5 Pitfalls to Avoid in a Commercial Lease Negotiation
Courts interpret commercial leases very differently than residential leases. Tenants in residential leases receive protections of local ordinances and consumer protection laws. There is often an assumption in commercial leases that both parties are on equal footing or have a certain level of sophistication in negotiating lease terms. Commercial leases are therefore interpreted more strictly.
Small businesses seeking leasing space should be aware of potential pitfalls in commercial lease agreements. Unlike residential leases where the law provides many consumer protections, tenants in commercial leases are free to negotiate nearly any terms – even if terrible consequences may result.
Below are five common lease terms that small business tenants should avoid:
1. Confession of Judgment
Pennsylvania is one of only a handful of states that still permit a Confession of Judgment. A confession of judgment clause is a lease term that permits the landlord to file a judgment with the court against the tenant if the tenant breaches the lease. A confession can be thought of as an automatic judgment that may include possession of the property, back-owed rent or liquidated damages. The tenant does not receive a hearing or opportunity to present a defense except under limited circumstances.
2. Personal Liability
A small business owner should limit liability in the lease to the business entity only, not in the personal name of the owner. Landlords often demand personal liability as disincentive for a tenant’s decision to default and walk away from the business. But a confession of judgment paired with personal liability is a terrible combination for a small business owner.
3. Responsibility for Repairs for Damages Caused by Another
Suppose a tenant’s unit within a building is adjacent to a restaurant. What happens if the tenant’s unit is damaged due to fire or other negligence caused by the adjacent restaurant? Hopefully adequate insurance is available to cover the damage and the insurance carrier cooperates. But the ultimate responsibility to pay for repairs may rest on the tenant if the restaurant and its carriers fail to remedy.
Indemnification is the shifting of responsibility for losses. Suppose a person is injured on the property and that the insurance policies are inadequate to cover the loss? Both the landlord and tenant will be named in any lawsuit brought by the injured person. But the lease may specify that the tenant is responsible to pay any portion of a settlement or award paid by the landlord which may also include attorney fees and costs. The tenant’s duty to pay the landlord’s fees may remain even if the landlord was primarily responsible for the loss.
5. Tenant’s Duty to Pay Rent even after Destruction of the Property
The tenant’s income and ability to pay rent depends on the income stream from its business. If the property is so heavily damaged that the tenant cannot use the property, must the tenant continue to pay rent? It is common language in commercial leases that the tenant must pay even if the tenant loses access to the property. These clauses are usually limited to a certain period of time such as 180 days. Tenants must be sure they can weather the lost income and obligation to pay rent for whatever time frame for repair is agreed.
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