The Premises of a Good Lease
Untangling the Lease makes commercial leasing language easier to understand. In each article in this series, Kegler Brown’s Real Estate team will examine a specific lease provision, explain its practical impact, and identify key considerations for landlords and tenants.
Here, Erica Kaple takes a closer look at how the leased premises are defined.
Welcome to Untangling the Lease – Commercial Leasing for Landlords and Tenants!
Commercial leases are full of interconnected terms that can create unintended risks if not clearly understood. In this series, we break down key provisions in commercial leases from both the landlord’s and tenant’s perspective to help you identify risks, avoid common pitfalls, and negotiate with confidence. We’re on it, so you don’t get stuck in the details.
Today, we are focused on the first question that everyone asks when they pick up a lease: Where is the tenant’s space? In leases for office, industrial, retail and restaurant properties, the tenant’s space is commonly defined as the “Premises.”
1. Back to the Basics – Is the Premises Clear?
So, you have walked through a space for rent, negotiated an LOI, and come to a deal with the other side. Whether you are the landlord or the tenant, one of the main goals in leasing should be clarity. Defining the property in a lease sounds like common sense, but small ambiguities can lead to costly disputes and misunderstandings down the road.
Both parties should understand which parts of the property belong solely to the tenant, which parts of the property are shared with other tenants, and which parts of the property are not to be used by the tenant. If a tenant is leasing the entirety of a building and the surrounding property, this is simple. However, if the space has multiple tenants, or if the landlord is retaining a portion of the building or property, this is much more important.
Consider everything the tenant may need to use at the property: common areas, patios, outdoor seating, a drive-thru, parking areas, bathrooms, and routes of access to the property may all be relevant. It is best practice to specify the square footage of the leased space and include a depiction of the leased space and all shared areas on the property. Outdoor patios and parking areas are also frequently depicted as an exhibit to the lease. Does the tenant have to share outdoor patio space, or do they have exclusive access?
- Bottom Line: Failure to clearly define the premises can lead to disputes over who controls shared areas, outdoor areas, and even whether the tenant has the right to operate certain aspects of its business. At a minimum, the lease should:
- Clearly identify the leased premises;
- Show a depiction of the premises and shared common areas;
- State the square footage of the premises and provide a method of determining square footage if unknown; and
- Specify if there are any exclusive patio areas or designated parking areas.
2. Square Footage of Premises
In the situation where the premises is being newly constructed or heavily remodeled, a tenant should consider negotiating a remeasurement right. Rent payments are typically based on the square footage of the premises, but if the premises is not yet complete, it can be difficult to understand the final size. An architect who is familiar with the premises can verify the square footage of the premises to ensure that the calculations for rent in the lease are accurate for purposes of base rent and for purposes of sharing common area maintenance charges. BOMA standards are most common for measuring commercial real estate.
- Bottom Line: Errors in the square footage can lead to underpayment or overpayment of rent under the lease. Even a small discrepancy can be compounded over the life of the lease, so tenants should consider including a remeasurement right.
3. Outdoor Patios
Outdoor patios and seating are increasingly common for restaurants, so the lease should clearly define the tenant’s rights to access and use those areas. Tenants typically do not pay additional base rent for the square footage of a patio, and the size of the patio typically does not affect common area maintenance either. However, patio rights are often more heavily regulated and may be subject to revocation if not properly documented.
It is common for the tenant to ensure that they have the proper licensure and approvals to serve food and alcohol (if applicable) on a patio. Additionally, landlords typically want the tenant to handle the regular maintenance on the patio, especially when it is only utilized by one tenant.
Landlords should consider whether they would like to regulate activities on patios such as live music and events. Some landlords restrict sound levels on patios, restrict usable hours for patios, or require fencing around a patio area.
- Bottom Line: If an outdoor patio is important to a tenant’s use, the tenant needs to ensure there are clear parameters around the patio’s use and ensure any restrictions on that use are reasonable. The tenant will likely be responsible for any licensure relating to the patio and any repairs and maintenance to the patio.
4. Parking and Curbside Pick-Up
The lease should specify whether the tenant has assigned parking spaces, or whether the tenant shares all of the parking spaces at the property with the other tenants on a first-come first-served basis. If having a certain number of parking spaces is critical for the tenant, the lease should specify that. The parties can also specify restricted parking areas, or any restrictions on the types of vehicles that may be parked on the property.
Some restaurant users request exclusive rights to parking spaces immediately outside of their premises for the purpose of curbside pickup orders. In this case, the landlord should be careful that granting exclusive parking rights to one tenant does not unintentionally violate the parking rights of another tenant using that same parking area.
- Bottom Line: If parking spaces are critical to a tenant’s business, the tenant should consider including a requirement for a minimum number of parking spaces or specifying exclusive parking spaces. Shared parking is normal but can become problematic when parking at the property is limited.
At first glance, details like square footage, patios, and parking may seem straightforward. In practice, however, these are some of the most common sources of confusion and disputes in commercial leases. Taking the time to clearly define the premises and related rights can help both landlords and tenants avoid costly issues later.
In our next installment, we will address commencement dates and delivery dates, so get your calendars and calculators ready!
