Understanding Five Common Clauses in Your Commercial Lease

Whether you're a landlord or prospective tenant, understanding your commercial lease is crucial to the success of the relationship between the respective parties. In New York City, the laws regulating commercial leases are quite broad, meaning that the parties are provided a wide latitude when it comes to negotiating the lease terms and there are little to no restrictions, such as the ones commonly found in residential leases. In general, there are a wide variety of commercial lease types, each with its own nuances and diversity of contract provisions. However, despite these differences there are still large portions of most commercial leases that contain boilerplate/standard clauses that provide a sense of consistency and set expectations between the parties.

Below are some common clauses that can be found in every single commercial lease agreement. Since these provisions are so integral to the landlord/tenant relationship, it would be quite difficult to find a commercial lease without them. With a basic understanding of these provisions, you'll be a step ahead of the rest and be able to navigate your commercial lease, despite the legalese that often plagues these documents.

Permitted Use/Use Clause

The Permitted Use or Use Clause will almost always be found closer to the beginning of the commercial lease agreement as its very important that the parties establish exactly what type of business the tenant will be operating in the leased space. From the Landlord's perspective, this provision is expected to be very narrowly defined to avoid having a tenant using the space for any and all purposes. If a tenant is expected to operate a pizzeria, you can anticipate this clause to state just that and nothing more. From the tenant's perspective, they will look to have this provision defined as broadly as possible, within reason. Using the same example, the tenant might seek to have the permitted use say something more like "pizzeria and Italian restaurant serving home-cooked recipes and a variety of non-alcoholic beverages." The more detailed description will give the tenant more room to offer a variety of food options other than just pizza.

Condition of the Premises / Landlord's Work / Tenant's Work

In practically all commercial leases, the Condition of the Premises will be stated in "AS IS" condition, subject to normal wear and tear. Most landlords will not guarantee the space in any other condition. However, this is where the Landlord's work and Tenant's Work clauses come into play. The parties will certainly discuss and negotiate what is required in order for the Tenant to be able to tailor the rented space to their needs and operate their business successfully. The Landlord's work, if any, might look like patch work, ceiling repairs, floor resurfacing, etc. whereas the Tenant's Work is commonly much more involved and detailed. For example, if the previous tenant operated a clothing store, and the new tenant is looking to operate a restaurant, significant alterations, remodeling and construction will be required to bring the rented space up to par.

From the landlord's perspective, the tenant will be expected to specify any and all repairs, remodeling, etc. before signing the lease, which is often attached as an exhibit to the lease. After that, any new construction/remodeling work will need to be approved by the Landlord. From the tenant's perspective, they will want to ensure that all work to be performed is laid out in detail in the lease exhibit and that the Landlord has approved such changes.

Repairs and Maintenance Clause

While the Repairs/Maintenance Clause is quite straightforward, it is important to understand where the responsibilities lie between the parties. In some commercial leases, the tenant could be responsible for any and all repairs or maintenance to the property, no matter the cost. Whereas, in more common leases, the Landlord is responsible for major structural repairs, such as the roof, structural columns, exterior walls, sub-flooring, etc. In contrast, tenants are often responsible for any and all issues that occur within the interior walls of the rented space. This could include repairing and maintaining in good order, anything related to plumbing, water, waste, heating, air conditioning or electrical conduits, lines and equipment. From the perspective of both parties, they will both want to ensure that it's very clear who is responsible for taking care of what inside and outside the premises and that there is no confusion when it comes to dealing with these matters.

Assignment and Subleasing Clause

The Assignment and Subleasing Clauses in a commercial lease cover situations where the Tenant is seeking to transfer its lease to a third party. An assignment is the total transfer of all rights in the lease to a third party, whereas a sub-lease is a partial transfer of rights in the lease to a third party. In both scenarios the commercial tenant may still be liable for certain covenants and obligations under the lease, even after they've vacated the space. This most often is the case where the Tenant's business is failing or they are looking to sell their business and avoid breaking the commercial lease. Ninety-nine if not 100% of commercial leases will require the landlord's written consent prior to seeking an assignment or sublease, as this potentially jeopardizes the relationship and ability to have a secure tenant occupying the commercial space.

From the landlord's perspective, they will want to have the ability to vet the new potential tenant and review any assignment or sub-lease agreement, prior to approving the assignment or sub-lease request. In addition, many leases will include language that provides certain scenarios that constitute an assignment or sub-lease, such as "the transfer of ownership of the tenant that results in 50% or more of the ownership to anyone who did not previously own 50% or more constitutes an assignment," to further protect themselves from potential risk. From the tenant's perspective, they will want to ensure that there as few loopholes as possible in securing the landlord's approval to the assignment or sublease. Moreover, if possible, it is in the tenant's best interest to limit the landlord's ability to withhold their consent by including the language, "landlord's consent to approve an assignment or sub-lease, shall not be unreasonably withheld."

Default Clause

Finally, the Default Clause will set out the circumstances wherein the tenant has effectively breached the commercial lease. The most notable breach being failure to pay rent. This provision will provide the situations that allow the landlord to terminate the lease, pursue the tenant for rent, evict the tenant and/or pursue any other available remedies. From the landlord's perspective, they will want to be explicit and provide as many instances that would justify breaking the lease or seeking remedies against the Tenant. In contrast, the tenant will want to seek to include language that provides the opportunity to "cure" any breaches. These are often established time frames within which the tenant can take action to fix the situation that resulted in a breach and avoid lease termination, damages and eviction. Ultimately, both parties will want to limit their exposure to causing a material breach to the commercial lease.

Whether you are a landlord or prospective tenant, if you require assistance with a commercial lease in New York City, please do not hesitate to give us a call at (212) 547-8857 or schedule a consultation online and we'd be happy to discuss these issues further and help you reach a resolution. Our experienced contract attorneys are here to provide the advice you need.

Disclaimer: This blog post and similar posts are not to be considered as providing legal advice. The discussion here is meant for educational and informational purposes only and shall not create an attorney-client relationship with the readers of this content.