unexpected Operating Expenses
Leases often require a tenant to pay its pro rata share of "operating expenses." Such clauses are often drafted broadly to include all costs of owning and operating the property and may obligate a tenant to pay a share of significant cost items, such as environmental cleanup costs, insurance deductibles upon damage to the property, and the cost of capital expenditures to improve the property. Regardless of whether the tenant's pro rata share is a few percentage points or 50 percent or more, a tenant will not want to share in these costs.
2. Compliance With Law
Most leases require the tenant to comply with applicable law. Some are phrased in such a manner that they obligate the tenant to make improvements to the premises required by applicable law. More than one tenant has been shocked to discover that it is obligated to make expensive capital improvements, such as seismic upgrades or compliance with the Americans with Disabilities Act.
3. Release of Landlord Upon Sale
Many landlords assume that upon sale of the property they are relieved of all obligations under the lease. This is not the case unless the lease expressly provides to that effect. If the provision is not included, the property is sold, and the buyer fails to perform an obligation required by the lease, such as to construct tenant improvements, the tenant will have recourse against the original landlord.
4. Condition of Premises Upon Surrender
Leases generally provide that the tenant must surrender the premises in good condition at the end of the lease term. Some leases provide that the premises must be restored to original condition. Such a clause requires the tenant to remove all improvements that were made by or for the tenant and return the premises to its original condition. This could be an extremely expensive endeavor.
5. Waiver of Subrogation
Every lease should include a mutual waiver of subrogation rights with respect to the insurers. If an appropriate waiver is not included, the insurer of the building, upon paying the landlord for the value of the damage suffered in a fire, is "subrogated" to the landlord's rights and may assert any claim that the landlord may have arising from the fire. If the fire was caused by the tenant's negligence, the insurer can sue the tenant to recover all that it paid to the landlord. Conversely, if an insurer of the tenant's personal property pays for a loss when the loss was caused by the landlord's negligence, the insurer may recover from the landlord the amounts that it paid to the tenant.
Stay tuned for Part II. A version of this article appeared in Oregon's Daily Journal of Commerce in 2015.