[author: Valerie Marciano, Esq.]
A depressed commercial marketplace has resulted in a tenant’s market. There is an oversupply of newly constructed commercial buildings which may never have had a tenant, coupled with low occupancy rates due to the economic downturn. Tenants, feel your power. Previously, with the exception of nationally known companies that had corporate attorneys to negotiate favorable lease terms for them, landlords have held the upper hand. The landlord may have dictated lease provisions that were favorable to them and put commercial tenants at a disadvantage.
On a drive around the Valley of the Sun, it becomes abundantly clear that nationally known companies may fill the big box locations and major shopping malls; they are not the majority of commercial tenants. Rather, "Mom & Pop" operations support the local traffic and line many streets with businesses that provide the local economy posi-traction. Ironically, those same "Mom & Pop" operations are the ones most likely to have appalling lease terms. Frequently, these terms are spelled out in the lease’s boilerplate provisions. Recently we have seen unreasonable terms that are forcing tenants to pay unexpected costs. These are relating to when construction defects are found in the landlord's improvements or when a landlord inherits leasehold improvements made by or for a former tenant.
In 2006 and 2007, land was acquired and shells of buildings were erected. Some of those buildings are just now beginning to get their initial tenants and have remained just an empty shell for more than five years. Tenants are expected to build out the space for their particular use and lease the space on a "triple net" basis, which, in laymen's terms, means that all expenses relating to the property are borne by the tenant. In addition to triple net lease terms, the landlord would include in the lease draft, lease terms that, at best, appeared to address circumstances that are far-fetched or unlikely. Logically, it would seem impossible that a roof could collapse and the tenant would be responsible for it. However, some lease terms would hold the tenant accountable for the roof repair. Other terms might include a scenario where the building's sewer system backs up or fails completely and the landlord is not being required to fix it. Consider a newly constructed parking lot that floods excessively, leaving the tenants with the sole remedy of filing suit against the landlord's contractor and, that contractor could no longer be in business. The building may have reverted back to the original lender who had no contracts with the construction companies. With buildings remaining vacant for long periods of time, latent construction defects may not have surfaced in a timely manner and the buildings may have suffered some retrograde damage due to long periods of non-occupancy. Mechanical, plumbing and HVAC systems are vulnerable if they have not been used or properly protected from extreme heat.
Many developers/landlords banked on selling their buildings after their completion and then lease-out to tenants. In other words, many developer/landlords were not expecting to be long term landlords. Boilerplate lease provisions that were ignored at the execution of the lease as improbable now may be a reality. For example, the lease provision that leaves the "latent and patent" defects to the tenant to shoulder may give the landlord room to argue that the tenant must bear the cost and responsibility to repair a broken supporting beam, a failed sewer system or a HVAC system.
While time-consuming, the best approach for the tenant is to ask themselves, after reviewing every provision in the lease, “What if…this occurs?” Consider various scenarios and determine who – the landlord or tenant – is in the best position. Ask the landlord to make changes to the lease term to equalize the risks between the landlord and the tenant that are associated with leasing and owning real property. Do not leave it to someone else to read the proposed lease and then summarize it for you. The proposed tenant is the party who needs to fully understand what each provision may, and can, mean in its practical application to the lease.
If you are a prospective tenant, you may expect landlord concessions in this market. Research the property. Read and negotiate the terms of the commercial lease, include hiring a legal professional if warranted.
About the author: Valerie L. Marciano is an attorney at the Phoenix law firm of Jaburg Wilk. She assists clients with real estate, foreclosure, bankruptcy and litigation issues. Val frequently writes on Arizona’s foreclosure and anti-deficiency statues and is a board member of AZCREW - Arizona’s premier commercial real estate professional association for women. Val can be reached at 602-248-1025 or firstname.lastname@example.org.
This article is not intended to provide legal advice and only relates to Arizona law. It does not consider the scope of laws in states other than Arizona. Always consult an attorney for legal advice for your particular situation.