How Well Do You Know Your Lease?

[This article originally appeared in Retail Recap.]

The start of a new year marks the perfect opportunity to reexamine the terms of your lease to ensure that you are adequately protected in 2008. The following are five common provisions of a lease that, if overlooked or misunderstood, can often result in unpleasant consequences for commercial tenants.

Definition of Leased Premises. In the beginning of your lease you will likely find a section defining the area that you will be occupying. In the event you are not leasing an entire building, your physical space should be clearly and precisely defined, possibly in square footage and with reference to a particular unit number. The lease should also describe your rights to parking, rest rooms, elevators, hallways and other common areas. If you anticipate needing to make improvements to the premises, the lease should carefully define your right to make modifications and who will bear the costs of construction (will the landlord contribute?).

Repair and Maintenance. Once the leased space has been defined, make certain that the provision requiring you to maintain and repair the premises is limited to the interior area and excludes the roof, building exterior, structural elements or building systems such as plumbing or heating. Expressly defining the area you are responsible for will avoid the cost of unanticipated repairs.

“CAM.” “CAM” – common area maintenance expenses – are the landlord’s costs for operating and maintaining the building and are usually passed through to each tenant proportionately. Make sure that your pro rata share is a fixed percentage and does not fluctuate based on unpredictable tenant occupancy levels. Also, the landlord should only be able to pass through certain legitimate expenses as CAM charges. Routine maintenance of the fire suppression system is a legitimate CAM charge, but the cost to comply with a new fire code requiring sprinklers should not be. Be especially wary of pass-through provisions coupled with a CPI escalator – such clauses effectively allow the landlord to raise the base rent every year.

SNDA. If your landlord has a mortgage covering your leased premises, a default under the mortgage could result in foreclosure of the mortgage and termination of your lease. This risk can be eliminated through execution and recording of a subordination, nondisturbance, and attornment agreement (SNDA) between you and your landlord’s lender. An SNDA should provide that, as long as you are not in default under the lease, foreclosure will not terminate the lease and the lender will honor the term of the lease after the foreclosure.

Real Estate Taxes. Make sure real estate taxes for the leased premises are being paid when due. After three years of unpaid taxes, the property may be forfeited to the city or town and all existing leases will be extinguished. Your lease should require that the landlord pay the taxes on time and provide you with proof of payment; failure to do so should give you the option of terminating the lease without penalty or suing the landlord for breach.

The foregoing are just a few of the lease traps that can trigger unnecessary expenses and derail the success of your business. Taking the time to understand what your lease says can help you avoid costly mistakes.