As lawyers who assist clients in documenting transactions, we are often asked to review commercial real property leases. Commercial leases can take many forms and can address many aspects of a real estate transaction. Common elements to commercial leases are the conveyance of the right of possession, the lease term, rental amount and the rights of the tenant as well as the rights of the landlord. This blog is not intended to cover all of the possible terms in a lease. It is important to have an attorney with experience in commercial real estate transactions review the lease and give you advice before signing any lease.
One common issue which parties fail to address in commercial leases is condemnation. Condemnation refers to the taking by a government entity of the leased premises or the common area near or adjacent to the leased premise. The government entity could be a city, county, town, state or department of a county, city, town or state. Some of the most common source of takings are hospital districts and transportation departments. However a taking can be initiated by economic development zones and other entities. When negotiating the terms of your lease, it is important to include provisions for what happens in the event of a taking. Will the lease terminate? If so, automatically or at one or more party’s option? If the lease is not terminated, will there be an adjustment in the rent? What if the taking is of parking lot space adjacent to the leased premises that is used by customers and clients of the tenant? Will there be a rent adjustment? How much? What if the taking includes part of the leased premises? What if the tenant’s business can continue, but at a reduced volume? Will the tenant have the option to terminate? If not, will rent be adjusted? If so, by what formula? These are some of the issues that a commercial lease can address with respect to a taking.
Generally, a total taking will require the lease to terminate. If the lease is terminated, is the tenant compensated for having to move? Can the tenant move to other space within the same building or complex? At what price? Is the government entity that is condemning the property paying the landlord? How much? For what? Can the tenant receive some of the money? Can the tenant make its own claim against the government entity doing the taking?
What if there is a partial taking of the leased premises? If the only part of the leased premises is taken, can the tenant continue it’s business? How much of the leased premises can be taken before the space is no longer suitable for the tenant? If not, can the tenant terminate? If the leased premises is no longer suitable, can the tenant still terminate? Who determines suitability? Does the lease prevent the tenant from sharing in payment for the taking?
Is the landlord aware of any impending condemnations proceedings? What duties does the landlord have if it becomes aware of possible condemnation proceedings?
The answers to all these questions and more should be addressed in the terms of a long term commercial lease. A business contemplating leasing commercial space to operate from, should consult professionals that can help the business identify as many potential issues as possible and get advice on the possible ramifications of such issues.
Paula Thompson says
Thank you for this insightful information. I would only wish there more free information for lay people on commercial leases. Nevertheless, thank you…….PThompson