Drafting Tips

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Even before the case starts, landlords are at a distinct disadvantage when they go to court over a lease interpretation: Because the landlord drafts the lease, courts will read any ambiguity in the tenant’s favor. Regrettably, landlords all too often aggravate this disadvantage by making assumptions that confuse what they think a lease provision means with what it actually says. And it’s not just landlords. Tenants are often guilty of the same mistake.

Security deposits are essential for commercial real estate owners to protect their interests when leasing space to tenants. That’s because a security deposit can be used in a number of ways to minimize the effect when a tenant doesn’t meet its lease obligations. But a security deposit amount that seems adequate at the start of the lease may not cover damages from a tenant’s breach later.

If you own a shopping center or mall, you know that the success of your tenants is connected to the amount of foot traffic that you can bring in. Movie theaters are a great example of one type of tenant that attracts crowds. But not all movie theaters show films that are of interest to a wide variety of moviegoers. For example, a movie theater that shows only independent films won’t draw as diverse a crowd as one that shows blockbusters and mainstream pictures.

If you own office building or retail space you’re probably very reluctant to give a termination right to your tenants in their leases. You run the risk of losing a large amount of money; allowing a tenant to get out of its lease early can render costly improvements and other expensive items associated with renting to it useless for reletting the space.

Adding a food court—a special area dedicated to small restaurant tenants selling a diverse selection of carry-out or ready-to-eat food customers can consume in a common seating area—can be a great way for shopping center owners to generate income. And it can help extend the length of shopping excursions, which results in more purchases and higher percentage rent for owners. It’s also a desirable amenity for tenants of an office complex. While a food court has its good points, it can also backfire unless your lease contains language to avoid certain risks.

While sometimes an owner’s failure to keep a center safe causes issues, tenants are also capable of actions that cause problems, too. And that’s where arguments and litigation arise. An owner is typically responsible for maintaining the common areas of its building or center, so if someone is injured in these areas, the owner is the party that will most likely have to pay for damages from an accident.

Depending on the particular synergy of tenants that you are going for, renting space to a restaurant tenant may be a desirable way to fill up space in your building or draw customers to your center. But problems can arise with restaurant tenants that just don’t apply to retail tenants. For example, if the restaurant tenant draws so many customers that long lines form, or crowds gather in the common areas near the restaurant, someone could get hurt if a queue or crowd becomes disorderly or unruly. Then you could face a lawsuit by the injured party.

CRE owners should be aware of situations in which a license agreement may prove to be more beneficial than a leasehold interest. The key factors that distinguish a license from a lease are the ability to revoke the licensees’ use at will, and the degree of control that the property owner maintains over the licensed premises.

Rent acceleration clauses in commercial real estate leases are often the subject of contentious negotiations between the parties, and increasingly, the subject of review by courts when enforcement is challenged by tenants and guarantors.

Rent acceleration clauses protect the owner by providing it with the ability to demand immediate payment of all future rents outstanding upon default by the lessee. They provide an obvious benefit to the owner, but will give rise to demands by the prospective tenant.

In a strong tenants’ market, you might find yourself fighting for good tenants that help the synergy at your center or serve as a destination spot that will draw and keep foot traffic. You may be forced to offer incentives, like a tenant improvement allowance (TIA) that’s bigger than you want to give. If giving a higher TIA than you planned won’t work for you, you can offer the tenant a figure you can live with and then loan it the extra amount that it has requested.