Even though a lease is between a landlord and tenant, there are others who are not part of the lease but have a connection with the landlord and tenant. They might have obligations such as maintenance or improvements. Let’s take a look at them.
The Landlord’s Owners
These are the owners of the landlord if its an entity such as an LLC. They more than likely formed an LLC to protect their personal assets. This means that the LLC is often highly leveraged and doesn’t have many assets. If the landlord is an LLC or corporation and is funding your tenant improvements, you may want to get a guarantee from their owners.
These are the owners of the tenant if it’s an entity such as an LLC. The landlord wants to make sure that it will get its money. Often the tenant is either heavily leveraged or thin on assets. The landlord often requires the tenant’s owners to sign personal guarantees. This exposes their homes, savings, cars, and other personal assets to liability for everything that’s in the lease. The tenant should try to make sure that the guarantee terminates if the tenant transfers the lease to another party, or the tenant should try to get more time to make payments and limit the affects of rent acceleration on the personal guarantee.
The landlord often finances the space you’re leasing with a loan from the bank. The bank secures the loan with the property. The bank might want you to confirm that your lease is enforceable and that there are no uncured defaults. The bank will want you to subordinate your interest in your lease to the bank’s interest. They’ll want you to acknowledge any new landlord that takes over the property after a loan default or foreclosure. You’ll want to make sure that none of your lease rights are affected by the landlord’s relationship with the bank.
Besides rent, your biggest liability exposure is for property damage and any injuries that happen on your leased space, the common areas, parking, etc. There is also exposure for environmental issues such as hazardous waste. If someone is injured, property is damaged, or environmental liability is incurred, your insurance and the landlord’s insurance should kick into gear.
Most leases include clauses that try to push the landlord’s liability to your insurer. There are waivers of subrogation, additional insured provisions, and primary insured requirements. You’ll want to make sure that liability is divided appropriately between you and the landlord. This includes mutual waivers of subrogation, mutual additional insured provisions, and no primary insured provisions.
The property manager takes care of the operations and maintenance of the leased space. You can set their duties and standards in the lease. Brokers
The tenant or landlord or both may have brokers or negotiate on their own. These brokers can receive hefty fees. Make sure you know who will pay their fees and how much they will be involved in the management of the lease.
Some contractors are better than others. Some do better work then others. The work often takes longer than anticipated and they will need to be paid. You’ll need to determine how much control you want over the contractors and their progress. When the lease is done the question of who owns the improvements comes into play.
What happens if your landlord leases a nearby space to one of your competitors? It could damage your business. This is something to consider if you know your landlord has other property to lease. You might want to get exclusive rights to operate your business in an industry or location.
Sublessors and Assigns
You might outgrow your space or need to move to a smaller space. No matter what you do, you’re on the hook for the total term of the lease. So you might want to sublease your space or even assign it. These are two very different things and you’ll want to make sure you have certain rights with each. For example, you may want to ask the landlord for a total release from your obligations if you transfer the lease to someone else.
Clients and Customers
You may have hundreds, even thousands of customers come and go from your space during the life of your lease. Hopefully they will come and go without mishap. But slips and falls happen. What if it happens in your space? What if it happens in a common area? What if the landlord’s faulty maintenance causes it? The insurance and liability provisions need to divide liability for these accidents between you and the landlord.
Sometimes the government will take an interest in your space. Whether its through inspections, eminent domain, or other laws, you’ll want to cover what happens when the government gets involved in your lease.
Landlord and Tenant
This is the main relationship of the whole lease. The key item is rent, but also includes security deposits, defaults and accelerations. The lease provides a valuable opportunity to set expectations between the parties and to discuss up front what happens if the lease doesn’t work out.
How will co-tenants use their space? You don’t want a bar next to a childcare center. You may rely on an anchor tenant. What happens if the anchor tenant moves or closes its doors? You should monitor co-tenants to protect co-tenancy rights and require cotenants to be opened for business when you open for business.