LEASE AGREEMENT REFERENCE GUIDE 910: PRO-TENANT TERM COMMENCEMENT STRATEGIES $24.95
SPECIAL PRO-TENANT TERM COMMENCEMENT STRATEGIES
This LARG focuses upon the language pertaining to the commencement of the term from the tenant's point of view. The first section lists ten ways for the tenant to improve term commencement provisions. The second part looks at the pro-tenant punchlist clause. The third section contains a discussion of pre-commencement delays and interruptions of the tenant's possession during the term, and how such events affect the lease term. Finally, the Lease Clause Critique contains three pro-tenant commencement riders with comment.
Ten Crucial Term Commencement Strategies for the Tenant
Tenants often regard the term commencement language in commercial leases as a good antidote for insomnia, and give commencement clauses only a cursory review. That can be dangerous, because such provisions are frequently complex, and are often strewn throughout the lease.
It's not unusual for the same commercial lease to contain provisions affecting commencement in the cover page specifying the economic terms of the deal, in the commencement of term article in the lease, and in the work letter and commencement of term certificate attached to the lease as exhibits. Retail leases often have additional provisions which condition commencement upon the presence of other tenants in the retail complex, or which affect the commencement of the term for seasonal reasons.
Ten pro-tenant term commencement strategies follow. The tenant should consider them in the business context of its negotiations.
Expand the Definition of Substantial Completion. If commencement is tied to substantial completion of the premises, it is critical for the lease to contain a comprehensive definition of that term. And the tenant should bargain to include a number of items in the definition of substantial completion which may be physically located outside the premises, but which have an important effect upon the tenant's use and enjoyment of the premises. Such items include the completion of all common areas, lighting, drainage, all utilities, all telephone trunk lines, all elevators and escalators, all access roads to the complex, and all parking improvements.
Require a Certificate of Occupancy (CO) as a Condition to Commencement. Many tenants want an independent agency to certify that the premises are, in fact, ready for occupancy by the tenant, and that all codes have been satisfied prior to the tenant's move-in. Depending upon local practice, the requirements for a CO may be more rigorous for the landlord than the elements contained in the definition of substantial completion in the lease. In addition, the CO is issued by an impartial official, whereas a determination of substantial completion is often made by the landlord's contractor or architect, who are not exactly disinterested parties.
Delete or Modify Pro-Landlord Delay Provisions Which Might Accelerate Rental Payments. So-called delay provisions usually advance the date rent starts by the duration of any delays of the construction of the premises caused by the tenant. Such clauses often appear in the work letter of the lease. However, frequently it is difficult to apply the mechanics of such clauses to specific construction delays, especially when multiple parties are involved.
Include a Well-Drafted Punchlist Clause to Ensure That All Landlord Work Is Completed in a Timely Fashion. It can be extremely frustrating for the tenant when the landlord or the landlord's contractor fails to complete small items of work after the term has commenced. But such problems tend to melt away when the lease contains a punchlist clause. See the next article in this issue for a sample punchlist clause with comment.
Bargain for Outside Dates For Completion of the Premises With a Termination Right if the Landlord Can't Perform and Deliver the Premises. Most pro-landlord lease forms contain language which keeps the tenant waiting if the landlord doesn't deliver the premises to the tenant on the proposed commencement date. Such forms also usually waive the tenant's right to terminate or rescind if the leased premises are not delivered to the tenant as promised. As a result, the tenant should insist upon some outside date (e.g., one hundred twenty days after the contemplated commencement date) by which the premises will be complete and delivered to the tenant. If the landlord misses that date, the tenant should have the right to walk.
Include a Certificate of Term Clause in the Lease to Eliminate Uncertainty About Key Dates. If the term of the lease commences after the landlord's construction is complete, and is not tied to a fixed date in the lease, the tenant should insist that a certificate of term be executed by the parties after the term has commenced. This certificate should specify the precise commencement date, but it should also specify the date the initial term expires, and the exercise dates for renewal options unless they are already expressed in the lease as fixed dates.
If Pre-Commencement Access to the Premises Is Important, Expressly Include That Right in the Commencement Clause. In some cases, the tenant must have access to the premises before the term commences for the installation of telephone and computer equipment, or for other reasons. Frequently, the landlord's contractor is in the space installing the leasehold improvements which are the landlord's responsibility--and will regard the tenant's pre-commencement presence in the space as a nuisance. If such access is critical for the tenant, it should be negotiated and documented in the lease to avoid future problems with the landlord or the landlord's contractor.
Include "Whole Term" Provisions Which Give the Tenant Possession During the Entire Lease Term. If the premises are delivered late to the tenant due to construction delays, cotenancy problems or for other reasons, and if the lease contains a fixed date for the expiration of the term, the tenant will not have the benefit of the space for the entire term originally negotiated. Likewise, if the tenant's possession is interrupted during the term (for destruction and restoration, or for alterations for code compliance, for example), a portion of the term will be lost. See the third article in this issue for a sample provision which protects the tenant from a shortened term when the tenant is not at fault.
If You're a Retail Tenant, Try to Tie Term Commencement to Cotenancy Protections. Retailers with good leverage usually try to condition their obligation to open for business in the premises (i.e., have the term commence) upon the presence of other major "anchor" tenants in the same retail complex. Cotenancy provisions also frequently refer to the percentage of other shop space occupied in the same retail complex. See, for example, the third pro-tenant commencement rider in the Lease Clause Critique below.
For Retailers, Consider a "Rollover" or "Blackout" Clause. Retailers generally do not want to open a new store during the first quarter of the year, which is always weak from a gross sales standpoint. Many retailers also do not like to open during November and December, or during the summer. To implement these preferences, retailers usually try to negotiate clauses which "black out" certain periods for opening, or which "roll over" the commencement date (i.e., defer the opening to the end of the applicable period). See, for example, the third pro-tenant commencement clause rider in the Lease Clause Critique in this LARG.