§18.3 SPECIFIC ISSUES
Certain issues are present in all types of commercial leases. There is no "right" way to resolve these issues, other than to reach a result that is consistent with the client's requirements for the transaction. Similarly, there is not necessarily a "fair" solution, although for most issues, by considering the differing concerns of the landlord and tenant, it is possible to arrive at compromise positions that will satisfy both parties. Some issues really do not accommodate compromise: the landlord wants timely rent payments and will insist on interest and late fees to compensate for untimely payments; by entering into the lease, the tenant really does want the right to use the premises during the term without interference and will insist on a covenant of quiet enjoyment. The discussion below is intended to provide an initial starting point in reviewing these lease issues.
Parties to the lease: The type of entity comprising the parties should be identifiedindividuals, marital communities, corporations, limited liability companies, etc. If this is a major concern, confirm the existence of the entity by getting a certificate of good standing or similar document reflecting the current status of the entity.
Premises: The area and location of the premises in the building should be specified; consider attaching a site plan or diagram that shows the physical location of the premises rather than just an address or description of the building. A legal description of the property on which the building is located also should be included. If there are expansion rights for additional premises, these also should be described.
Term: If the term commences upon the happening of a contingent event (e.g., 30 days following the completion of tenant improvements), make certain that there is a way to identify with certainty when the event occurs. The issuance of a certificate of substantial completion by an architect or the issuance of a certificate of occupancy by the appropriate municipality are alternatives in the construction context. If a certificate of occupancy is referenced, differentiate between temporary and permanent certificates of occupancy if that is an issue in the municipality in which the premises are located.
If the date of commencement is critical, then negotiation of some liquidated sum for late delivery is appropriate. There should be an outside delivery date for the premises so that the parties are able to make alternative arrangements if for some reason the commencement date never occurs.
Option Terms: If there are options, two recurring issues are (i) the length of time required for notice and (ii) whether the tenant is bound for the option term prior to the determination of rent, if the rent for the option period is not fixed at the commencement of the lease. If the tenant is not bound by its election to renew or extend until the rent is fixed, the landlord will need to make sure the process for determining rent is completed in sufficient time to allow the landlord to market and lease the space to another party if the tenant rejects the renewal rent. If you are representing the tenant, consider asking for a written notice from the landlord before the option expires due to lack of exercise by the tenant. There has been repeated litigation between landlords and tenants over the effect of the failure to give timely notice to exercise an option. See, e.g., Rec. Equip., Inc. v. World Wrapps Nw., 165 Wn.App. 553, 266 P.3d 924 (2011); Wharf Rest., Inc. v. Port of Seattle, 24 Wn.App. 601, 605 P.2d 334 (1979). Much time and expense can be avoided if the lease provides a clear procedure to determine whether a tenant has timely exercised an option, which provides certainty for both the landlord and tenant.
Rent: Fixed rents generally are stated in monthly and annual amounts. Although rents may be established based on a square foot charge, specifying a rent as a per square foot value in the lease may create ambiguities if the actual area varies from what is estimated in the lease. If the intention of the parties is to charge on a per square foot basis, then there should be some provision in the lease for determining area and adjustment of the rent based upon actual measurement.
Operating Expenses: The items that should be addressed are the (i) selection of base year; (ii) right of tenant to verify expenses; (iii) method of escalation over time; and (iv) identification of those expenditures that are capital in nature or that are not appropriate for the landlord to charge the tenant. For smaller tenants, it may be more economical to try to obtain a limit on the annual increase of operating expenses rather than seek to negotiate extensive changes to the landlord's standard definition of what is included in the calculation.
Security Deposit : If a deposit is required, when it will be paid to the landlord and when it will be refunded should be addressed. Because there is no legal requirement to escrow deposits, landlords prefer to have the deposit paid upon lease execution, particularly if a commission is due at that time. From a tenant's perspective, if there are contingencies to the tenant's obligation, such as permit approvals, a delay in making the deposit may be appropriate.
Late charges: The calculation of a late charge should not be in addition to interest due on amounts past due under the lease.
Use Restrictions: A use restriction affects retail leases more than office and industrial leases. Shopping center landlords are interested in creating and maintaining the appropriate "tenant mix" to enhance consumer interest in the shopping center location. This is less of a concern for office and industrial projects, although some office landlords will seek to restrict uses involving high pedestrian traffic within the building, such as certain governmental service providers, which might strain the capacity of elevators or lobby areas. Generally, the landlord seeks to specify the use for which the tenant may use the premises, which gives the...
