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Commercial Leases

One of the services I perform for my small business clients is review and explanation of commercial leases. Admittedly, it is quicker and cheaper (in the short term) to just sign a commercial lease drafted by the commercial landlord’s lawyers without any serious review by a lawyer who represents your interest. WHAT IS THE WORST THAT CAN HAPPEN?

Here is an example – if your lease contains a subordination clause, and the landlord’s lender forecloses on the property, the lender, or other entity that bought the property at the foreclosure sale can come to you and either make you renegotiate your lease or evict you. The reason for this is that a typical subordination clause – which most commercial leases contain – is an acknowledgement that your lease is subordinate to any present or future loan secured by the property, and if the lender forecloses, the new owner has the option of honoring and enforcing your lease against you or declaring it null and void and terminating your tenancy.

How about that renewal clause that gives you the right to renew the lease for another year or two “at market rates”? It’s not worth the ink used to print in into the lease, because the courts have consistently held such a term is too vague to be enforceable.

If your landlord was a multi-state real estate corporation headquartered in Minnesota and its lease stated, “the sole and exclusive jurisdiction and venue for any dispute arising out of or related to this lease is Hennepin County, Minnesota” – what does that mean? That means if you sued your landlord because it breached the lease – or if the landlord sued you for breaching the lease – that suit could only be brought in Minnesota.

Remember that promise the leasing agent verbally stated that if your business decreased after the first year the rent would not increase like the lease said? If the lease contains a “sole and exclusive agreement” provision, that verbal promise means nothing.

If your commercial lease states that “any claim against the landlord may only be exercised against the landlord’s equity in the property” it means you are behind the multi-million dollar security deed and will not get paid what is owed to you unless the landlord sells the entire property for something in excess of the balance of that loan – even if you went to court and got a judgment against the landlord for breaching your lease. That provision means you have agreed that judgment is only good against that property and is payable only out of the landlord’s “equity” in that property.

I have found that landlords – like any other party drafting a contract – put all of these one-sided provisions into their agreements as a matter of course and wait for someone to call them on it. If an issue is raised, sometimes landlords may pare them down to a more even handed version or even agree to have them completely struck from the lease.

I have represented commercial tenants and had landlords give ground on every one of these provisions just mentioned. If you do not hire an experienced lawyer to read a commercial lease and explain these and other provisions to you, you may never know what you have signed off on – until it is too late.

About the Author

John Gibson
John Gibson