Colorado Real Estate Journal - September 16, 2015
The lease. It’s such a seemingly mundane document, but as a legal professional I cannot stress enough the importance of a solid, written agreement. The lease, in short, is the “private law” to which the parties – the landlord and the tenant – agree. Congress spends months and sometimes years debating and settling federal law. Your lease need not involve such a long process, but why settle for a lease that isn’t up to par when it will govern your own agreement and carry very important legal ramifications? Many of my clients are savvy and understand the importance of the lease document. Too many times, however, I meet individuals who think they are lease masters without really considering the important terms that need to be included in the agreement. Even worse, there are some individuals I meet who have been told that a commercial lease is the same as a residential lease and the same concerns and conditions apply. I encourage you to put your own lease knowledge to the test! Read the following information to determine if you are truly a lease guru or if your own knowledge base could use a tune-up. Lease term. The need to negotiate the duration of the lease term is almost a no-brainer. Because this requirement is so second nature, it’s also one of the easiest to actually negotiate. The most important items to keep in mind involve when the term begins and ends as well as the method by which the lease can be renewed. In relation to when the lease will begin or end, go one step further than most individuals and time-stamp the date (e.g., 12:01 a.m. on 1/1/15 is better than simply 1/1/15). As far as renewal, also go one step further and require written notice mailed to a particular contact address by a certain time on a certain date. (Such specific terms are better than simply requiring a phone call anytime before the end of the lease term.) Specific terms that build in notification and ample time for a landlord to find a new tenant can avoid a landlord losing a month or two of rent. Rent. The amount of money that a tenant will pay is more than just the landlord’s favorite part of the lease. In addition to the lease term, it’s also one of the most basic requirements as well. Many landlords are worried about entering into the relatively longer terms generally required by commercial circumstances because shorter terms allow an opportunity to increase rent if the prevailing rental rates increase or the property’s value increases. Of importance to landlords, a lease can incorporate periodic rental rate increases, sometimes called escalations, to avoid this concern. If such escalations are included in the document, for both parties (but for tenants especially) it’s important to carefully spell out the circumstances where these escalations can and will take place and to understand precisely how such escalations will be calculated and implemented. Security deposits. Security deposits, and the landlord’s supposed failure to return them, present some of the most fertile grounds for disputes between a former tenant and a landlord. Clearly and simply documenting the conditions under which a security deposit, in part or in full, will be returned or kept is an absolute must in any lease. I also suggest that both the landlord and tenant carefully document the condition of the premises both before and after moving. A room-by-room checklist that captures any damage is a very useful tool, and in this day of mobile phones it is incredibly easy to document the premises’ condition with photographs. Improvements and fixtures. There are very important legal ramifications depending on whether a modification to a property is an improvement or a fixture. A complete article could be written just on that one topic. But in the context of a lease, it’s critical to spell out clearly which party will own the modification, pay for its creation and installation, and ultimately keep the modification when the lease ends. A landlord, generally speaking, will keep an improvement while a tenant will keep a fixture. And, yes, unless the lease specifies otherwise, there are certain circumstances where the tenant pays for certain modifications but a landlord can keep them, so it’s important to spell out these terms in a way that everyone is happy and understands them before the issue arises. Signs.Advertising can be critical for a business’ success and, as with most real estate, location (of signage) can be everything. I have consulted with business owners who are convinced they have a draconian landlord because of a request to stop work on a sign or the location of an existing sign needed to be changed. If a landlord has very specific wishes concerning the style or location of signs, it’s critical that those terms be clearly stated in the lease before work on signage begins. Maintenance. The need to clearly indicate the party responsible for the maintenance of a property absolutely needs to be clearly spelled out in the lease. In circumstances where the burden will be shared, such terms are all the more necessary to clearly create the division of responsibility. The biggest concerns that I see raised involve the HVAC system and snow/ice removal (especially here in Colorado). Landlords and tenants would both be well served to ensure that the party responsible for these two maintenance issues in particular is clearly delineated in the lease. I’m not sure if you noticed, but there is an underlying theme to each of these items: If there’s a provision that is important to you, it should be included in the lease. To that simple theme, I would add that all terms should be custom-tailored and very specific to your individual situation. In the context of commercial leases, I am an advocate of avoiding the cookie-cutter approach of Internet-ready forms and highly recommend a custom-drafted document. Many clients are initially concerned about additional fees for a custom document, and understandably so. I always remind my clients that once the initial drafting is complete, these documents can be easily modified for reuse – thus, the cost is really negligible taken over the life of a property. And all it takes is the avoidance of one potentially nasty legal issue for the value of the document to become readily apparent. To conclude, there are many other lease terms that are an absolute must to protect your interests and I haven’t touched on everything in this primer. I hope that you have read the information I’ve shared above and thought to yourself that this information is nothing new. Even better, I hope that you can think of one or two items that you have included in your lease that I haven’t touched on. If that describes your situation, I think you’re likely well on your way to being a lease guru. If, however, you review this information and maybe after taking a look at your own lease you decide that some of these items aren’t discussed in your document with sufficient detail (or at all), I highly recommend that you speak to a licensed legal professional concerning drafting a new lease.