Thinking Outside the Four Walls of a Premises

by Pepper Hamilton LLP
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Pepper Hamilton LLP

Before submitting a letter of intent (LOI) for a new commercial lease, a tenant should consider whether it has special business needs that must be incorporated in the lease. These include lease provisions necessary for the tenant to successfully use and occupy the premises for its intended business and to fulfill its responsibilities under the lease without conflict with the landlord or other tenants. These points can be addressed as early as the initial draft of the LOI, and addressing them early will better equip all parties to quickly negotiate issues that could complicate the lease or turn contentious if left until a later time.

In particular, complications may arise when a tenant requires ongoing access to, or the additional use of, portions of a landlord’s property that fall outside of the premises’ four walls. These “outside” portions of the property may include areas in a common space generally accessed and used by the landlord and other tenants (such as driveways and parking lots); areas that are located in difficult-to-access spaces (such as under floorboards, under the concrete of a parking lot, or within the walls of another tenant’s premises); or areas atop the roof of the building housing the premises.

When a tenant needs to access or use these “outside” portions of a property, the lease needs to address (1) coordination and requirements of the access, (2) additional indemnification obligations and (3) increased insurance requirements. A detailed examination of these components by the parties may require expanding standard lease terms to ensure that the tenant will have the appropriate rights to fulfill its responsibilities under the lease, while also leaving the landlord and the other tenants protected and able to use the “outside” areas. If the use of “outside” areas is not considered early and not set forth explicitly in the lease, the parties may later argue over these issues, which may lead to a court deciding to interpret the lease language in a manner that may not be consistent with the parties’ expectations.

One situation to consider early is whether a tenant requires exterior alterations to operate its business, as those exterior alterations may affect the use of, and/or access to, common areas, parking lots and other premises contained in the building by the landlord, other tenants and their patrons. Exterior alterations are commonly included in restaurant leases, where the intended use and occupancy of the premises often necessitates deliveries at irregular hours, requires the installation of HVAC equipment with increased capacity, and leads to food-related odors and music that permeate the premises. Exterior alterations are also common in medical office leases, where the tenant’s business often generates a higher amount of waste, which may be potentially hazardous or confidential and may require specialized storage and handling.

As described above, a common situation that involves “outside” areas arises when a tenant’s use and occupancy of its premises requires deliveries that may impact the other tenants’ and their patrons’ use of those “outside” areas. In these cases, a landlord may wish to use the lease to restrict the time period for deliveries to lessen their impact on common areas and other tenants’ enjoyment of their respective premises. However, while the tenant also may want to minimize the impact of its deliveries, that may not always be possible. For instance, weather events may delay deliveries, and perishable deliveries that are critical to a business, such as cut flowers or fresh-food products, may not be deliverable during normal business hours. Therefore, the tenant and landlord should agree on reasonable expectations and should address ways to enforce those expectations to minimize the impact on the landlord, other tenants and all patrons, without putting the tenant in default if it unintentionally fails to meet the expectations for deliveries and other “outside” area uses.

Another situation that brings “outside” areas into play is when a premises is not located on the top floor of a building, but requires additional HVAC equipment. In some cases, it may not be feasible to vent the HVAC system directly to the building’s roof. A landlord and tenant may then need to determine the feasibility of wending the HVAC chase through other portions of the building without disturbing the “outside” areas. If this is not feasible, then — in addition to adding details to the lease about which party is responsible for the cost and performance of the HVAC construction and installation — the parties should address the need to indemnify, by one or both parties, other tenants for this potential disturbance and the need to increase insurance coverage, whether for the tenant’s premises alone or for the entire building or the whole property.

For medical offices, hazardous or confidential waste might include the accumulation, disposal and pickup of sharp objects, bodily fluids or confidential personal information. For restaurants and mechanics’ shops, which generate nonsoluble liquids such as grease, applicable laws may require the installation and routine maintenance, cleaning, repair and replacement of grease traps during the term of the lease. The responsibility for the separation, storage, removal and ultimate disposal of each of these types of specialized waste (and the need to perform these actions in accordance with applicable laws) should be specified in the lease. Additionally, on consideration, the landlord may want to predetermine whether it will take on the responsibility of handling disposal of the increased, hazardous or confidential waste, or whether it would prefer that the tenant hire its own waste management service.

The parties should be prepared to add language to the lease granting the tenant use of and access to any area needed by the tenant and its employees and contractors, while also addressing the need for indemnity or increased insurance that may result from handling the increased, hazardous or confidential waste. It is likely that this increased, hazardous or confidential waste will require the tenant to use portions of the overall property that lie outside the four walls of the tenant’s premises. The parties must determine if the landlord will require additional rent as a result. The parties should also determine if increased insurance would be prudent to cover liability for potential damage to other tenants’ premises, or if a broader scope of indemnification (typically the tenant’s indemnification obligations) should be included to cover the other party and the other tenants for any failures to comply with applicable laws or other claims related to the increased, hazardous or confidential waste.

Regardless of whether you are the landlord or the tenant in a transaction, consideration of issues that may lie outside the four walls of the premises early on and in consultation with knowledgeable advisors and attorneys will reduce the amount of negotiation needed upfront, and will ultimately result in a more successful lease.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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