A Commercial Lease Primer (With Forms) · including rent, term, space leased, expenses, any...

The Practical Real Estate Lawyer | 9

Cathy M. Rudisill

The key to a strong commercial lease is careful use of the basic terms.

COMMERCIAL LEASES ARE OFTEN the sub-ject of complex, lengthy, and intense negotiations. To be proficient at such negotiations, one must be familiar with certain basic concepts and be able to anticipate and protect clients from issues that may arise during the term of the lease. This article addresses some of the principal legal and financial terms applicable to commercial leases. Examples are included where applicable. All examples provided are for illustrative purposes only, and should be used as a guide and starting point only by practitioners in preparing their own forms in compliance with applicable laws, and with the terms and conditions of each particu-lar transaction.

RENT BASICS • Charges for commercial office build-ing, industrial, and flex space are often calculated as “tri-ple-net,” which means that the rent the landlord receives does not include payment for taxes, operating expenses, and insurance. Tenants pay separately for their share of these charges, which is based upon the square footage leased by the tenant. Generally, landlords will estimate the tenant’s share of expenses in a triple-net lease and the tenant will make a payment each month with its rent to pay its share of expenses. At year’s end, the landlord will

Cathy M. Rudisillis a partner in Nelson Mullins Riley & Scarbor-ough LLP’s Raleigh office. She has experience in commercial real estate matters, including, ac-quisitions, sales, leases, easements and restric-tive covenants, title matters, and legal opinions; financial transactions, including, real estate and asset-based loans; workouts and foreclosures; corporate law; and contract law. She has been named to Business North Carolina magazine’s Legal Elite in Real Estate (2013), and awarded the Triangle Chapter of Commercial Real Estate Women’s Professional Service Award (2012), Member Networking Award (1999, 2000, 2001, 2002, and 2007). She has been named one of the Triangle Business Journal’s Top Women in Business (1999), is AV Rated by Martindale Hub-bell, and has been named a Super Lawyer by Law & Politics magazine.

A Commercial Lease Primer (With Forms)

10 | The Practical Real Estate Lawyer July 2013

review its total costs for expenses and reconcile the payments made by the tenant. Some landlords compute lease charges using a “gross” or full-service lease which includes an all-inclusive rent charge. The rent charge includes all expenses, including taxes, insurance, and operating expenses. This type of lease is used more frequently by landlords who have a well-established estimate of their building expenses. Many tenants like the concept of a full-service lease as it provides them a clear picture of their total lease costs. Most square footage leased is computed based upon the concept of the “rentable” square foot. Rentable square footage is the total area of space leased to the tenant and includes columns, pro-jections, lobbies, utility rooms, and bathrooms. In contrast, the usable square footage is the area that will actually be occupied by the tenant, a lesser to-tal than the rentable square footage. If the usable square footage were used to calculate tenant charg-es instead of the rentable square footage, portions of the leased premises would be exempt and not covered by tenant payments. The distinction in us-able versus rentable area is often explained as the area for which tenant buys carpet versus the area that gathers dust. The rentable square foot concept is used in calculating rent and expense charges so that the totality of the leased premises is allocated amongst the tenants in a building. Tenants should confirm the measurement standard that is used by the landlord, and verify that their square footage as computed by the landlord is accurate. The Build-ing Owners and Managers Association (“BOMA”) promulgates measurement standards that have gar-nered broad acceptance.

LEASE TERMS • Depending upon the interests and leverage of the parties to a lease, almost any lease term is subject to negotiation. Some of the provisions that may be negotiated include the fol-lowing.

Rent The amount of rent paid by a tenant is calculat-ed based upon market conditions, type of building (office vs. industrial center), quality of building (an A type building vs. a C type building), profit margin sought by the landlord, and leverage of the tenant (anchor tenant vs. tenant with small square footage, or first tenant in new space vs. last tenant in space). In determining the amount to charge a tenant for rent, the landlord makes certain assumptions about the charges it will incur for taxes, expenses, management fees, and insurance. These assump-tions should be made after thoroughly investigating the actual cost of such expenses for similar proper-ties. A figure for debt service must also be includ-ed, as well as a percentage of profit margin for the landlord. All expenses must be calculated carefully. If expenses are underestimated, the profit margin of the landlord may be adversely impacted.

Base Rent Base rent is a fixed amount of rent per square foot of the space leased. Calculations of base rent must be sufficient to recoup all of the landlord’s ex-penses with a gross or full-service lease, and all of the landlord’s expenses, except for net items, with a triple-net lease.

Increases in Rent Increases in rent are often based upon Con-sumer Price Index (“CPI”) increases. Tenants will seek to cap such increases by requiring that the in-creases cannot exceed, for example, five per cent of the amount paid the previous lease year.

Rent Abatement Tenants may negotiate a rent abatement for a portion of the lease. During the recent recession, abatements could be as much as 12 months. In bet-ter economic climates, abatements are generally from one to three months. Where leased space re-mains in low demand, or where leasing to a par-

Commercial Lease Primer | 11

ticular tenant is particularly desirable to a landlord, rent abatements have become very common. An example of a rent abatement addendum is attached as Exhibit A. Rent abatements are especially useful for a tenant who needs an opportunity to get in its space, conduct business for a few months, and then begin paying rent. In providing a rent abatement, a landlord should consider and address how the rent abatement affects its damages upon the tenant’s de-fault.

Renewals Or Extensions Rent during renewal terms may be established as a set amount, or calculated based upon:• Increases in the CPI;• Market rates at the time of the renewal; or• A certain percentage increase agreed upon by

the parties.

An example of a CPI calculation is attached as Exhibit B. An example of a lease renewal provision is attached as Exhibit C. If the terms of a right to renew are vague, or left to later resolution by the parties, the right to renew may arguably be void. All conditions of a right to renew should be addressed, including rent, term, space leased, expenses, any al-lowances, and whether the remaining lease provi-sions continue to apply.

Operating Expenses Tenants are generally required to pay a share of the expenses required to operate, maintain, and repair the common areas of a building. With triple-net leases, the tenant payment are based upon the landlord estimate of expense at the beginning of each lease year. With multi-tenant buildings, oper-ating expenses are generally based upon the tenant’s proportionate share of the building. An example of a proportionate share calculation is attached as Ex-hibit D. With gross or full-service leases, a base year may be referenced, and provide that after the first lease year under the lease, any increases over the

amounts paid by the tenant in the base year shall be borne by the tenant as additional rent payments. Some leases have the landlord bearing a certain portion of the expenses up to a set dollar amount which is called a “stop.” Any amounts incurred in excess of this stop are borne by the tenant, and as-sessed by the Landlord as additional rent.

Taxes Payment by tenants of taxes generally follows the same manner as payment of operating expens-es. Taxes should be defined to specify what types of taxes, charges, and assessments are included. The tenant may seek a right to contest the amount of the taxes, especially in single-tenant buildings.

Insurance Insurance payments by tenants generally follow the same manner as payment of taxes and oper-ating expenses. Tenants may seek to negotiate the types and amounts of insurance coverage; the man-ner, timing, and incidence of repair; and the recon-struction of a building in the event of casualty or condemnation. A waiver of subrogation should be included for both landlord and tenant by the other party, and each party should seek evidence of the other party’s insurance.

Audit Tenants may seek to audit a landlord’s charges for taxes, insurance, and common area expenses to verify the types of charges included in the calcu-lation and the basis for apportioning the charges amongst all tenants. Tenants should ensure that estimates of such charges and actual amounts are reconciled by the landlord within a certain period after the end of the landlord’s calendar year to as-sist the tenant in budgeting its expense. Landlords should reconcile such amounts promptly to ensure that the tenants do not have a right to argue that the landlord has waived its right to collect such charges.


Security Deposits When space is not in great demand or the land-lord is comfortable with the financial capacity of the tenant, a landlord may waive the requirement of a security deposit. If the tenant is a new business or has insufficient financial capacity, a greater de-posit may be required, or in some cases, landlords will allow a tenant to post a letter of credit or other collateral. When deposits are required, they are generally in the amount of one month’s rent. With-out a deposit, a landlord may have little recourse if a tenant vacates and abandons its premises. Ap-plicable state law should be examined to determine whether a security deposit with a commercial lease must be placed in an escrow account.

Upfit Allowances The amount of upfit allowance provided to a tenant can be nothing or a complete upfit, depend-ing upon current market conditions, financing or upfit monies available to the landlord, the leverage of the tenant, and the interest of the landlord in leasing to the tenant. Landlords will attempt to re-coup the upfit allowance from the rent paid by the tenant over the initial years of the term of the lease. Often provisions are incorporated into a lease re-quiring that a tenant pay a certain portion of the upfit costs to the landlord if the tenant seeks an early termination of the lease. This amount would decrease the longer the tenant remains in its space.

Condition And Use Of Premises Landlords seek to lease premises “as-is” condi-tion. If a landlord is not required to provide an upfit allowance or to perform upfit for the tenant, the costs incurred by the landlord are reduced and its returns are greater. To limit its liability, the landlord will seek to avoid providing representations to the tenant regarding the condition of the premises or the suitability of the premises for use by the ten-ant. Tenants should obtain representations from the landlord on the present condition of the prem-

ises, the compliance of the premises and the build-ing with applicable laws (including, the Americans With Disabilities Act), the manner in which upfit will be performed, and warranties about the upfit performed to provide the tenant comfort with re-spect to the premises and its upfit. Tenants should perform due diligence regarding the condition and permitted uses for the premises by having the prem-ises inspected by a professional inspector or general contractor, and consulting with the local planning department to verify the zoning of the property and the uses permitted. Tenants should insure that the use provision is sufficiently broad that they can fully conduct their business at the premises.

Term Landlords seek to have long lease terms while tenants generally seek shorter terms. If a tenant is a financially capable tenant, the landlord will want as long a lease term as the tenant will agree. For the tenant, if it can obtain a favorable rent agreement and is comfortable that its business will continue to prosper, a long term is acceptable. The typical term in an office building is five years but initial terms will vary from three to 10 years. The typical ground lease is at a minimum 30 to 40 years, and at times 99 years. Many tenants will seek to negotiate options to renew or extend their term as part of the original lease. See Exhibit C for an example of the language used to renew or extend the term of a lease. Provi-sion should be made for rent and expenses when the tenant holds over beyond the initial term, with-out the right to renew the term of the lease.

Options To Terminate Office tenants may seek the right to terminate their leases if they have concerns about the success or growth of their business. From a landlord’s per-spective, all such rights should be conditioned upon there being no event of default by the tenant un-der the lease at the time the right is exercised based upon the view that a tenant should not be allowed


out of its lease if it is in default. Many such rights are conditioned upon the payment by the tenant of a buy-out fee to reimburse the landlord for up-fit monies expended or other monetary concessions provided by the landlord such as rent abatements. This fee may be graduated depending upon the time of the exercise of the termination. An example of an option to terminate is attached as Exhibit E.

Options To Purchase Ground lease or other full building tenants may be provided rights of first refusal to purchase their building. Such rights must be clearly stated, includ-ing the manner of determining the purchase price. Some states have time limitations on the exercise of such rights that if not included in the lease will void the option to purchase. Arguably, if any conditions to the exercise of such rights are unclear or omitted, the rights may be unenforceable. Tenants may seek this right to have a measure of control over who continues as the landlord under a lease.

Casualty And Condemnation Lease provisions concerning what happens to the lease once a casualty or condemnation has oc-curred are often negotiated. The issues concern:• Whether the lease terminates;• Who has the right to terminate the lease (the

landlord, the tenant, or both);• How long a period of time the landlord has to

rebuild if he is required to do so;• What property the landlord is responsible for

repairing and replacing;• What proportion of the building or property

must be damaged or taken to trigger these pro-visions; and

• What charges are abated to the tenant and when does abatement commence and end.

Tenants should also seek comfort from the land-lord regarding its provision of substitute space dur-

ing any repair or reconstruction if the tenant is un-able to occupy its space. If the landlord has a loan with a lien upon the building, its lender may have requirements for the application of the insurance or condemnation pro-ceeds that could impact how quickly, and whether or not the landlord may rebuild. In certain circum-stance, a lender will require that proceeds be used to repay its loan, in which case, the landlord would need to pay for repairs from its own funds, or termi-nate the lease if the landlord is unable to do so.

Subordination And Nondisturbance Landlords and their lenders will want to insure that the interest of the tenant in the lease is subor-dinate to the lien of the deed of trust of the lender. The lender requests subordination of the tenant interest to insure that the provisions of its deed of trust govern and control over any conflicting pro-vision in the lease. By having the provisions of its deed of trust control over the lease, a lender can re-quire for example, that insurance proceeds paid to the landlord be used to pay down the loan made by the lender to the landlord regardless of provisions in the lease that require the landlord to rebuild. In agreeing that its interest is subordinate, the tenant will want to insure that it is granted nondisturbance under the lease which means that the tenant will be allowed to remain in the premises if the lender becomes the owner of the building. Lenders will generally agree that a tenant is granted nondistur-bance so long as there is no event of default by a tenant, and so long as the tenant agrees to attorn to the lender should the lender become its landlord. To effectuate the agreement between the lender, the landlord and the tenant, the parties will execute a Subordination, Attornment and Nondisturbance Agreement.

Maintenance And Repairs Maintenance, repair, and replacement obliga-tions must be delegated clearly so that issues will not


arise later about who is responsible, the landlord or the tenant. With a triple-net lease, the tenant may be wholly responsible for all repairs and mainte-nance, while under a gross or full-service lease, the tenant may be responsible only for disposing of its refuse. Who bears the responsibility for these items will affect operating expense calculations. In doing its due diligence, a tenant should examine the con-dition of the building systems for which the tenant is responsible as the repair or replacement of an HVAC system can be very costly, and of particular concern, if the lease term of the tenant is ending and it must repair the HVAC system before it va-cates the building. Under the law of many states, if the lease does not delegate responsibility for repair and maintenance, the responsibility resides with the tenant as the tenant is in possession of the premises. Leases generally require that when a tenant vacates its premises, it must leave the premises in good con-dition and repair and broom clean. In vacating the premises and satisfying this requirement, tenants should insure that they are not viewed as respon-sible for repairs that are allocated to the landlord under the lease.

Indemnities Leases executed in a commercial setting today generally contain even-handed indemnities of each party to the other unless the parties have agreed to forgo indemnities, waive claims against each other, and seek recourse from each party’s insurer.

Default Leases include specific provisions detailing what acts or omissions constitute a default by the tenant under the lease. Tenants may seek to have notice, in writing, and a grace period before a default under the lease becomes an event of default and allows the landlord to begin exercising its remedies. Landlords must consider the administrative requirements that they must comply with before declaring an event of default, and ensure that such requirements are

not too cumbersome to effectuate. Landlords may agree to provide written notice of a default but con-dition such notice on the requirement that it only be provided a certain number of times each year. In negotiating a lease, landlords do not generally agree to waive any of their remedies upon the occurrence of an event of default but seek to retain the right to assert that all remedies available at law or in equity are available to the landlord since the landlord will want to evaluate at the time of default what is the best remedy for it to pursue. Tenants may seek to have written notice provided before the exercise of certain remedies after an event of default due to the severity of a particular remedy such as securing the premises. Landlords tend to avoid such provisions because a delay in exercising its remedies could result in further losses for the landlord. What may seem a small and amicable resolution during lease negotiations can become a large problem once the lease is in default. It is of benefit to both the landlord and the ten-ant to address default by the landlord despite the resistance of some landlords to do so. By addressing a landlord default, the parties can clarify what con-stitutes a landlord default, the grace period allowed to the landlord, and the remedies of the tenant. An example of a landlord default provision is attached as Exhibit F. Applicable law generally requires that each par-ty act to mitigate its damages upon the occurrence of a default but it is best for the tenant to request that an express provision be included in the lease to that effect to avoid issues with differing common or case law. A tenant would not want the landlord to have no obligation to mitigate its damages as the landlord could keep seeking payment from the ten-ant regardless of whether it makes any effort to find a new tenant.

Attorneys’ Fees Landlords generally seek to recover their at-torneys’ fees for enforcing lease provisions. Tenants


should seek instead to have a prevailing party provi-sion inserted in the lease so that both parties have a right to recoup attorneys’ fees depending upon which party proves to have the better argument. Landlords may also include provisions for late fees and interest for late payments. Tenants should seek to insure that these fees are reasonable.

Lease Guarantees If at all possible, landlords should seek guaran-ties with corporate and partnership tenants. This assists them in seeking recourse upon a default un-der the lease. If the tenant defaults in payment of its rent, it is likely having issues with its income and thus may have no assets from which the landlord can recover its losses. The procurement of a guaranty is often a question of the leverage of the parties, the financial capacity of the tenant, and the demand for the leased space. An example of a lease guar-anty is attached as Exhibit G. The landlord should seek to have any debt of the tenant to the guaran-tor subordinated to the lease obligations to facilitate the landlord collection of its losses. The landlord should also require that the guarantor waive any rights under applicable law to require that the land-lord first pursue the tenant or any other party for a default under the lease prior to the landlord pur-suing the guarantor, if permitted under applicable state laws.

Assignment And Subleasing Tenants will generally seek the right to assign or sublease their interest in a lease to allow the ten-ant to plan for growth or changes in its business. Tenants will want the flexibility of reducing their amount of space if their business does not prove as successful as the tenant had hoped, or if the busi-ness is so successful, the tenant wishes to move to larger space in another location or wishes to assign the lease to a successor purchaser of its business. The tenant will want to review its growth plans and obtain sufficient language in its lease to allow it to

effectuate its growth plans such as assigning its in-terest to an affiliate, parent or other successor. The landlord will want to insure that if a tenant assigns or subleases its interest in its lease, the landlord con-tinues to have a high quality tenant with the finan-cial capacity to pay its rent. Rights to assign and sublease are conditioned typically upon a require-ment that the landlord must consent to the assign-ment. The tenant will seek to have the consent of the landlord be reasonably exercised. In determin-ing whether an assignee is suitable, the landlord will examine the business of the assignee and its finan-cial capacity. Landlords may also refuse to release a tenant from liability under its lease despite its having assigned or subleased its interest in the lease unless the landlord can obtain sufficient assurances of the financial capacity of the new tenant/sub-lessee, and have the new tenant/sublessee assume any continuing obligations of the former tenant. The lease should provide clearly what constitutes an assignment, for example, whether a change in the ownership structure of the tenant would effect an assignment. The definition of an assignment is important to prevent the tenant from modifying its ownership structure in such a manner that it has assigned the lease by operation of law but such a modification is not defined as an assignment under the lease. Applicable state laws will affect the inter-pretation of the language in the lease governing the right of a tenant to assign or sublease.

Entry By Landlord Landlords should ensure that they have a right to enter upon the premises to inspect the same, to conduct repairs to the premises, and to show the premises to prospective tenants during the last por-tion of the term. Since the tenant is in possession of the premises, these rights of the landlord should be expressly included in the lease. Tenants will want to ensure that such inspections are conducted upon notice, if at all possible, and in a manner that does not disrupt the operations of the tenant. Tenants


will also want the landlord to follow any require-ments of the tenant regarding its security, the pro-tection of its confidential information, or the entry into any secure or potentially hazardous areas of the premises such as laboratory space.

Environmental Matters Most commercial leases contain a provision concerning environmental matters where both landlord and tenant represent to each other their knowledge of their environmental usage, the con-ditions under which hazardous and toxic materials may be handled and stored at the premises, and agree to indemnify each other. These provisions may be negotiated as to the breadth and complete-ness of the parties’ knowledge and the indemnities provided. Landlords must do sufficient due dili-gence, including environmental audits, to provide their representations. Some landlords seek a list from their tenants of the hazardous materials used by them in the premises. Tenants will want to re-view any audits that the landlord has obtained. An example of an environmental insert is attached as Exhibit H.

Use Restrictions Certain office tenants may seek exclusive use provisions or require that the landlord covenant re-garding the other tenants who will be allowed to lease space in the building to ensure that they will not have direct competition within the premises, or have a competing party in their building who may thus obtain information about their clients or customers. Landlords may seek to protect other tenants in the building by limiting the usage to be made by a tenant of its space. Landlords must use care in agreeing to such provisions since they may agree to an exclusive use provision now that later may cause them to be unable to attract a certain type of tenant. In addition, for a landlord to moni-tor such provisions in a multi-building project can be time-consuming and problematic. An example

of an anti-competition covenant is attached as Ex-hibit I. Care should be used with such covenants as antitrust issues may arise with their use.

Limitation Of Liability Of Landlord Landlords seek to insert clauses in their leases limiting their liability to a tenant to the interest of the landlord in the building which should include the rents and profits, and insurance proceeds there-from. The enforceability of such clauses in all cases has been questioned but they do provide a level of comfort to the landlord. Tenants may question such clauses when the landlord has little, if any, equity in the building and the building is mortgaged to a third party, which would leave a tenant with little recourse. In addition, such clauses may be of little comfort with environmental liability situations that might quickly exhaust any interest of the landlord in the building. Tenants may obtain some com-fort by ensuring that the landlord has substantial amounts of liability and environmental insurance. An example of a clause limiting the liability of the landlord is attached as Exhibit J.

Relocation Of Tenant With multi-tenant buildings, landlords may in-clude provisions allowing them to relocate a tenant to new premises. This allows the landlord flexibility in attracting and placing new tenants. Some ten-ants may strongly object to the possibility that they may be moved, and may refuse such provisions, due to the inconvenience and possible business dis-ruption incurred. At a minimum, a tenant should request that the landlord give them substantial no-tice, and reimburse them for their costs, including moving expenses, upfit costs, installation of utilities, equipment and furniture, and letterhead and busi-ness cards. A tenant will want to insure that it is moved to substantially similar space including age of building, size of space, configuration and desire of location — such as floor level and location, or view from premises, that it has substantially similar


upfit, and that it does not pay any greater charges if the space is larger than its current premises. The tenant will also want to limit such relocations so that it is not moved when it has little term left on its lease. An example of such a provision is attached as Exhibit K.

Rights To Lease Adjacent Space Tenants may seek the right to lease adjacent space to help them plan for future growth and ex-pansion. In providing such rights, the landlord must keep in mind and notify the tenant of any tenants that have rights superior to those of the tenant. An example of an insert for leasing adjacent space is attached as Exhibit L. Such a provision is beneficial to a tenant but may provide headaches for the land-lord in administering these provisions. The landlord will need to contact the tenant when others express an interest in adjacent space and ensure that cor-rect records are maintained of each tenant’s priori-ty in the adjacent space. These provisions should be clear with respect to the space in which the tenant has rights, the terms under which the tenant would lease the space, and the time period the tenant has to respond.

Landlord’s Lien Landlords often seek a lien upon the person-al property of its tenants. Such a lien is sought by the landlord to assist it in recouping its losses in the event of a default by the tenant under the lease. Tenants may refuse to agree to such a lien if their personal property secures an operating line of credit or other financing and they have agreed not to further encumber their personal property, or they may wish to seek such financing in the future and not wish at that time to encumber their per-sonal property. If a lease provides for a lien by the landlord, compliance with local law is required to perfect a security interest in such a lien. In addition to obtaining and perfecting a security interest in the personal property of the tenant pursuant to agree-ment under the lease, a landlord may have certain

rights under applicable law to a statutory lien on the personal property of the tenant. An example of an insert for a landlord’s lien is attached as Exhibit M.

Signage Signage can be significant to a tenant in high-lighting its location and prominence in the area, and also in marketing its business. Tenants should seek signage on the lobby directory in their build-ing, any monument signage located on the land adjacent to the building, and the entrance to their premises. Tenants leasing substantial square foot-age in a building should seek visible signage on the exterior of the building. Having the ability to grant a tenant signage on its building is a useful recruiting tool for a landlord so the landlord should use care in granting exterior building signage to tenants. Local governments regulate signage as to size, coloring, location and other factors so these regulations and ordinances should be taken into consideration in developing approved signage.

Rules And Regulations Many leases contain detailed rules and regula-tions for tenants. Such rules and regulations may be updated by the landlord periodically. Tenants should ensure that the rules and regulations are rea-sonable in form and are enforced uniformly. No-tice should be provided to tenants of new rules and regulations before their becoming effective.

CONCLUSION • A lease is a complicated docu-ment. Many landlords and tenants are reluctant to expend money on attorneys’ fees for leases. Some think that lease negotiations may be conducted less expensively by laypersons or brokers. It is useful, however, when problems arise during the term of a lease to have had legal representation to anticipate and protect one’s interests. With the myriad of le-gal issues that a lease presents, it is helpful to have an attorney skilled in lease negotiations to help one sort through the maze.


EXHIBIT A Rent Abatement

Notwithstanding anything to the contrary contained in Section _____ of the Lease, and provided that Ten-

ant enters into occupancy of the Premises on the Commencement Date, and there is no default or event

of default hereunder by Tenant, Tenant’s obligation to pay Base Rent under the Lease shall be abated (the

“Rent Abatement”) for the first ___________ (___) month(s) of the term of the Lease (the “Rent Abate-

ment Period”). The Rent Abatement Period shall begin on the Commencement Date of the Lease as estab-

lished pursuant to Section ____ hereof, and shall expire ____________ (___) months thereafter.

EXHIBIT B CPI Formula

(1) During each Lease Year of the Renewal Term, Tenant covenants and agrees to pay to Landlord as

annual base rent an amount equal to the product obtained by multiplying the annual base rent for the im-

mediately prior Lease Year of the Renewal Term by a fraction, the numerator of which shall be the CPI-U,

as that term is hereinafter defined, for the eleventh (11th) calendar month of the immediately prior Lease

Year of the Renewal Term, and the denominator of which shall be the CPI-U for the eleventh (11th) calen-

dar month of the second most prior Lease Year of the Renewal Term. For the purposes of computing the

annual base rent for the first Lease Year of the Renewal Term, the immediately prior Lease Year shall be

deemed to be the last lease year of the initial term of the Lease. The annual base rent computed in accor-

dance with this Section ___ shall be paid in equal installments in advance on the first day of each calendar

month of the Renewal Term.

The CPI-U shall mean the “Consumer Price Index — Seasonally Adjusted U.S. City Average For All Items

For All Urban Consumers, (1982-84=100),” published monthly in the “Monthly Labor Review” of the

Bureau of Labor Statistics of the United States Department of Labor. If the CPI-U is discontinued, the

“Consumer Price Index—Seasonally Adjusted U.S. City Average For All Items For Urban Wage Earners,

and Clerical Workers (1982-84=100),” published monthly in the “Monthly Labor Review” of the Bureau

of Labor Statistics of the United States Department of Labor (the “CPI-W”), shall be used for making

the computation set forth above. If the CPI-W is discontinued, comparable statistics on the purchasing

power of the consumer dollar published by the Bureau of Labor Statistics of the United States Depart-

ment of Labor shall be used for making the computation set forth above. If the Bureau of Labor Statistics

shall no longer maintain statistics on the purchasing power of the consumer dollars, comparable statistics

published by a responsible financial periodical or recognized authority selected by Landlord shall be used

for making the computation set forth above. If the base year “(1982-84=100)” or other base year used in

computing the CPI-U is changed, the figures used in making the computation above shall be changed ac-


cordingly, so that all increases in such price index are taken into account notwithstanding any such change

in the base year.

Notwithstanding anything to the contrary contained in this Lease, in no event shall the base rent for any

given Lease Year of the Renewal Term be less than the base rent for any previous Lease Year.

EXHIBIT C Renewal or Extension of Term

[__] Option to Renew the Term of the Lease.

(a) Provided Tenant shall have well and faithfully performed in a timely manner all of the terms, covenants,

and conditions on Tenant’s part to be performed under the Lease, Tenant shall have the option to extend

the term of the Lease for one renewal term of ___ (_____) Lease Years in duration (hereinafter referred to

as the “Renewal Term”), provided that Tenant shall not be in default under the Lease, either on the date

such rights are exercised or on the date the Renewal Term shall commence. The date of the commence-

ment of the Renewal Term shall be the day after the expiration of the initial term of the Lease. All of the

terms and conditions of the Lease shall continue in full force and effect during the Renewal Term, except

that (i) upon the exercise by Tenant of its right to extend the term of the Lease for the Renewal Term,

Tenant shall have no further right to renew or extend the term of the Lease; and (ii) the rent during the

Renewal Term shall be adjusted as provided in this Lease.

(b) Tenant covenants and agrees to pay to Landlord as base rent the following sums per month during the

Renewal Term in accordance with the terms and conditions of the Lease:

[INSERT RENT CALCULATION].

Tenant shall deliver Landlord written notice of its election to exercise its option to renew no less than nine

(9) months before the expiration of the initial term of the Lease; failing which Tenant’s right to the Renewal

Term shall be null and void.

EXHIBIT D Proportionate Share Calculation

Tenant’s share of [INSERT NAME OF EXPENSE] shall be based upon the ratio of the [INSERT

SQUARE FOOTAGE OF PREMISES] to the total square footage of the [INSERT DEFINED TERM

FOR WHOLE OF BUILDING] which equals _____________ percent.


EXHIBIT E Option To Terminate

Commencing with [INSERT EFFECTIVE DATE OF TERMINATION] (the “Termination Date”), and provided that Tenant is then occupying the Premises, and shall have well and faithfully performed all of its obligations pursuant to the Lease with no default under any of the terms thereof beyond any applicable cure period, Tenant shall have the option to terminate the Lease, upon the (i) provision of ___ days’ written notice to Landlord (the “Notice”) before the Termination Date, and (ii) payment of a termination fee in the amount of $______________ (the “Fee”) with the Notice. The Fee is comprised of [INSERT BREAK-DOWN OF FEE]. Upon the termination of this Lease, Landlord and Tenant shall have no further liability to each other hereunder except as provided in Sections _______ [INSERT SECTION NUMBERS FOR ENVIRONMENTAL LIABILITY and OTHER MATTERS OF CONTINUING LIABILITY].

EXHIBIT F Landlord Default

Default by Landlord. Should Landlord fail to perform any of its duties or obligations hereunder, Landlord shall have a period of thirty (30) days within which to commence a cure of such failure. Failure of Landlord to commence such cure within such 30-day period or to effect such cure within such 30-day period shall be an event of default under this Lease, and Tenant may, at its option, elect to (i) [OPTIONAL - TENANT RIGHT TO TERMINATE] terminate this Lease upon written notice to Landlord, (ii) provide Landlord with an additional period of time within which to effect such cure, (iii) commence such cure itself and re-quire that Landlord immediately reimburse Tenant for its expenses, or (iv) pursue all rights and remedies available to Tenant at law or in equity [OPTIONAL – LIMITED REMEDIES OF TENANT]; provided, however, in the event of an emergency, Tenant may immediately effect a cure of Landlord’s failure should Landlord failure act immediately to do so, without the requirement of any notice by Tenant to Landlord.

EXHIBIT G Guaranty of Lease

THIS GUARANTY, made this _____ day of _______________, _____, by ___________________________________________________________ (hereinafter called “Guarantor”), in favor of ___________________________________, a __________________________ (hereinafter called “Landlord”),

WITNESSETH:

WHEREAS, Landlord has entered into a Lease Agreement (the “Lease”) of even date herewith with (hereinafter called “Tenant”), which Lease demises certain Premises in ______________________ located in the County of ____________, State of North Carolina (the “Building”);


WHEREAS, Guarantor has a financial interest in Tenant, and Landlord would not have entered into the Lease in the absence of the execution and delivery of this Guaranty; and

WHEREAS, Guarantor has examined the Lease, and is fully cognizant of the covenants, conditions, and agreements contained herein and its obligations under this Guaranty with respect to the Lease. NOW, THEREFORE, in consideration of the premises, and the sum of One and No/ 100 Dollars ($1.00)paid by Landlord to Guarantor, the receipt and sufficiency of which is hereby acknowledged, Guar-antor agrees as follows:Guarantor hereby unconditionally guarantees to Landlord the full and prompt performance and obser-vance of all covenants, conditions, and agreements provided in the Lease to be performed and observed by Tenant, its successors, and assigns, including but not by way of limitation, if any, to fixture and ready the Premises for Tenant’s occupancy at the time and in the manner specified for the same.

Guarantor agrees that its obligations hereunder shall not be terminated, reduced, or affected in anyway by reason of the assertion by Landlord against Tenant of any right or remedy for the enforcement of the obligations of Tenant under the Lease, or by reason of the waiver by Landlord of, or its failure to enforce, any of the terms, covenants, or conditions of the Lease, or the granting of any indulgence or extension of time to Tenant; and Guarantor waives notice of any of the foregoing, and of default by Tenant in payment of rent, and any other sum of money required to be paid under the Lease, and breach by Tenant of any covenant, condition, or agreement contained in the Lease. Guarantor further agrees that its obligations hereunder shall apply with full force and effect to any amendment, renewal, or extension of the Lease, even though made without notice thereof to Guarantor. Guarantor hereby consents to any sublease of the Premises covered by the Lease which may be made or proposed by Tenant.

Guarantor agrees that its liability under this Guaranty shall be primary, and that with respect to any right of action which shall accrue to Landlord under the Lease, Landlord may at its option proceed against Guar-antor without having commenced any action or having obtained any judgment against Tenant. Guarantor waives any and all defenses available to it in connection with the enforcement of the Guaranty, including but not limited to the right to require pursuit of any remedies against Tenant or any other person or to require that security held by Landlord be foreclosed or that resort be had to any other security or to any balance of any account or credit, before pursuit against Guarantor under this Guaranty.

[OPTIONAL RESTRICTION ON GUARANTOR] During the term of the Lease, Guarantor agrees that Guarantor shall not, either directly or indirectly, own, operate, or be financially interested in, either by itself or with others, a business like or similar to the business permitted to be conducted under the Lease within a radius of three (3) miles of the perimeter of the Premises except for those which Guarantor has in operation as of the date of this Guaranty.

This Guaranty shall be binding upon Guarantor, its successors and assigns, and shall inure to the benefit of Landlord, its successors and assigns.


This Guaranty shall be governed by and construed in accordance with the laws of [INSERT GOVERN-ING JURISDICTION.]

IN WITNESS WHEREOF, the undersigned Guarantor, has caused this Guaranty to be executed in its name, and on its behalf by its duly authorized officer, and its seal to be hereto affixed, and attested on the day and year first set forth above.

___________________________

By:________________________Its:________________________

[ADD NOTARY FOR AUTHENTICATION OF SIGNATURE]

EXHIBIT H Environmental Insert

Definitions. As used in this Section, “Hazardous Substance” means any pollutant, contaminant, toxic or hazardous substance, hazardous waste, dangerous substance, potentially dangerous substance, noxious substance, hazardous, ignitable, explosive, toxic or radioactive material, urea formaldehyde foam insula-tion, asbestos, PCBs, petroleum products or any other substances the removal of which is required, or the manufacture, production, generation, use, maintenance, disposal, treatment, storage, transfer, handling or ownership of which is restricted, prohibited, regulated or penalized, by any federal, state or local statute, law, regulation or other legal requirement now or at any time hereafter in effect, including but not limited to, the Comprehensive Environmental Response, Compensation, and Liability Act (U.S.C. 9601 et. seq.), the Hazardous Materials Transportation Act (49 U.S.C. 1801 et seq.), the Resource Conservation and Re-covery Act (42 U.S.C. 6901 et. seq.), the Federal Water Pollution Control Act (33 U.S.C. 1251 et seq.), the Clean Air Act (42 U.S.C. 7401 et seq.), the Toxic Substances Control Act, as amended (15 U.S.C. 2601 et seq.), and the Occupational Safety and Health Act (29 U.S.C. 651 et seq.), as these laws and legal require-ments have been or are in the future amended or supplemented; provided, however, Hazardous Substances shall not include substances used or stored by Tenant at the Premises in compliance with Applicable Laws for use with its business or as cleaning supplies.

Covenants. Tenant shall not use or permit any Tenant Party to use the Premises or any other part of the Project for the unlawful production, generation, manufacture, treatment, transportation, storage or dis-posal of any Hazardous Substance, except with the prior written consent of Landlord. Tenant covenants with Landlord that it will: (i) deliver promptly to Landlord true and complete copies of all notices received by Tenant from any governmental authority with respect to the generation, storage or use by Tenant of any Hazardous Substance (whether or not on or in the Premises); (ii) permit entry onto the Premises by Land-lord or Landlord’s representatives at any reasonable time upon reasonable prior notice to verify Tenant’s compliance with the provisions of this Section and to monitor Tenant’s generation, storage or use of any Hazardous Substance, including, but not limited to the performance of testing required by Landlord, any


governmental agency or lender to determine the status of any Hazardous Substance on or in the Premises; (iii) pay to Landlord as Additional Rent, all of Landlord’s actual costs and expenses in connection with such entries, verification, monitoring and testing as well as the reporting therefor; and (iv) complete fully, truthfully and promptly any questionnaires sent by Landlord with respect to Tenant’s generation, storage or use of any Hazardous Substance and any affidavits, representations and the like from time to time at Landlord’s request with respect to Tenant’s generation, storage or use of any Hazardous Substance.

Indemnity. Tenant hereby indemnifies, defends, and holds harmless Landlord from and against any and all liabilities, expenses (including, without limitation, court costs and reasonable attorney fees), demands, damages, costs, losses, clean-up costs, actions, causes of action, claims for relief, penalties, fines and charges incurred, assessed, resulting from or arising out of the presence of any Hazardous Substance on, in or under the Premises or the Property (and any off-site property when such Hazardous Substance emanated from the Premises) resulting from the activities, operations or occupancy of Tenant or any act or omission of Tenant or Tenant’s employees, agents, visitors or invitees (hereafter, a “Tenant Party”), regardless of whether Landlord shall have consented to, approved of, participated in or had notice of such act or omis-sion or the presence of such Hazardous Substance. Landlord hereby indemnifies, defends and holds harm-less Tenant from and against any and all liabilities, expenses (including, without limitation, court costs and reasonable attorney fees), demands, damages, costs, losses, clean-up costs, actions, causes of action, claims for relief, penalties, fines and charges incurred, assessed, resulting from or arising out of the presence of any Hazardous Substance on, in or under the Building, Project or the Property (and any off-site property when such Hazardous Substance emanated from the Project) resulting from the activities, or operations by Landlord of the Project or any act or omission of Landlord or Landlord’s employees, agents, visitors or invitees (hereafter, a “Landlord Party”). The provisions of this Section shall survive the expiration or earlier termination of this Lease.

Landlord Representation. Landlord represents and warrants to Tenant that Landlord has not as of the execution date of this Lease, received written notice, nor does Landlord have any knowledge, of any viola-tion at the Building or the Project from any local, state or federal governmental authority with respect to the generation, storage or use of Hazardous Substance on the Premises. Landlord shall indemnify Tenant from any loss or damage resulting from any contamination of the Property that was caused by the actions of Landlord or any Landlord Party.

EXHIBIT I Anti-competition Covenant

[__.] Landlord agrees that, during the term of the Lease, which term shall include any renewal terms included within this Lease, and provided that Tenant is then occupying the Premises, and shall have well and faithfully performed all of its obligations pursuant to the Lease with no default under any of the terms thereof beyond any applicable cure period, Landlord shall not enter into a lease of space at the Building with any tenant whose principal business shall be __________________________________________________; provided further, however, that Landlord shall not be prevented from renewing or extending a lease existing as of the date hereof with any such tenant.


EXHIBIT J Limitation of Liability

Notwithstanding anything to the contrary contained in this Lease, Tenant agrees, and understands that Tenant shall look solely to the estate and property of Landlord in the Building and the Land, including, but not limited to, all rents, profits, and proceeds therefrom, for the enforcement of a judgment (or other judi-cial decree) requiring the payment of money by Landlord to Tenant by reason of default, breach or event of default of Landlord in performance of its obligations under this Lease, it being intended that there will be absolutely no personal liability on the part of Landlord, and no other assets of Landlord, the investors in Landlord, or of Landlord’s partners, if any, shall be subject to levy, execution, attachment or any other legal process for the enforcement or satisfaction of the remedies pursued by Tenant in the event of such default, breach, or event of default, this exculpation of liability to be absolute, and without exception whatsoever.

EXHIBIT K Relocation of Tenant

At any time after the Commencement Date, and if Landlord shall elect to devote all or a portion of the Premises to use by another existing or prospective tenant, Landlord shall have the right to relocate the Ten-ant to other comparable space in the Premises or any other building in the Project (the “New Premises”) by written notice delivered to Tenant not less than one hundred twenty (120) days before the date set forth in said notice as the effective date (the “Relocation Date”) for such relocation. The Relocation Date shall be the date upon which Tenant shall open for business in the New Premises. Such written notice shall include a floor plan identifying the New Premises which premises shall have a rentable square footage equal to or greater than the Premises, and shall be similar in configuration, location within the building, similar view from the premises, and upfit provided. Tenant shall submit Tenant’s Plans and Specifications for the New Premises for Landlord’s review and approval in accordance with the terms of Section hereof. Landlord shall reimburse Tenant for all expenses incurred with and caused by such relocation (including telephone installation, moving of equipment and furniture, and printing of stationery and business cards with Ten-ant’s new address in replacement of all existing stocks of same) within fifteen (15) business days following receipt from Tenant of invoices or receipts marked “paid in full”, or evidence of payments to vendors with applicable invoices. Prior to Tenant’s occupancy of the replacement premises, Landlord and Tenant shall amend this Lease to modify the description of the Premises and any other matters affected by such change. From and after the Relocation Date, the term Premises shall be deemed to mean the New Premises for all purposes under the Lease.

EXHIBIT L Right of First Refusal To Lease Adjacent Space

Provided there is no default or event of default under the Lease on the date such right is exercised, or on the date Tenant shall enter into occupancy of any or all of the space adjacent to the Premises (the “Adjacent Space”) shown on Schedule A, attached hereto and made a part hereof, Tenant shall have a right of refusal


to lease the Adjacent Space, subject to the existing rights of other tenants of the Building as set forth on Schedule B, attached hereto and made a part hereof.

Upon the receipt by Landlord of notice from a third party of interest in such space, Landlord shall notify Tenant in writing of such interest (the “Third Party Notice”). Tenant shall respond to the Landlord in writ-ing within five (5) business days of the receipt of the Third Party Notice indicating its intent or lack of intent to exercise the rights under this paragraph. Tenant’s failure to notify Landlord within the five-day period set forth above will entitle Landlord to lease such space to such third party without liability to Tenant, and Tenant shall have no further rights as to such space.

If Tenant exercises its right of first refusal pursuant to this paragraph, Tenant shall lease the space with respect to which it exercised its right of first refusal hereunder on such terms as Tenant and Landlord shall negotiate [OR ON THE SAME TERMS AS THE PROPOSAL TO THE THIRD PARTY, IF ANY], except that (i) the term for such space shall be coterminous with the term of Tenant’s lease of the Premises, (ii) the space shall be taken by Tenant “as is” [OR LANDLORD SHALL PROVIDE THE FOLLOWING UPFIT MONIES $________] and (iii) the rent shall be calculated per rentable square foot based upon that applicable per rentable square foot for the Premises.

An amendment to this Lease providing for the lease of such space shall be executed by Tenant within ten (10) business days of the receipt by Landlord from Tenant of its intent to lease.

EXHIBIT M Landlord’s Lien

LANDLORD’S LIEN. In addition to any statutory lien for rent, damages, and costs of any sale as provided in this Section for the benefit of the Landlord, Landlord shall have, and Tenant hereby grants to Landlord a continuing security interest for all rentals and other sums of money becoming due hereunder from Tenant, upon all goods, wares, equipment, fixtures, furniture, inventory, accounts, contract rights, chattel paper, and other personal property of Tenant, and the proceeds and products thereof situated on the Premises, and such property shall not be removed therefrom without the prior consent of Landlord until all arrearages in rent as well as any and all other sums of money then due to Landlord hereunder shall first have been paid and discharged. In the event of a default under this Lease, Landlord shall have, in addition to any other remedies provided herein or by law, all rights and remedies under the Uniform Commercial Code, including, without limitation, the right to sell the property described in this Section at public or private sale upon notice required by applicable law, if any, to Tenant. Tenant hereby agrees that Landlord may file such financing statements and other documents as may be needed under applicable law with respect to the security interest granted herein. Any statutory lien for rent, damages, and costs is not hereby waived, the express contractual lien herein granted being in addition and supplementary thereto.

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A Commercial Lease Primer (With Forms) · including rent, term, space leased, expenses, any...

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Transcript of A Commercial Lease Primer (With Forms) · including rent, term, space leased, expenses, any...