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Poorly Drafted Leases Can Cause Headaches for Tenants and Landlords (Part II of II)



Continued from Part I . . .

These 10 common problem areas can easily be avoided by paying attention to details.

6. Outside the Premises

A tenant should think beyond the four walls of the premises and consider whether it needs to use any amenities, such as parking and common-area conference rooms. Unless the lease directly grants the tenant the right to use such facilities, the tenant may find that they are unavailable when the landlord decides to convert the facilities to a different use.

7. Discount Rate

Many leases provide that upon a tenant default, the landlord may recover all the rent for the entire lease term, discounted to its present value at a specified rate. Many tenants and even some landlords confuse this discount rate with an interest rate. In fact, the lower the discount rate, the more the tenant will owe. A tenant should always negotiate for the highest discount rate possible, and a landlord should always negotiate for the lowest discount rate possible.

8. Tax-Exempt Tenant

A 501(c)(3) tax-exempt organization may sign a lease that requires the tenant to pay the taxes, believing it will be exempt from paying the taxes. However, under Oregon law, the county tax assessor will reject the application for exemption unless the lease expressly states that the rent has been set at a level to take into account that the tenant is a tax-exempt entity and that all the benefits of the property being exempt from taxation will inure solely to the tenant.

9. Casualty Damage to Tenant Improvements

Tenant improvements can often be very expensive, particularly in high-rise offices. Yet leases commonly fail to adequately address which party has the responsibility to insure the tenant improvements and to rebuild them upon casualty loss. A lease may provide that the landlord is responsible to rebuild the premises following casualty loss, which by its terms includes the tenant improvements. But the insurance the landlord carries may not cover the tenant improvements. Conversely, a tenant may assume that the lease requires the landlord to rebuild the tenant improvements and upon that assumption not obtain its own insurance, when in fact the lease does not so require.

10. Subordination and Non-Disturbance

Many leases provide that the lease is subordinate to any existing or future mortgage against the premises. From the tenant's perspective, this clause should always be coupled with a "non-disturbance" clause, which provides that so long as the tenant performs under the lease, the tenant's possession will not be disturbed. Without a non-disturbance clause, if the landlord defaults on its loan and the lender becomes the owner of the premises, the lender will have the ability to terminate the lease and evict the tenant. It will be able to use this right to extract a substantial increase in rental.

Both landlords and tenants can avoid danger by using an appropriately drafted lease. Money and time spent with an experienced real estate lawyer before signing a lease is money and time well spent.

A version of this article appeared in Oregon’s Daily Journal of Commerce in 2015.

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