Protections a Landlord Should Include

in a Commercial Lease Agreement

By Craig Wagener PhD, MBA, MCNE

Before a landlord considers leasing property to a tenant, he should engage

an attorney to prepare a Form Lease Agreement, to include adequate
protections to safeguard the landlords interest.
In the negotiation process, the landlord should have a clear understanding of
which terms and clauses in the form lease agreement is non-negotiable and
which may be altered without waiving landlord protections. Knowing the
difference between clauses is essential for the landlords protection.
Here are some basic protections all commercial lease agreements should
contain:
1. Personal guarantees and signature of the spouse The lease will
only be as strong as the personal guarantors financial status. If the
tenants business fails, the remedies available to the Landlord become
commensurate with the guarantors financial ability to repay what is
owed. Most times businesses are owned by a business entity, like an
LLC or a corporation, which has its own identity. If a business is in
trouble the owner can always siphon assets out of the corporation,
leaving it with no value to pursue legally. It is imperative to check the
tenants/guarantors credit to obtain valuable information on their
personal financial responsibilities as it will also reveal how they
conduct day-to-day business. Carelessness in personal matters often
spills over into business matters.
2. Final Rent due date and late fees The lease agreement should
always have a final due date. Rent is usually due on the first of the
month, but the landlord may extend a 5-day grace period. If this is the
case, then rent received after the 5th of each month is subject to a
late fee. This should be clearly worded in the lease agreement to avoid
ambiguity and it should clearly stipulate the late fee amount as well as
whether the fee is a flat amount or an amount per diem.
3. A provision for an annual CPI (Consumer Price Index)
adjustment This provision allows the landlord to increase the rent
incrementally each year over the term of the lease, usually on the
anniversary date of the lease, to compensate for the devaluation of
money and inflation over time. It is best to state specifically the source
of the CPI adjustment, e.g. the monthly labor review of the US
Department of Labor, Bureau of Labor Statistics designated CPI-W for
all urban wage earners and clerical workers. The CPI adjustment may
have a minimum adjustment, e.g. CPI adjustment or a minimum of
4%.

4. Specific use clause The lease should contain a specific use clause
so that the tenant cannot change their business use during the lease
term into something that is not desirable or conflicts with other
tenants in the building. This also allows the landlord to control the mix
of tenant uses and the synergy created by the different businesses in
the building.
5. Control of the approval of the transfer right Landlord needs to
be able to accept or reject the transfer of the business ownership to
another person or persons. It also ensures that any new tenant will
need to conform to the specified use provision. Landlord will also be
able to assess the financial strength, run a credit and background
check, and analyze the probability of success of the new owner, before
committing to any transfers.
6. The right to sublease Landlord may allow the right to sublease
after accepting the new business after assessing the strength of the
principals. Landlord may not allow sub-leasing and may prefer to
terminate congruently an existing lease agreement, while
simultaneously approving a new lease agreement with a new party.
7. Buildout approval rights- Landlord will want to approve all plans to
alter the building before they occur, to protect any detrimental
changes that could negatively affect the building and or other tenants.
This allows landlord to avoid a situation where a tenant wants to
perform unwanted construction or wants to place undesirable signage
on the building.
8. Establishing rules for the use of the property Clearly specified
rules and guidelines for the use of the property should be spelled out
in the lease agreement. Tenants should be made aware that nonconformity to these rules and guidelines will result in being in default
of the terms of the lease.
9. Adequate Tenant Insurance Landlord needs to specify what
insurance is required and the minimum dollar amounts for each
category. Insurance must be obtained from a highly rated carrier, e.g.
A+ and which covers all potential catastrophes. Furthermore, the
landlord should be named as a co-insured on tenants policy. All
policies should contain endorsements waiving the insurers right of
subrogation against landlord for any reason whatsoever. Certificates of
insurance must be provided to landlord on an annual basis and
insurers are required to notify the landlord by giving at least 30 daysnotice before termination or cancellation.

10. Specify the pass through expenses Leases should detail exactly
which expenses are pass through expenses to the tenant, so that there
are no disputes.
11. Landlord and tenant responsibilities - To avoid confusion of
responsibility, leases should delineate which responsibilities are the
landlords and which are the tenants.
12. Witnesses and notary All leases should contain the signature of
two witnesses who have witnessed the signature of the principal, to
ensure legality of the document. The personal guarantee should be
signed by a notary public. Each page of the lease agreement should be
initialed by both parties for further protection.
13. Default clauses Commercial leases should contain a list of what
constitutes a default of the lease agreement. Usually a time to cure, a
default is specified so that tenant knows he has a limited time to
perform.
14. Landlord lien for rent clause landlord should require that the
tenant pledge all furniture and fixtures, signs and goods and chattels
to the landlord as security for the payment of rent.
15. Surrender of the premises Landlord should specify how the
premises are to be left at the termination of the lease. Tenant should
be required to repair any damages.
16. Waiver of jury trial This is usually included in a lease agreement
that both parties agree to waive a jury trial, otherwise legal expenses
may be extensive and prohibitive.
17. Exculpation clause The lease should contain an exculpation
clause that specifies that tenant can only look to landlords interest in
the property, of which the tenants demised premises are a part, for
the satisfaction of any claim, judgment, decree, or ruling of any court
action.

When executing a lease agreement, Landlord is entering a long term

contractual relationship with a person, persons, or a business entity. It
is the Landlords responsibility to ensure that the prospective tenant is
one that is viable and committed to the success of the business. Once
the lease is executed both parties are obligated to perform. It can only
be altered by mutual agreement, so caution is warranted when
choosing a tenant. It behooves the Landlord to request a copy of the
tenants business plan for review and to determine whether
compatibility exists between the tenants business purpose and the

location, size, and attributes of the premises, as well as to determine

whether the tenant has adequate funds to establish the business and
sustain the business through the beginning stages. Landlord should
have a level of confidence in the Business Plans success.