When it comes to landlord – tenant relationships, nothing should be left to translation or interpretation. The dealings between both parties should be mutually beneficial, respectful, and above all else, clear. With that in mind, the attorneys at Holmquist & Gardiner work with landlords (and tenants) to make sure their interests are provided for and protected.
In a recent blog post, Commercial Leasing Terms in Seattle, What Tenants Need to Know, we dug into the details, outlining many of the lesser known, but very important lease provisions a tenant should pay attention to during negotiations. The thing is, much of the terminology discussed in the blog, such as assignment provisions, renewal options, recapture clauses, audit rights, etc., are essential to the landlord as well.
In addition to those key provisions mentioned in the previous post, although it is not a comprehensive list, below are 5 ways landlords specifically can take action, ensuring their property and their interests are protected from the start.
1. Make sure the property description is correct and lease is properly executed.
As trivial as it sounds, many future issues with a lease stem from failure to the properly execute a lease. Legal property descriptions entail an exact definition of the premises including square footage, suite number and preferably a written diagram that shows where and how the space is being rented. Many times, tenants are not renting the entire building, but the property description should relate to the building as a whole. When the description only includes a property address and isn’t fully defined, the tenant has an open door to claim lease is invalid.
Critical to leases over one year is ensuring that the signatures are notarized. (Most commercial leases are.) Neglecting to legally notarize a commercial lease in Seattle provides a tenant with an opportunity to argue that it’s a month-to-month lease rather than a year.
2. Make sure you account for any additional rents.
All leases have a base monthly rent, but as a landlord, you also need to account for items that go into a lease but are outside the base rent such as various taxes, the maintenance of common areas, insurance, landscaping, and utilities. This is all additional rent and if the tenant is responsible for it (or a portion of it), this should be clearly spelled out within the lease.
The term triple net comes into play here. Triple net is the total cost of the tenants use of the premises. It’s a recognition that the total rent includes property taxes, maintenance changes and base rent, for example. A tenant’s triple net is determined based on the percentage of the building or property they occupy and is reevaluated annually. Assessing additional rents in advance and legally agreeing to what constitutes additional rent and at what cost will create less potential friction for everyone in the future.
3. Secure a personal guarantee from all members of a corporation or LLC prior to signing the lease.
When evaluating a new tenant, there are a few key things to consider. Take pains to understand the prospective tenant’s financial stability, their business history and if it’s a corporation or LLC, who the individual members are, securing personal guarantees from each and every one of them. Especially if you are working with a newly formed business, or there are concerns with the finances of the business.
A personal guarantee is a good faith gesture showing the owner’s intent to follow the obligations within the lease. From a legal standpoint, an LLC/corporation is seen as a separate individual. In the event of a breach of lease, you want the ability to go after the LLC and its members that chose to enter into the lease. A personal guarantee is a common practice to accomplish this.
4. Make sure the default notices in the lease match the letter of the law.
Prior to legalizing a lease, make sure all default notices are acceptable to both you and the tenant. Don’t assume that the notice periods in the lease match the law minimums. For example, many leases contain conditions precedent to default ― like notice requirements and cure periods. At times, these will differ from the minimums required under law (i.e. 3 day notice to pay rent or vacate). Despite what the law requires, if a lease requires written notice of the tenant’s failure to pay in a certain format (like certified mail) or provides a longer period of time in which the tenant can cure this breach of the lease, then a landlord must strictly adhere to the lease.
As an example, in the State of Washington, the proper notice and cure period for failure to pay rent is 3 days - RCW 59.12.030(3). If a tenant has not paid the rent when due, the landlord can issue a notice to them that they must pay within 3 days of service of the notice and/or vacate the premises. Those 3 days are the cure period. But, if the cure period outlined in the lease provision is 7 days, that’s what needs to be followed. Many times, provisions listed in the lease provide extended cure periods for a default compared to what the law dictates. The takeaway here, is to be sure you understand the law and compare that to the lease – taking the time to educate and advocate for yourself.
5. Provide a well-defined use of the premises and parking.
Without a well-defined use of the premises explicitly noted in the lease, you can inadvertently open the door to unintended uses. If your property is ideal for a general office space, explicitly state what the general office space is for (i.e. accounting firms, law firms, business and sales of a specific nature, etc.). It is not uncommon to see a tenant’s business shift and that business may not be something that you planned for and/or wanted within your commercial space. Explicitly noting the same allows you recourse if the tenant’s business drastically changes.
Along with clearly defining the use of the premises, parking is something that should be described in detail within the lease, especially in downtown Seattle where it’s at a premium or in areas where parking is a “first come; first serve” with multiple tenants. Issues commonly arise when a tenant’s business changes and their need for parking changes. An influx of clients visiting the business can disturb other tenants, creating unnecessary frustration with the access/parking to the premises. Specifically detailing a tenant’s use of parking along with additional costs associated with parking and the terms for tenant use is essential at the outset of the lease.
There’s a lot a landlord can do on the front end of a lease negotiation to protect themselves and provide clarity to the agreement. While many tenants have good intentions, situations can change quickly and without defined use parameters, legal execution of the lease, additional rent descriptions, and personal guarantees, they are exposing themselves to some pretty serious and costly disputes down the road.
If you’re a landlord in the process of securing a new tenant or if you’ve recently developed a building and you want to start the leasing process on the right foot, reach out to Holmquist + Gardiner. Contact us today to set up a free consultation in person or over the phone. We strive to help clients quickly with professional counsel and ethical legal representation in all matters of commercial real estate law, and would be happy to assist you.