Commercial Lease Disputes
Disputes between companies and their commercial landlords are not uncommon. In such commercial lease dispute cases, a number of recurring issues form the majority of matters that end up being adjudicated by legal action.
The issues at the heart of most commercial landlord and tenant commercial lease disputes are duty to repair, early lease terminations and subletting. Commercial landlords and their tenants handle these disputes through negotiation, mediation, arbitration and, as a last resort, litigation.
Duty to Repair
There is a legal expectation that the tenant in a commercial lease maintain the property in a reasonable state of repair and sanitation. Likewise, the landlord is typically expected to present the property in a usable condition, that is one that is structurally sound, has working electricity and running water if applicable and is free from leaks and infestation. These obligations are almost always reflected in the commercial lease agreement. However, in practice, these obligations draw a vague line between the responsibilities of commercial tenants and landlords. The lack of clarity can lead to differing interpretations and cause a dispute.
One example of this is in the case of infestation. Preventing an infestation is typically the responsibility of the commercial landlord and may be outlined as such in the commercial lease agreement. Yet it is the responsibility of the tenant to maintain the property in a sanitary condition that, in some interpretations, might include preventing infestation through cleanliness. If an infestation occurs while a tenant appears to be maintaining the property in an unsanitary way, then a landlord could make the argument that it is the responsibility of the tenant to remedy the infestation.
The key is to make sure that, whether you are the tenant or landlord, the commercial lease agreement clearly states what is expected from each party in clear and indisputable terms. Review by an experienced Florida real estate attorney would ensure that the terms and conditions related to duty of repair are both clear and written with the best interests of your business in mind.
Early Lease Termination
When commercial leases are terminated early, there is often more at stake than simply the lease deposit. An early lease termination fee may include anywhere between three months and a year of rental. Furthermore, any improvement costs made by the landlord in order to accommodate the tenant would also be expected to be paid back to the landlord according to most commercial lease agreements.
However, a number of situations may force a tenant to have to terminate a lease. These include being purchased by a company that may strategically wish to change the location, downsizing or growing so that the size of the space is no longer able to serve the needs of the business, a major life change principals of the company (eg: severe disability or death) and a major change in the tenant’s business model.
When a tenant’s company is facing such drastic changes to their business, it may be a bad time to begin a dispute with a landlord. However, due to the circumstances and the large sums of money involved, conflict may be inevitable if there is not already a mechanism in place to allow for termination in a more affordable way. In such cases, the dispute may end up in requiring the involvement of attorneys on both sides with the potential of going into mediation, arbitration or court.
To avoid such a case, an experienced Florida real estate attorney may advise that an early termination option is added to the commercial lease agreement. Such an option allows tenants to pivot more affordably to adapt to changing business conditions. Landlords should beware that some early termination clauses may not be in their best interest. An experienced Florida real estate lawyer should be asked to draft or review such clauses to ensure that the clause does not empower the tenant to “walk away” without consequences too early in the term of the lease. A well-drafted termination option should require the commercial tenant to remain in the property for a period of time before the termination option can be exercised. It should also allow for the commercial landlord to recuperate the real estate broker’s fees that were incurred in the transaction, as well as the costs required to return the property to a leasable state. In the latter requirement, the landlord may have made custom upgrades to the property to suit the needs of the tenant only to be left with a specialized property that cannot be easily leased to other businesses.
“An early lease termination fee may include anywhere between three months and a year of rental.”
Commercial property subletting is another common area that is frequently the source of commercial disputes between landlords and tenants. If you are a tenant, it is generally in your best interest to have a “subletting clause” and/or an “assignment clause” in your commercial lease agreement. Such clauses allow your business to either share the space with another business entity for cost savings or move out entirely and allow a new business to fulfill the terms of your lease so that your business does not incur costly early termination fees.
It is important to note the difference between subletting and assigning.
When subletting, a tenant may rent out the space they are leasing to a third party which in terms pays rent to the tenant. The subletting tenant can be legally evicted for non-payment by the original tenant in the same way that the landlord may evict a tenant for nonpayment. In order to be a subletting tenant, you must either share the space with the original tenant at the same time or take over space for a specific period of time. For example, perhaps a tenant that sells school supplies in September moves out entirely and sublets to a tenant that sells holiday decorations in December.
Assignment occurs when a commercial tenant moves out entirely and allows a new tenant to take over the lease agreement, paying rent directly to the landlord. In such a case, the new tenant is of the original tenant’s choosing.
Whether you are a commercial landlord or tenant, there are several pitfalls to beware when subletting or reassigning a property. As a tenant, it is important to note that you are responsible for the behavior or sub-tenant. For example, the landlord has a right to terminate your lease in cases where your sub-tenant commits an infraction (eg plays loud music, crowds a common area or installs a prohibited sign). As a landlord, it is important to consider the implications of an assignment clause. You may end up with a new tenant that does not have the creditworthiness that you would typically require.
To avoid situations that could lead to disputes and disappointments, it is essential that you review your commercial lease agreements, including commercial sublease agreements with an experienced Florida real estate lawyer. By anticipating potential conflicts ahead of time, a real estate attorney can save you significant amounts of money and time in the future.
Are you a commercial real estate tenant or landlord or about to lease or lease out a commercial property? Contact South Florida Law, PLLC today by clicking here for our contact form or calling (954) 900-8885.