Owners of residential and commercial property must be careful in preparing and signing leases with tenants. Beyond the dollars and cents of the agreement and the income or financial statement analyses, an owner must consider how to protect themselves before, during and after the term of the lease. This overview of commercial and residential leases highlights several common mistakes made by property owners when leasing to a tenant. This overview addresses these issues directly, but is not an all-inclusive summary with respect to important issues facing a residential or commercial landlord. Leasing and contract preparation requires expertise—from the owner, from outside consultants and preferably from an experienced real estate attorney. While the author has substantial legal experience in real estate and leasing matters, this article should not be construed as formal specific legal advice to the reader, nor should the reader consider the author to be his/her attorney solely on the grounds of having read this article. Every owner, every tenant and every lease is unique and advice for particular circumstance really does require individual review and consideration.
Legal disclaimers aside, an owner who wants to protect themselves from potential liability and attorney’s fees (not to mention administrative headaches), should consider the issues detailed below with respect to the following 5 lease provisions, which commonly lead to substantial landlord mistakes:
1. Use Limitations
While the intended use of the property has undoubtedly been considered well in advance of the signing of the lease agreement, it is essential that an owner include detailed limitations on the tenant’s rights to use the premises. Due to assumptions, prior informal conversations and failure to consider potential ramifications, an owner may overlook this important portion of any lease.
2. Required Insurance Provisions
A well-drafted lease should spell out the insurance requirements of both the owner and the tenant. A property owner must be diligent in being sure that its property (and pocketbook) are protected upon the occurrence of events ranging from a fire or a slip-and-fall accident to a disgruntled tenant or negligent (or malicious) acts of a tenant or other party.
3. Protections in the Event of Tenant’s Default
No matter how well-drafted a lease is or how well-situated a tenant might be, there will unfortunately be instances where a tenant defaults on its obligations under the lease. Whether due to cash flow shortfalls, misunderstandings regarding lease terms or simply a negligent (or malicious) tenant, every owner faces the very real risk of a tenant not living up to their contractual obligations. It should be noted that defaulting on a lease encompasses much more than late (or unpaid) rent—it also includes such events as misuse of the property, failure to obtain required insurance or violating other specific terms of the lease agreement.
4. Necessity of a Personal Guaranty
An owner must seriously consider a personal guaranty for both commercial and residential leases. A guaranty provides an owner with added security regarding payment of rent and other expenses (and liability) while also committing the tenant to further responsibility and investment in the use of the property. There are no practical downsides of a guaranty for an owner.
5. Sale of the Property During the Lease Term
Any owner of property knows that the day will come when they will want to sell the property. With respect to the lease, the owner needs to be sure to protect its right to transfer (i.e. sell, give away, or transfer to a related business entity) the property while not terminating the lease. The following provisions will prove necessary to protect the owner’s right and ability to do so.