Commercial leases are complex documents that many business people will encounter during their careers. It would be a mistake for either a landlord or a tenant to think that a commercial lease is a “standard” document. Most provisions contained in a commercial lease can be and should be negotiated. A commercial lease is anything but “standard”, and it is highly recommended for both landlords and tenants to seek the advice of counsel when negotiating a commercial lease. A few important lease provisions that present many issues during a lease negotiation are as follows:
Confession of Judgment Clauses
Pennsylvania is one of the few states that permits a commercial lease to contain a confession of judgment clause. A confession of judgment allows a landlord to unilaterally go to court and obtain an accelerated judgment against a defaulting tenant without notification to the tenant and without providing the tenant with the opportunity to dispute the judgment, except in a few limited circumstances. There are two types of confessions for judgment; one for money damages and the other is for possession of the property. Any confession of judgment clause contained in a commercial lease must be conspicuously written, so a tenant is aware of the existence and importance of the provision.
Most, if not all, commercial leases prepared by a landlord will contain a confession of judgment clause. If a tenant has enough leverage to do so, they should try to negotiate the removal of the clause, but this usually only occurs for bigger business tenants. However, landlords often will agree to remove a confession of judgment for money damages but not remove the confession of judgment for possession, so smaller business should always attempt to negotiate the removal of the confession of judgment clause. If a tenant cannot negotiate the removal of a confession of judgment clause, they should, at the very least, try to negotiate an additional written notice and cure period before the landlord can confess judgment.
From a landlord’s perspective, a confession of judgment is important because it can greatly reduce the time and costs associated with obtaining a judgment and/or regaining possession of the property against a defaulting tenant. Without a confession of judgment provision in the lease, landlords risk a loss of numerous months of rent and operating expenses due to the long litigation process to have a defaulting tenant removed from the leased premises. The confession of judgment for possession is essential for a landlord, so the landlord can regain possession of the property and try to lease out the space to a paying tenant.
Most tenants under a commercial lease are business entities (i.e. an LLC, limited partnership or corporation). Smaller business entities usually do not possess enough assets to satisfy a landlord’s financial requirements for leasing out a space. In such cases, most landlords will require owner(s) of the tenant to enter into personal guaranties as a condition of the lease. A personal guaranty is important for a landlord, especially in situations where the tenant is a small business, because it reduces the landlord’s financial risk when entering into a lease. An owner of entity tenant who signs a personal guaranty is less likely to permit the tenant to default under the lease for fear of personal liability.
An individual that enters into a personal guaranty opens themselves up to liability if the tenant defaults under the lease. An individual who is requested to sign a personal guaranty should try to limit the scope and reduce the risks associated with the personal guaranty. The personal guarantor should negotiate the limit of the dollar amount that they are liable for, as well as the time frame of the guaranty, such as for only the first 5 years. The personal guarantor should also try to carve out specific assets from being included in the guaranty (i.e. their primary residence). The guarantor should also require that the personal guaranty allow the guarantor to receive notification of a tenant default and permit them the opportunity to cure the tenant’s default.
If a landlord is willing to provide time and amount limitations in a personal guaranty, the landlord should make such limitations conditional on the tenant not defaulting under the lease for a certain time period. It is essential for a landlord to get a personal guaranty executed by both spouses in order for the landlord to obtain a judgment against property owned by both spouses. In Pennsylvania, a landlord cannot obtain a judgment against marital property if they only have a personal guaranty signed by one spouse. Landlords may be willing to only have one spouse sign a personal guaranty if that spouse can show that they have a significant amount of assets in their name only.
Assignment and Subletting
Most commercial leases prohibit a tenant from assigning or subleasing the leased premises to another party without first obtaining the landlord’s consent. Often, a commercial tenant will execute a lease failing to insert language that a landlord will act reasonably when a tenant requests the landlord’s consent to an assignment or sublease. A tenant, at the very least should negotiate that a landlord’s consent to an assignment or sublease should “not be unreasonably withheld, conditioned or delayed.” A tenant needs to be concerned with this clause because most tenants do not realize that they could be in default under a lease simply because of (i) the death of a shareholder; (ii) the sale of the company and/or (iii) the reorganization of their company. I have known landlords to hold up the sale/merger of a company because the landlord wants to renegotiate the lease as a condition to granting an assignment. A tenant should attempt to have the lease permit certain assignments or subleases without obtaining the landlord’s consent, such as assignments to an affiliate company. The tenant should also request that stock transfers would not qualify as a transfer for purposes of the lease.
A landlord that permits the assignment or subletting of a lease should list certain conditions that assignee/sub-tenant must meet before the landlord is obligated to consent to such assignment or subletting. Such conditions could include the financial strength of the new tenant and/or what the new tenant’s use of the leased premises will be. Another condition is for the landlord to require a tenant to pay the landlord’s attorney fees related to any consent of any assignment or subletting; however, a tenant should request a cap on such attorney’s fees.
This article only addresses a few important issues regarding a commercial lease. There are many other provisions that a landlord and tenant should negotiate when entering into a commercial lease. Such provisions include, but are not limited to, leasehold improvements, accelerated rent remedies, operating expenses, subordination and non-disturbance clauses and relocation clauses. Some clauses may be more important than others to landlords and tenants because every lease scenario is different depending on that landlord or tenants needs.
For legal counsel in drafting and negotiating commercial leases, please contact James J. Esposito, Esq. at email or 215-736-2521.