As I stated in the first commercial leases blog, I started this out as a quick breakdown of some basic Tenants’ Rights in Commercial Leases. It quickly became obvious that there was too much to condense into one blog. In light of the ongoing COVID pandemic, things have changed dramatically with the way new language is being written into leases as well as the language being interpreted to reflect COVID.
Here are some other key terms you need to pay attention to in a lease:
Holdover Clause – A lease clause requiring that if the tenant stays beyond the end of the lease without notice, the Landlord then has the right to increase the rental rate by a stipulated amount. I have seen this as low as 110% of the previous month’s rent. However, I have also seen tenants that have signed commercial leases with as high as 200% of the previous month’s rent. This is meant as a deterrent to not informing your landlord of your intentions and the reason why it is typically dramatically higher than exercising an option to renew.
Termination Right – this is as simple as it sounds in that a tenant has the right to terminate the lease. It is a lot more common than you would think. Typically, this happens with national tenants with strong credit. They may be taking a gamble in a new market and want the right to terminate. There is typically a termination penalty that can include one or more commissions, tenant improvement money spent, and some sort of penalty fee.
Sale or Foreclosure of Property – I put this in here as it may seem obvious to most but not to all. If you have a “valid” lease with the property your lease stays with the property in the event of a sale. In the event of a foreclosure, there could be instances in which the lease could be terminated. There are a number of factors depending on what came first the mortgage or the lease, whether there was an SNDA (Subordination, Non-Disturbance, and Attornment) Agreement signed, and other factors determined by the state the property/lease is located. In most instances, the lender is typically agreeable to honor the commercial leases.
Relocation Rights – this gives the landlord the right to relocate a tenant within the building. While these are not uncommon to find, they are uncommon to see exercised. The biggest reason is the cost of moving said tenant falls on the landlord. The cost of building out the existing tenant’s space again and moving all their FF&E into the new unit typically will outweigh the financial gain in accommodating the new tenant. However, this clause does allow the landlords the flexibility to do so.
Force Majeure – is a French term that literally means “superior force.” Until the most recent events of the COVID pandemic, this was typically defined as events like acts of God (e.g., earthquake, tornado, or flood), terrorism, or war. COVID could possibly be defined as within this clause. The interpretation could be applicable especially if the force majeure clause contains a “catch-all” statement. Even without it, the clause could apply to certain obligations between the parties.
We are hearing of new COVID language being inserted into the lease outside of the Force Majeure clauses. Some examples are tenants having their rents reduced to ½ rent or even fully abated rent. In some instances, there are outright termination rights for the tenant if the business is restricted from opening for a certain period of time. Making the wrong decision or agreeing to a “bad deal” in your lease can be the difference between having a successful business or having to file for bankruptcy. Now more than ever it is important to have a team of professional advisors on your side advising you on your next lease.
Aaron McDermott, CCIM, LEED GA
Latitude Commercial provides commercial real estate services such as purchasing, leasing, landlord representation, tenant representation, and property management throughout Northwest Indiana and the Chicago Suburbs. To find out how we can help you, call us today at (219) 864-0200.