5 Landlord Protections When Negotiating Commercial Leases

To be enforceable, a commercial lease need only address the parties, the property, the rent to be paid and the duration of the lease. Otherwise, parties to commercial leases are accorded broad latitude in defining their rights and obligations.  Further, contrary to the myriad of restrictions on residential landlords in drafting and enforcing leases, Michigan law has few restrictions on landlords for commercial leases.  Landlords have developed relatively standard provisions in commercial leases to protect the landlord’s interest.  Some of these provisions to consider in negotiating a commercial lease include:

1 - Know Your Tenant and Obtain Sufficient Security

Understand your tenant’s financial condition and business plan and draft the lease accordingly. Depending on the tenant’s financial circumstances consider: (i) requiring a guarantor; (ii) obtaining credit checks to determine the viability of both the tenant and the guarantor; (iii) obtaining an appropriate security deposit; (iv) obtain a security interest in the tenant’s assets.  In addition, take precautions to protect against third party liability by incorporating appropriate indemnification provisions and limitations of liability in the commercial lease in the event of third party claims.

2 - Obtain Appropriate Insurance and Understand Coverage Issues

Always confirm that the tenant has adequate insurance to minimize the landlord’s liability. This may include insurance for the leased premises and/or the contents of the leased premises, as well as general liability insurance for claims of injury or property damage.  The landlord should be included as an additional insured and/or loss payee in the tenant’s insurance policies.  The landlord should also be entitled to notice before an insurance policy is amended or cancelled.    Because insurance policies have numerous exceptions to liability, the landlord should obtain copies of the actual policies and make sure the landlord understands what claims are covered and any potential loopholes to coverage.

3 - Anticipate Problems and Draft Accordingly

While landlords do not enter into commercial leases anticipating a tenant’s default, the lease provisions should consider this possibility and include appropriate protections for the landlord.  First, the landlord should include clear grounds for termination.  In addition, in the event of a dispute, the landlord should consider alternative dispute resolution provisions, jury trial waivers, and provisions allowing the landlord to recover all damages including attorney fees and costs.  The landlord should also be careful to document and preserve all rights to post-eviction rent and post-eviction damages.  Finally, the landlord should protect against potential counterclaims by tenants in the event the landlord brings a claims for damages.  These protections might include a provision in the lease that requires the tenant to provide written notice to the landlord with any issues or claims that the tenant may have against the landlord, or the issue or claim will be deemed waived.

4 - Assignments or Subletting

Ideally, the landlord may prohibit assigning or subletting the premises without the consent of the landlord, which consent is in the landlord’s sole discretion.  Nevertheless, the landlord may consider additional provisions to discourage the improper assigning of the lease.  These may include requiring the tenant to pay any administrative costs associated with the assignment and providing that any additional rent obtained by the assignor is the property of the landlord.  The landlord may also require a waiver of any claims by the tenant for improper refusal to consent to an assignment.

5 - Construction Issues

The lease may contemplate an initial build-out of the leased space or subsequent renovations.  The landlord should understand Michigan construction lien law and draft protections in the lease accordingly.  For example, the lease should contain a provision requiring prior written approval by the landlord before a tenant can make any alterations to the leased space.   If the lease requires build-outs or other construction, Landlords should carefully draft provisions to minimize the possibility of construction liens and protect the Landlord in the event of construction issues.  In the event of construction, all contractors should be required to obtain appropriate insurance, with the landlord as an additional insured or loss payee where possible.

The above are only some of the issues that landlords should consider to protect their interests and minimize liability. Each of these topics may be addressed in more detail in subsequent blog articles.