Tamara L. Harper Business Law Blog on Lawyers.com

LEASE EXECUTION CHECKLIST

            The intent of the following is not to provide legal advice on how to document the business or legal points of a lease, but rather outline the points that should be brought to the surface by your negotiating team and resolved in your favor when possible.

            The list below provides guidance to several pertinent lease requirements that should be considered before signing a lease. This list may not be inclusive, thus, please discuss further issues with your counsel. Your attorney should review a negotiated lease for the following:

                        Date of Lease:  Make sure the lease is correctly dated including the month, day and year.

Lease Commencement Date:  Make sure the lease clearly sets forth a specific commencement date.  If the date set forth is at some later point in time, i.e., 90 days after Landlord completion, make sure an Estoppel Certificate is executed at that point in time to confirm the exact start date of the lease.  See below for further information regarding an Estoppel Certificate.

Rent Commencement Date:  Make sure the lease sets forth an exact date for the rental payments to begin.  If rental abatement is negotiated make sure the months in which rent is not accruing is spelled out clearly within the lease.

Renewal Option Date:  Check to make sure the dates are correct, timely notice is provided, and the rental increase reflects the negotiated rate correctly.

Notice Address:  The address set forth for service of legal notice should include not only the Landlord’s address and your corporate address, but a clause should be inserted providing for a copy to be sent to the premises and to your attorney.  Check the accuracy of the address as well.  Also verify a clause exists in the lease providing for changes in address to be given by written notice only.

Taxes and Utilities:  Verify accuracy of negotiated terms.  Commonly, the Tenant pays.

Condition of Premises at End of Lease:  There should be inserted a clause within the lease allowing for the condition of the premises upon termination or expiration of the lease to be “as is.”

Square Footage:  There are three primary terms you should be familiar with:  gross square feet, rentable square feet, and usable square feet.  Gross square footage refers to the measurement of the exterior or outside walls of the building.  Quite often you measure from the drip line-meaning the farthest exterior point of the building, including the building’s overhang.  This adds substantial square footage to your measurement. Rentable square footage is calculated on what is known as the Building Owner’s and Manager’s standards.  This includes all of the space on your occupied floor or floors, excluding vertical penetration such as elevators, stairwells and mechanical shafts.  Thus, you are paying for not only the space you are using, but common areas as well.  Usable square footage is the actual space you will occupy.   In evaluating your lease costs, it is crucial that you do so based on the usable square footage.  Thus, it is recommended that you refine the term of square footage as usable square footage.  Your architect should be able to tell you what space within your demised are is truly usable.

Security Deposit:  Verify accuracy of negotiated terms.  Generally the landlord will hold without interest accruing.

Confidentiality:  The lease should provide for a “Confidentiality Clause,” stating that the terms of the lease are to remain confidential and are not to be release without prior consent of an authorized representative of your company or President of your company.

Tenant Improvements:  Verify the dollar limits set forth by a clause stating that the Lessor must approve in writing Tenant improvements of a certain amount.  Negotiate whose contractor is to provide such, whether you can use your own contractor and who is to be responsible for obtaining permits.

Non-Disturbance Clause:   Your lease should have a “Non-Disturbance Clause.”  This is also known as a “Quite Use and Enjoyment Clause.”  This clause will ensure that upon Lessee paying the rent for the premises and observing and performing all of the covenants, conditions, and provisions on Lessee’s part to be observed and performed, Lessee shall have quite possessions of the premises for the entire term subject to all of the provisions of the lease.

No Continuing Operation Clause:  Your lease should not under any circumstances have a “Continuing Operation Clause.”  Generally, if a Tenant defaults under a lease with a continuing operation clause, the Landlord has two options.  The Landlord may terminate the lease, in which case the Landlord is required to re-let the space to reduce or mitigate the Landlord’s damages.  Alternatively, the Landlord may keep the lease in effect and sue for the rent as it becomes due, sometimes referred to as the “lock-in” remedy.

Use Clause/Negative Use Clause:  The “Use Clause” should be as broad as possible and include the phrase, “for any legal and lawful use.”  Having the right to change the use of the premises gives a Tenant the flexibility to expand and modify a successful use or to completely abandon an unsuccessful business and pursue a new one.  A Landlord typically wants a restrictive use clause to indirectly obtain additional ground to control assignment and subletting.  However, many leases will require specific wording and in order to provide for conformity the following clause should be used:

Exclusive Use Clause:  An “Exclusive Use Clause” grants to your company the right to business use specified within the shopping center or marketplace and disallows the Landlord from leasing to any type business offering the same services specifically listed on the clause within that center.  A typical clause reads, “It is agreed that the Leased premises shall be used and occupied exclusively for your business’ services, sale of your company’s name trademark items, and any other uses which may be customary from time to time in other your company’s name stores or any other use which is reasonably comparable.  Provided Leasee is not in default hereunder, Lessor agrees that it will not, for the term of the lease, execute any new lease to any other person, firm or corporation for a store in the XYZ Shopping/Market Center whereunder said Lessee would be permitted to any of the uses enumerated above on a retail basis and grants the exclusive right to conduct the aforesaid business on the Center.”

California Only – Use Restriction:  Unless the lease specifically limits the use, the Tenant may make any reasonable use of the leased property.  A strict use clause can hinder any further possibilities of subletting.  Even though a lease may not allow subletting without prior Landlord written consent and specifically states the Landlord’s consent may not unreasonably be withheld, a Landlord can still restrict an assignment or sublet through the use clause.  Upon relocation under strict use clause, your company would not be allowed to sublet to any business, but rather only to a business as defined under your own use clause.  Simply  put, this means that your company would be forced to rent only to a competive business.

 Adequate Parking/Stripping/Exclusivity:  The lease should reserve an appropriate amount of parking spaces for the demised premises exclusively for your business.

Adequate and Visible Signage with Your Company Colors and/or Trade dress:  Your franchisor’s or company’s trade dress should be negotiated per the applicable specifications from the franchisor, if applicable, to ensure not only conformity but also make sure it conforms with your specific city’s ordinances.

Percentage Rent:  No lease should under any circumstances have a percentage lease clause.  This could require you to send to your Landlord confidential financial data. Beware of percentage rents, even if it is not foreseen that such a clause would be trigger. Sometimes the amount set applies to the corporation, and not just the leased premises. Further, this clause allows the Landlord access to confidential corporate financial records and can be used against the Lessee in further rent re-negotiations and renewals.

Guarantor:  Most Landlords’ will require a personal guarantee.  Try to negotiate out of such at the onset of the negotiations.  If however, a guarantee is necessary, you should attempt to limit the time, i.e., if the lease is a five-year leasehold interest, strive, for a guarantee for only the first year.

On Site Visit:  An attorney or lease negotiator should always visit the site.  If unable to visit, at a minimum, you should request a panoramic view picture from the broker. Strategic negotiations cannot be performed without some idea of the demographics of the demised premises.

Business Hours:  The lease items should provide for 24 hour/7 day use even if not in use now, in order to allow for future expansion in hours.

Efficient Lighting:  Lighting is an invisible selling tool and probably the most powerful tool in merchandising today.  Creating the proper light level in the store is also understood as brightness, which is an overall even balance or ambient amount of light throughout a space.  This result is achieved by using the proper color balanced lamps in your light fixtures.

Fixed Landlord Buildout Completion Date:  Very often the commencement date is thirty (30) days after Landlord completion and in such case there should be a Delay in Possession Clause.  This clause should state verbatim:

“Nowwithstanding said commencement date, if for any reason Lessor cannot deliver possession of the premises to Lessee on said date, Lessee shall not be obligated to pay rent until possession of the Premises is tendered to Lessee; provided, however, that if Lessor shall not have delivered possession of the Premises within sixty (60) days from said commencement date, Lessee may, at Lessee’s option, by notice on writing to Lessor within ten days thereafter, cancel this lease, in which event the parties shall be discharged from all obligations hereunder; provided further, however, that if such written notice of Lessee is not received by Lessor within said ten day period, Lessee’s right to cancel this lease hereunder shall terminate and be of no further force or effect.”

Estoppel Certificate:  An estoppel certificate should be completed after Tenant has occupied the premises.  The certificate should set forth Lessor and Lessee names, date of lease, location or premises, and lease commencement date.  Furthermore, the following clauses should be verbatim:

                                    1)      An Incorporation by Reference Clause- “the lease document is incorporated by reference,”

                                    2)      A Non-Default Clause- “as of the date if this certificate, Lessor/Lessee is not in default in the performance of the lease and has not committed any breach of the lease,”

3)      A Setoffs, Claims, or Defenses Clause-“the lease is in full force and effect; Lessee has accepted the premises and presently occupies them, and is paying rent on a current basis; Lessor has no setoffs, claims, or defenses to the enforcement of the lease.”

Insurance Specifications:  Discuss the landlord’s insurance requirements with your insurance agent prior to signing the lease to ensure that you are able to meet such requirements.

Hold Harmless Clause:  At a minimum, make sure the hold harmless clauses states verbatim: “Tenant agrees to hold Landlord harmless from liability, except for Landlord gross negligence.”  This area is complicated and it is recommended that you seek the advice of your counsel.

Hazardous Materials Clause: This clause should state:

“Landlord has not utilized the property, nor any part thereof, to treat, deposit, store, dispose of, or place any hazardous substance, as defined by 42 U.S. C.A. §9601 (14), any pollutants or contaminants as defined by 42 U.S.C.A. §6904(5) or any other toxic or hazardous substance prohibited under similar State or Federal law under any regulations and ruled promulgated in connection with the laws referred to above (“hazardous substance”) nor has Landlord authorized any other person or entity to treat, deposit, store, dispose of, or place any hazardous substance, as defined above, on the property, or any part thereof. To the best knowledge of Landlord, no other person or entity has treated, deposited, stored, disposed of, or placed any hazardous substance, as defined, on the property, or any part thereof. In the event a release or threatened release of a hazardous substance is discovered on the property, regardless of whether Landlord is in any way form whatsoever under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C.A.  §9607, or under any other statutory or common law, Landlord agrees to indemnify and hold harmless Tenant from any such liability which may be imposed.”

Americans with Disabilities Act Requirements:  An employer is required to make reasonable accommodations to the known physical or mental limitation of a qualified individual who is an applicant or employee, unless such covered entity can demonstrate that the accommodation would impose an undue hardship on the operation of the business.  Reasonable accommodation ay include making existing facilities used by employees readily accessible to the disabled.  The duty to provide reasonable accommodation applies to all non-work facilities provide or maintained by you for your co-workers.

Updating Your Corporate Records:  A Board of Director resolution will need to be executed authorizing an officer of the corporation to sign the lease.  Your corporate attorney can handle this for you.

Lease Renewal: Upon renewal negotiations, review all the above and applicable clauses. Further, have your architect and tenant representative offer suggestions as to how your current space is to be measured (see Square Footage above).  Quite often, the Tenant assumes that the original measurement is unchangeable, when, in fact, it could be possible to renegotiate the actual footage that you occupy.

Lease Termination:  Anyone who is considering terminating any lease should also be aware that Landlords are becoming very tough about letting Tenants out of their leases.  This is a potential ground for litigation.  Please make sure you consult with an attorney before proceeding with a lease termination.

            This list is just a highlight of some important deal points to consider in reviewing a lease.  Frequently a broker working for both the landlord and tenant will prepare a Letter of Intent which only touches on very few deal points and lease terms.  The items above are important to negotiate prior to the landlord or its counsel sending the lease to you for final signature.  Please involve your attorney in the early stages and be proactive.  Being reactive and having to hire counsel to litigate an already negotiated and signed deal is far more expensive. 

Harper & Associates, P.C. gives piece of mind to business entrepreneurs who desire to protect their assets, ideas, and wealth by showing them how to limit their liability exposure, register their intellectual property, and hold property in trust.  Tamara L. Harper, Esq. assists small to mid-size companies in the real estate, bio-tech, restaurant, and service industries with initial formation, corporate governance, commercial leasing, business sale or acquisition, and investor capitalization in addition to registering and defending intellectual property rights.                                             © 2007 Harper & Associates, P.C.