LEASE AGREEMENT REFERENCE GUIDE 340: PRO-TENANT STRATEGIES FOR INDUSTRIAL LEASES $24.95
Pro-Tenant Strategies for Industrial Leases
This LARG looks at a standard form lease used by a major industrial tenant. All of the substantive clauses of that pro-tenant lease are set out below in red. The landlord response to each clause follows in black. It is obvious that the clauses contained in the lease are aggressively oriented in favor of the tenant. But the tenant gains additional advantage by the types of provisions that are omitted from the document entirely (e.g., no comprehensive default clause, no assignment and subletting restrictions, etc.). For a discussion of these omissions, see "The Pro-Tenant Industrial Lease--What's Left Out" below.
Sample Form of Industrial Lease
Landlord, on the following terms and conditions, hereby leases to Tenant, and Tenant hereby leases from Landlord, the real property described in Exhibit "A" attached hereto and incorporated herein, together with all improvements, fixtures and equipment now and hereafter placed thereon by Landlord, hereinafter called "premises."
1. Construction of Improvements. Prior to the commencement of the term of this lease and in any event no later than July 31, 1997, Landlord shall, at Landlord's expense and to Tenant's satisfaction, construct and complete improvements on and to the premises in strict accordance with drawings and specifications listed on the sheet attached hereto and marked Exhibit "B" and hereby made a part hereof. Said drawings and specifications are hereby specifically referred to and made a part hereof and shall be signed by both parties.
Comment: The construction clause above contemplates a "turnkey" deal, where the landlord constructs the improvements to the premises, and the lease commences upon their completion. The clause requires the landlord to finish the improvements no later than July 31, 1997. The landlord is exposed if he cannot complete the improvements by that date, since he will be in default under the lease.
Ordinarily, landlords favor language which provides that the tenant cannot terminate the lease if the improvements constructed by the landlord are not completed on a specified date, since such a default by the landlord permits the tenant to terminate the lease. If the tenant does terminate for late completion, in addition to having no tenant for the premises, the landlord has a building improved for the tenant that just terminated; additional improvements may be required for the building to be leasable to another tenant. Is the tenant entitled to its own parking area with the building? If so, it should be spelled out in the lease.
The clause also requires the landlord to construct the improvements "in strict accordance" with the drawings attached to the lease in Exhibit "B". Landlords generally prefer construction of such improvements "in substantial accordance," or "in reasonable accordance," or merely "in accordance" with the drawings and specifications describing the improvements. Duties to construct in strict accordance with the drawings set the landlord up for delays in the commencement of the term and claims of default for minor variations from the drawings, which may be mandated by the building department or code requirements. Generally, the landlord prefers some sort of an extension provision if completion of the improvements cannot be made within, say, three months following the time the improvements were to be completed.
2. Term. The term of this lease shall be five years. Said term shall commence on the date Tenant's Facility Manager (after having been notified in writing by Landlord that the premises are ready for Tenant's occupancy) determines and so notifies Landlord in writing that said improvements have been constructed and completed to Tenant's satisfaction and in accordance with the provisions of paragraph 1, and that the premises are delivered and ready for Tenant's occupancy.
Comment: In the foregoing paragraph relating to term, the tenant's Facility Manager is designated as the person who makes the determination that the improvements have been constructed pursuant to the construction documents, and completed to the tenant's satisfaction. Ordinarily, landlords prefer to have their own consultants (e.g., the project architect) determine that all improvements have been completed in accordance with the construction documents.
Landlords also prefer to obligate the tenant to supply a "Commencement Certificate" in which the tenant certifies that all improvements have been constructed in accordance with the construction documents and which confirms the commencement date and expiration date for the term of the lease. Normally, the form of the Commencement Certificate is attached to the lease as a separate exhibit to prevent arguments from the tenant over the form of the certificate when the time comes for its execution.
3. Rent. Tenant agrees to pay Landlord rent in the amount of $5,000 per month for the use and occupancy of the premises. Said rent shall be payable monthly in advance, subject to proportionate refund of rent paid in advance should this lease be terminated before the expiration of any month for which rent shall have been paid. Should the term of this lease commence on a date other than the first day of a calendar month, Tenant shall pay on the first day of said term the prorated rent for the remainder of the calendar month in which such term commences, and thereafter Tenant shall pay a full month's rent on the first day of each calendar month, in which event, payment for the final fractional month shall be adjusted so that the sum of the amounts of rent paid for the first and final fractional months shall equal one full month's rent. Rent for any extension of this lease shall be paid in like manner.
The rent specified herein shall be paid to the Landlord at the notice address for Landlord specified in paragraph 16 hereof or to such other person or persons or at such other address or addresses as Landlord hereafter may designate by written notice to Tenant. Payment of rent to any person or persons so designated by Landlord shall exonerate Tenant from all responsibility for payment of such rental or for the proper distribution thereof.
Comment: Paragraph 3 dealing with rent should provide that all rent is payable without deduction, offset, prior notice or counterclaim. Note that the rental clause contains no escalation provisions. Finally, most industrial landlords like to receive the first month's rent at the time the lease is signed, with language stating that it will be applied to the first month's rental when the lease commences.