When both landlord and tenant want to use their own lease form, there often is a "battle of the lease forms." Who wins this battle ultimately depends on who has the most leverage in the negotiations. When the tenant wins, the landlord's counsel must carefully review the tenant's lease form. The tenant's lease form addresses issues of concern to the tenant, and often leaves out crucial protections for the landlord. The following are some of the more critical lease provisions landlords will want to add to the tenant's lease form.
1. Limitation of landlord's liability. This provision limits the tenant's right of recovery, in the event of a landlord default, to landlord's interest in the shopping center. It protects owners of the shopping center from risking their personal assets in the venture, and is rarely found in the tenant's lease form.
2. Operating covenant. Most tenant lease forms provide the tenant with the right to use the premises for a specific use (or any lawful use) during the lease term. This right will not create a covenant on the tenant's part to operate in the premises. An express covenant to operate continuously in the entire premises for the lease term should be added. Also needed is a provision granting the landlord liquidated damages for the tenant's failure to operate.
3. Radius restriction. If not expressly negotiated prior to the initial exchange of lease drafts, a radius restriction provision will not appear in the tenant's lease form. Adding it on the first round of lease comments at least raises the issue for discussion.
4. Refurbishment. If the lease term is lengthy, a landlord will want the tenant to be required to remodel the premises at some point during the term. Tenants resist this requirement and will not have it in their lease forms.
5. Relocation. Particularly with a tenant with a longer lease term, the landlord will want to build flexibility into the lease. The landlord will want to be able to relocate the tenant's premises during the term as the needs of the shopping center change.
6. Landlord termination right for casualty and condemnation. Often, tenant lease forms grant the tenant the right to terminate the lease in such events, but provide no reciprocal right to the landlord. Since the landlord may have to pay insurance proceeds to the mortgagee, or may decide not to rebuild the center if the destruction is too expensive, a termination right is crucial.
7. Default remedies. A tenant's lease form often limits a landlord's remedy in the event of a tenant's default to lease termination. A broad range of remedies should be added, including the right to recover possession of the premises without a presumption of termination, a continued obligation on the tenant's part to pay rent and all charges due, rent acceleration, and recovery of landlord's costs arising from the default.
8. Lease subordination and attornment. Generally, the landlord's lender will want a lease provision requiring the tenant to subordinate the lease to the mortgage at the lender's election. The landlord also will want the tenant to attorn to a subsequent purchaser.
9. Landlord's lien. Tenants will have no interest in creating a landlord's lien on tenant's personal property and fixtures. This provision will not appear in the lease form unless raised by the landlord.
10. Rules. Usually the landlord's lease form will contain a list of rules governing the activities of the tenant in the shopping center. These should be added to the tenant's form.
11. Holdover rent. In tenant's form, there often is a provision governing the type of tenancy created during a tenant holdover after the expiration of the lease term, but no provision for payment of increased rent. A significantly higher rent during the holdover period tends to discourage holdovers, and also compensates the landlord for market increases in rental rates.
12. Control of the common areas. Tenant lease forms usually impose an obligation on the landlord to operate and properly maintain the common areas. But landlords also need the ability to control the common areas: To close them when necessitated by law or safety concerns, to make changes to the common areas during the term without the tenant's consent, to grant others the right to use the common areas.
Landlord's counsel also should identify specific requirements of state law affecting the landlord/tenant relationship or peculiarities of the shopping center that will need to be addressed.
M. Rosie Rees is a lawyer in the Chicago office of Los Angeles-based Pircher, Nichols & Meeks.