Commercial Lease (“Five Ws”) Checklist

“A good reporter must cover the ‘five Ws’ (who, what, where, when and why) in every story”- Perry White.

A good real estate attorney (and landlords, tenants and their brokers) must be cognizant of the answers to these seemingly simple, but sometimes overlooked questions in every commercial lease transaction:

a) Who are the parties to the lease? If your answer is landlord and tenant, you only get partial credit. Who is the tenant? If it is an undercapitalized subsidiary of a larger corporation, for example, the landlord and its attorney should ask for a guaranty from the parent company. Additionally, a prospective tenant’s financials should always be requested. If you are or represent the tenant, knowing the landlord and its track record, experience and financial strength is equally important.

b) Who do you represent? If it is the tenant, for example, a landlord-oriented form lease should not be utilized without modification.

c) Where is the property located? The more information, the less potential for dispute. A legal description, street address and auditor parcel number(s) should be incorporated in the lease to accurately define the property and where it is located.

d) What type of property is being leased? In a retail lease, for example, landlords will be expecting continuous operation, radius restriction and percentage rent provisions. Tenants will be expecting exclusive use and co-tenancy clauses. In an office lease, the type of services offered, and the concept of “usable” vs. “rentable” square feet and “load factors” must be understood and evaluated. In industrial leases, particular attention should be given to the availability of “industrial amenities” (e.g. high pressure gas lines, cranes, loading facilities and electric capacity) and environmental protections in the lease.

e) What exactly is being leased? Especially when the leased premises is only part of the property owned by the landlord, site plans should be added as exhibits to the lease to clearly delineate the leased premises, any exclusive parking and common areas. Often, in practice, lease exhibits are attached at the end of negotiations and tenants are unpleasantly surprised to see, for example that they do not have adequate parking, or that the premises is configured differently than that discussed early on. What is the square footage of the premises? Tenants, at the very least should independently measure the space and verify its rentable area. Especially when a space is not yet built at lease inception, a right to re-measure provision can protect both the tenant and landlord with “not less than and not greater than thresholds”.

f) What is the price (rent)? The lease should clearly specify: the rental rate; if the rental rate is not to be a “gross” rate, the additional charges or “additional rent” (typically, some combination of taxes, common area maintenance charges, insurance and reimbursements for building improvements/maintenance); any rent escalations (Note: an agreed percentage increase is now preferable over CPI adjustments [from a landlord’s perspective] as inflation and CPI increases have been negligible the last few years).

g) What other charges is tenant to be responsible for (e.g. utilities)? The lease should clearly specify who pays for what utilities and services (e.g., gas, electric, water, janitorial services, trash dumpsters); how utilities are measured (e.g., by direct meter from the utility company, by sub-meter from the landlord or by proportionate share); and how they are billed (e.g., by the utility company or the landlord).

h) What build-out (if any) will be required? For example, is the premises to be delivered in “as-is” condition (more common for storage facilities), or in “Vanilla Box” condition (more common in retail leases). A landlord delivering a “Vanilla Box” typically demises the premises with firewalls/tenant separation walls, provides a concrete floor, and “stubs” utility lines to one location in the premises, with the tenant assuming responsibility to distribute same within the space. Details such as preparation, approval and submittal of plans; definition of “Landlord’s Work” and “Tenant’s Work”; and identifying who will physically perform the work, and who pays for same must be clearly specified.

i) When will the lease be in effect (Term)? Obviously, the number of months (or month to month) or years of the Term needs to be specified. Additionally, commencement, interim and expiration dates should be identified so there is no question regarding same. Specific dates typically identified are: Effective Date (the date the contract rights and obligations of the lease are put in effect-usually the day the lease is signed); Commencement Date (the date the first day of the Term is to begin-this date often coincides with the “Delivery Date”); Delivery Date (the date landlord is to deliver possession of the premises to tenant); Expiration Date (the last day of the Term).

Option periods/dates, if applicable must also be specified, and a notice (of exercise of the option) date (typically 4-6 mos. prior to the expiration of the Term) specified.

j) Why is the space being leased/what is the premises being leased for (Use)? Tenants and landlords (and their attorneys) will need to know the specific nature of tenant’s business and exactly what the space is proposed to be used for. Tenants will need to review zoning laws to make sure their planned use is permitted by the municipality in which the premises is located. Additionally, there may be private lease restrictions or covenants recorded against the property preventing or restricting a particular use. Violating such restrictions and zoning laws could create litigation and un-budgeted for expenses (for the landlord as well as the tenant), so investigating use restrictions is strongly advised for both parties, prior to signing a lease. In fact, landlords should make such restrictions part of the lease, to ensure its tenant has notice of the same. Additionally, a particular tenant’s use, for example, an industrial tenant’s manufacturing process (or a warehouse tenant’s storage of flammable items) might trigger an increase in insurance premiums. Accordingly, conferring with one’s friendly neighborhood insurance agent is also strongly advised.

Determining and agreeing upon the “commercial lease five Ws” will always help ensure your “lease story” has a happy beginning, middle and ending.

Learning a Lesson the Hard Way -- Why paying attention to the paperwork and contract terms matters

Many people in business are not big on paperwork, and some get down right annoyed with lawyers who want to direct their attention to every little detail. Often I have to ask a client the same question several times and in many different ways in order to pry out of him or her the information I need in sufficient detail to complete my task.  That lack of attention to certain details and not appreciating their importance can get a company into trouble.

Below is an example of a 'hot mess' waiting to happen.....

Certain commercial property is owned by a company. The principals of that company will often have a separately owned company that provides property management services to the commercial property. While these two company are owned by the same person , by law, each company and the owner all have separate legal identities and each will carry their own insurance coverage with typical exclusions and notice requirements.

Property owner, through its management company, retains a general contractor to provide construction services on the property.  The general contractor is owned by an affiliate of the property owner, or is otherwise a longtime business associate. Standard contracts are signed as may be required by lenders, but no one is reading them very closely, because they are all related or are long time friends who trust each other. Certificates of insurance would also be provided. Again, never really looked at that closely. General contractor then contracts with certain subcontractors for parts of the construction work. This work should also be subject to contracts with specific requirements for insurance coverage that adds the general contractor and property owner as additional insureds on the subcontractor's insurance. The certificates of insurance are obtained and tossed in a file without any real review. After all, general contractor and the subcontractor have worked together on many jobs over the years without a problem. 

During the construction, an employee of one of the subcontractors injures himself. He's rushed to the hospital and recovers fully. At the time of the accident, property owner, contractor and subcontractor all fail to notify their respective insurance carriers of the accident. While no claim has been filed (yet), it's a potential claim and statutes of limitation can run 1-2 years.  Insurance policies typically have requirements that the insured notify the insurance company within a specified period of time after the event or risk losing coverage.

11 months pass by and the employee files a lawsuit. He names everyone, including the property owner, property management company, general contractor and subcontractor. Property owner and property management company each notify their insurer, who first threaten to not cover the lawsuit due to failure to timely notify them. They also look to the general contractor's insurance.  The general contractor's insurance refuses to cover it due to failure to timely notify it and other exclusions. It directs general contractor to look to the subcontractor's insurance. Subcontractor failed to add general contractor and property owner as additional insureds so its insurance company washes its hands of the mess. No one bothered to review the certificates of insurance  to verify that they were complete and now it is too late. Insurers for property owner and property management company turn on the general contractor and counter sue his company. They do not care about the long working relationship or other affiliation between the companies.  First lesson to be learned -- never underestimate how low an insurer will stoop to get out of covering a messy claim.

The general contractor is left exposed with no coverage at all and having to sue the subcontractor for reimbursement of potential losses. Business relationships are strained to the limited.

Worse, no one will be reimbursing general contractor for the massive legal fees he incurs to protect his interests. If the case goes all the way to trial, the fees could run into six figures.  That is what I call a rather expensive lesson to learn that the paperwork is important, to read and follow contracts and to keep the insurance agent on speed dial.  
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IT IS ALWAYS WISE (AND SOMETIMES REQUIRED) TO NOTARIZE COMERCIAL REAL ESTATE LEASES

It’s not enough to “get it in writing” with regard to enforceability of a commercial lease of real property in Ohio, although that is a necessary first step. Ohio’s “Statute of Frauds” (ORC Section 1335.04) with respect to leases, provides in pertinent part that “no lease… of, in, or out of lands, tenements or hereditaments… shall be granted, except…in writing, signed by the party …granting it”. Ohio’s Landlord and Tenant Act (ORC Section 5321, et seq) supersedes the foregoing Statute of Frauds rule with regard to residential leases. With commercial leases of real property, however, there is no such exception.

The second necessary step with regard to enforceability of commercial leases of real property in Ohio is acknowledgement (e.g., notarization). Often called the “Conveyancing Statute”, ORC Section 5301.01 provides in pertinent part that “leases [and deeds, mortgages, land contracts and other recordable instruments pertaining to real property] must be signed by the … lessor in the case of a … lease… [and] the signing shall be acknowledged by the… lessor… by a judge or clerk of a court of record in the state, or county auditor, county engineer, notary public, or mayor who shall certify the acknowledgement and subscribe the official’s name to the certificate of the acknowledgement.” While “size [of the lease] does not matter”, its duration does. ORC Section 5301.08, read together with ORC Section 5301.01 provides that a lease whose term is three (3) years or less does is not required to be acknowledged or recorded. Stated another way, the law in Ohio provides that leases of non-residential real property whose terms exceed three (3) years must be in writing, signed and notarized (or otherwise acknowledged as provided in ORC Section 5301.01).

How have Ohio courts interpreted these statutes? It is first important to note how they have not interpreted same. Ohio courts, as a general rule have not interpreted an improperly executed/acknowledged lease in the same manner as an improperly executed/acknowledged deed. With regards to improperly executed/acknowledged deeds, the Ohio Supreme Court in Citizens National Bank v. Denison (and Ohio appellate courts thereafter) has held that a deed is still valid despite a defective acknowledgment, but only as between the grantor and grantee. Regarding leases, however the law is settled in Ohio such that when a tenant takes possession under a defectively executed lease (and pays rent…), only a periodic tenancy will be implied to exist, in spite of the lease’s stated duration. So, if a ten (10) year commercial real estate lease is not notarized, and payments are made monthly, the general rule in Ohio is that only a month-to-month tenancy exists.

As with most case law, there are exceptions to the aforesaid “general rule”. Two principal exceptions exist. The first is the equitable doctrine of “part performance” (which is not particular solely to leases). This doctrine basically dictates (based upon fairness/equity) that a lease (or other contract) should not be rendered unenforceable due to technical failures when much of the contract has been performed, at least in part, and other equitable factors are present. The often cited case with regards to a part performance “test” for a defectively executed/acknowledged lease is Delfino v. Paul Davies Chevrolet, Inc., 2 Ohio State 2d 282 (1965). According to the Ohio Supreme Court in Delfino, part performance can excuse failure to comply with the ORC Section 5301.01 when four factors are present: “1) unequivocal acts by the party relying on the agreement exist; 2) These acts are exclusively referable to the agreement; 3) the acts change the party’s position to its detriment; and 4) the acts make it impossible to place the parties in status quo.” While the court in Delfino established the test, it did not apply the doctrine of part performance in favor of its plaintiff-tenant. Delfino (the tenant) paid its landlord rent, however, there was no evidence that the plaintiff otherwise changed its position to his detriment, in reliance on the lease. In contrast, the Third District Court of Appeals in Sigg v. Subway Sandwich Shops (1997 Ohio App. Lexis 3381) found in favor of the tenant (Subway), applying the factors outlined in Delfino with regard to a deficiently executed lease. The court in Sigg held that Subway passed the “Delfino test” because Subway made substantial improvements to the premises with the understanding that it could remain at that location for 20 years pursuant to the lease. This constituted detrimental reliance, according to the court, effectively rendering the tenant unable to return to the “status quo”.

The other relatively recent exception to ORC Section 5301.01concerns oil and gas leases. On April 15, 2013, the Federal District Court for the Northern District of Ohio in Cole v. E.V. Properties L.P. dismissed an Ohio landowner’s claims that oil and gas leases not properly notarized pursuant to Ohio law are invalid. The plaintiffs in this case admitted to signing oil and gas leases, but claimed that the leases should be declared invalid because there they were not notarized or otherwise acknowledged as required by Ohio Revised Code Sections 5301.01 and 5301.08. The court agreed with the defendants, however, reasoning that oil and gas leases are inherently different from traditional leases of real property. Apparently, the court felt that an oil and gas lease is more akin to the transfer of a deed interest, in which case the improperly executed/acknowledged lease would still be enforceable between the parties.

The morale of this story? Get it in writing, sign it and get it notarized. Even if not required, it is always wise, to notarize. Notarization is such an easy, next to no cost procedure, and it will always be preferable to spending a lot of attorneys’ fees trying to carve out a new exception to ORC Section 5301.01.

Casualty and the Commercial Tenant: Follow the Terms of the Lease

A common mistake that many commercial tenants make is assuming that protections provided by courts for residential tenants are also available to commercial tenants. There are many statues and ordinances in existence designed to protect individual consumers and residential tenants. The reasoning behind these laws is the assumption there is unequal bargaining power between an individual and a larger, more well funded, commercial enterprise.

One of the protections that courts typically afford residential tenants is the warranty of habitability. This same protection does not necessarily apply to a commercial tenant unless it is expressly negotiated into the lease. When it comes to 'business to business' contracts of any kind, including commercial leases, with certain exceptions, a court will look no further than the terms of the contract.  Many tenants only look at the key business terms and pay scant attention to the remainder of the lease agreement.

One of the first Superstore Sandy-related cases to addressed by the New York courts brings this point home. In Maiden Lane Properties v. Just Salad Partners, 056312/13, N.Y.L.J. 1202598292879 (Civ., NY, Decided April 29, 2013), the building was without its power for 2 months. The landlord provided a generator to ensure residential tenants had access to electricity but the commercial tenants were on their own.  Just Salad obtained its own generator but experienced significant downtime and costs for obtaining and running its own generator. It decided to not pay its rent for those two months and the landlord sued.

The tenant claimed that it was entitled to a rent abatement under the casualty provisions of the lease. However, the tenant failed to follow the terms of the casualty provisions by providing the required notice of casualty to the landlord.  As a result, the court sided with the landlord .

While this case was decided in New York, the lessons we can learn from it still resonate in Ohio. When you are a commercial tenant you need to follow the terms you negotiated in the lease regardless of who unfair they seem when a crisis occurs. If a notice is required to obtain protections under the lease, then you must provide that notice. Also, it's important to consider what events qualify as a casualty under your lease. Under the New York case above, that landlord raised that issue as well. After a significant event has occurred is the wrong time to be reviewing your lease to determine if you are protected.
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Are Mortgage Servicers “Suppliers” of “Consumer Transactions” pursuant to the Ohio Consumer Sales Practices Act (Part II)?

On May 14, 2013, the Ohio Supreme Court in Anderson v. Barclay’s Real Estate, Inc., Slip Opinion No. 2013-Ohio-1933 answered the above question posed to it by the Federal District Court for the Northern District of Ohio by holding that “the servicing of a borrower’s residential  mortgage loan is not a ‘consumer transaction’ as defined in O.R.C. 1345.01(a); and “an entity that services a residential mortgage loan is not a ‘supplier’ as defined in O.R.C. 1345.01(C).

A complete background and fact summary of the case can be found in this author’s earlier blog posting of March 4, 2013 appropriately titled: “Is a Mortgage Service Company a Supplier of Consumer Transactions pursuant to the Ohio Consumer Sales Practices Act (“CSPA”)?  Basically, the Anderson case originated in the Federal District Court for the Northern District of Ohio, who concluded (with regard to the CSPA claims) that there was no controlling precedent in Ohio on whether the CSPA applied to mortgage services, so the Federal Court asked the Ohio Supreme Court to answer the following two questions:

1) Does the servicing of a borrower’s residential mortgage loan constitute a “consumer transaction” as defined in the Ohio Consumer Sales Practices Act, O.R.C. 1345.01(a)?  The Plaintiff, Mrs. Anderson  argued that the answer to this first question should be “yes” because mortgage servicers provide a number of services to borrowers, including accepting their payments and working with borrowers to obtain loan modifications.  The servicer, Barclay’s Real Estate, Inc. dba HomEq Servicing (“HomEq”) argued that mortgage servicers perform their services for financial institutions, not for borrowers/consumers, and that therefore the transactions were commercial and not covered by the CSPA.

The Supreme Court of Ohio agreed with HomEq, holding that the servicing of a borrower’s residential mortgage loan is not a “consumer transaction.”  To justify its holding, the court first recognized that one essential element of O.R.C. Section 1345.01(a) was not met:  that there was no “sale, lease, assignment, award by chance, or other transfer of a service [by the servicer]to a consumer”.  Rather, the court reasoned that mortgage servicing is a contractual agreement between the mortgage servicer and financial institution, with no direct contract between the borrower and the mortgage servicer.  While the court acknowledged that the servicer’s duties might involve interaction with borrowers, it reasoned that those interactions are always on behalf of the financial institution. 

The court further reasoned that service provider transactions are not consumer transactions because there is no “transfer of an item of goods, a service, a franchise or an intangible” as required by the statute. The court explained that while a financial institution may contract with a mortgage servicer to service a loan, the mortgage servicer does not transfer a service to the borrower.  The court’s decision was also influenced by:  (1) the CSPA 2007 amendment which added dealings between consumers and loan officers, non-bank mortgage lenders and mortgage brokers as being covered by the CSPA but did not include dealings between consumers and mortgage servicers; (2) Uniform Consumer Sales Practices Act commentary which noted that land transactions should be specifically excluded from Consumer Sales Practices Acts; (3) Ohio court decisions holding that the CSPA does not apply to “collateral services” that are solely associated with the sale of real estate; and (4) other states that wanted real estate transactions and loan servicing covered by their consumer protection statutes specifically defined consumer transactions to include them.

2) Is a mortgage servicer a “supplier”?  Mrs. Anderson argued that servicers are “suppliers” within the CSPA because they essentially function as collection agencies.  The court disagreed, concluding that in order to be a supplier, the servicer would have to be engaged in the business of “effecting” or “soliciting” consumer transactions as provided in O.R.C. 1345.01(c). The terms “effecting” and “soliciting” are not defined in the CSPA, so the court went to Black’s Law Dictionary and found “effect” to mean “to bring about or to make happen”; and  “solicit” to  mean “requesting or seeking to obtain something”. Since servicing a mortgage does not cause a consumer transaction to happen, and mortgage servicers do not seek or request borrowers, the court handily dismissed the plaintiff’s argument and held that servicers are not “suppliers” under the CSPA.

 In spite of the Supreme Court of Ohio’s ruling, many believe that since lenders often disappear once they sell their loans, and the homeowners are left to deal with a servicer exclusively, mortgage servicers are exactly the type of entity intended to be regulated by the CSPA.  Since the court has spoken, however, the only recourse for those who disagree with its decision is to lobby the Ohio Legislature to specifically amend the CSPA to include dealings between consumers and mortgage servicers. 

 

General Provisions in Contracts: "Miscellaneous" does not mean "Unimportant"

Towards the end of every contractual agreement, including real estate purchase agreements and leases, are certain provisions that often come under the heading of “Miscellaneous” or “General Provisions” and are often referred to as the “boilerplate” provisions.

While these provisions may be “boilerplate” in the sense lawyers insert them into nearly every agreement, they remain important and should not be ignored. Below is a summary of some of these provisions and their purpose:

Entire Agreement – Most agreements have a section captioned “Entire Agreement” or “Integration.” The purpose of this section is to clarify that the entire agreement of the parties is embodied in that written agreement, and prior agreements (verbal or written) are integrated into this current signed contract and no longer have separate force and effect. If a party to the agreement later asserts that there were other agreements between the parties and these  other agreements pre-date of the signed agreement containing an integration clause, then the earlier agreements will be considered merged into the newer agreement and enforceable. If there are other agreements that the parties want to remain in effect concurrently with the new contract, then they must revise this ‘boilerplate’ provision to reflect this.

Binding Effect; Assignment  – Most contracts include a provision that states the agreement will be binding upon the parties’ successors and assigns.  If a company is bought out, you may want to ensure the acquirer is still bound to honor the obligations in the contract.  A separate issue to address is what limitations should be placed on a party’s ability to assign the agreement without the other party’s consent. If a buyer on a real estate purchase agreement intends to create a new entity prior to closing to own the real estate, then it will be important to include language allowing the buyer to assign the agreement to an affiliate.

Severability – This provision is included to ensure the entire contract isn’t voided if a court finds that one or more the provisions are unenforceable.  It allows the unacceptable provisions to be severed by the court and the remaining terms of the contract are still enforceable. However, there may be instances where certain provisions are so important to the purpose of the contract, that if a court strikes out any of those provisions, the parties will not want the contract to continue. In that case, a severability clause should not be included in the agreement.

No Waiver – The purpose of a waiver provision is to make it clear that a party can waive one or more breaches and still be free to act on a similar breach later. Without such a clause, the breaching party could argue before a court that prior waivers of a breach by the other party  created a ‘course of dealing’ that amends the contract and the court might agree.

Governing Law; Venue – Governing law matters in an agreement. The laws in one state may be, and often are, vastly different from the laws in other states.  Which state’s law governs can effect the outcome of a lawsuit.   Some contracts also include venue provisions. Be aware that an agreement to litigate in courts of a specific state, or even a specific county within a state, will typically be upheld. 

Notice – The notice section of a contract dictates how notices under the agreement should be delivered and to what addresses.  It is important to follow the requirements in this section precisely if a formal notice under the agreement is given. For example, don’t email or fax a notice to the other party unless the agreement expressly allows for it.

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Types of Commercial Leases-What’s in a Name?

There are as many types of commercial leases as there are creative lawyers to draft them. Most types of leases are defined either by the kind of property involved (industrial, retail, office), or by how the rent is calculated and who pays what.


Industrial/Office/Retail Leases. While industrial, retail and office lease forms will contain many similar provisions, “one size does not fit all”. In a retail lease for example (especially in large shopping centers), the following provisions can be found that are not often utilized in office and industrial leases: a) Continuous Operation (the tenant is required to open and operate their business on the premises, continually, throughout the lease term); b) Exclusive Use (the tenant is granted the exclusive use to operate a particular business in the shopping center); c) Radius Restriction (the tenant is required to covenant that it will not lease space within a radius of so many miles of its leased premises for the same use [e.g., a second pizza hut location too close to the one which is the subject of the lease]; d) Percentage Rent (the tenant is responsible for paying base rent on the property, as well as a monthly percentage of income earned from the business occupying the leased space); and e) Co-Tenancy (the tenant reserves the right to terminate the lease, or pay lower rent if an anchor tenant leaves the shopping center).

In an office lease, there are typically more services provided (e.g. elevator, janitorial, guard/concierge) by the landlord (which expenses are typically passed on to the Tenant). In addition, the concept of “usable” vs.” rentable” square footage and “load factors” must be understood and evaluated. A Load Factor is a method of calculating total rent of a tenant that combines usable square feet of the premises and a percentage of square feet of common areas. Basically, usable square feet + percentage of common area square feet (for common restrooms, lobby, elevators, stairwells, and hallways) = rentable square feet. This calculation of the addition of a percentage of the common area expenses to monthly base rent is known is the "load factor." In order to simplify and standardize the measurement of office space, the Building Owners and Managers Association International ("BOMA") has adopted uniform standards for the measurement and leasing of office space. The "BOMA Standard" is utilized in many office leases.

In industrial leases, particular attention should be given to the availability of “industrial amenities” (e.g. high pressure gas lines; cranes; truck docks and “drive-ins” and electrical capacity) and environmental provisions in the lease. Representations, warranties, covenants and indemnities are the norm for the tenant and its operations, as well as regarding landlord’s common area operations and past environmental status of the premises. An environmental audit is often recommended so that a “snapshot of environmental status” can be taken at the lease’s inception.

Lease Types based on Rent-Gross vs. Net Leases. Typically, when dealing with commercial real estate leases, a gross or net lease is utilized, with net leases coming in more than one “flavor”. The following summarizes the basic types and their variations on a theme.

In a gross lease – aka a “full service lease”, the landlord pays all of the expenses associated with maintaining and operating its property (such as insurance, taxes, repairs, trash collection…). These costs will be blended with the base rent to determine the overall rent due by the tenants. Gross lease provisions are usually used for industrial/warehouse space, but can be found in office and retail leases as well. The term “Modified Gross Lease” (sometimes referred to as an “Industrial Gross Lease”) describes a lease in which some, but not all operating expenses are absorbed by the Landlord.

A “net lease” requires the tenant to pay, in addition to rent, some or all of the property expenses that normally would be paid by landlord (or "lessor"). These include expenses such as real estate taxes, insurance, maintenance, repairs, utilities, and other items. For “multi-tenant” properties, such as a shopping center, the expenses that are "passed through" to the tenants are usually pro-rated among the tenants based on the square footage of the area leased by each tenant. The tenant’s share of expenses is often referred to as “Tenant’s Proportionate Share”. There are different kinds of “net leases”, with different names to describe same based on what market one is in, and who is describing the lease (e.g., tenant, landlord, broker or attorney) Many in the commercial real estate industry describe the variations of net leases as follows:

Single Net Lease - the tenant pays for real estate taxes as well as the base rent.

Double Net Lease - the tenant pays for real estate taxes and commercial property insurance.

Triple Net Lease (or Net-Net-Net or NNN) – the tenant pays all real estate taxes, building insurance, and costs associated with the repair and maintenance of any common areas. This form of lease is most frequently used for single tenant buildings and retail space.

Absolute Triple Net lease (or "True Triple Net Lease”)- in the so-called “true” triple net or “bondable” lease, tenants will pay (or reimburse landlord for), in addition to real estate taxes, insurance and common area maintenance, their proportionate share of roof replacement and structural costs to the building. Typically, these leases are not terminable by the tenant, nor are rent abatements allowed. Basically, the tenant pays for and assumes every imaginable real estate risk related to the property.

But what’s in a name? As you might expect, there is much disagreement among landlords, tenants, brokers and attorneys re: the type of lease they have. Focusing on the “label,” however is misguided and problematic. Closely analyzing the lease to determine who is responsible to pay for what is much more important, especially regarding the scope of a tenant’s and landlord’s respective liabilities under commercial leases for repairs and replacements.

When allocating responsibility for maintenance and repairs, most commercial landlords intend for their tenant to make most of the repairs, or be responsible to reimburse the Landlord for same. Does repair mean replacement? Some landlords may think so, however, most courts have decided that if a landlord wants a tenant to replace the roof, for example, vs. patch it periodically, the lease must provide, to the effect, that “it shall be the tenant’s obligation to repair and replace the roof.” See ASP Properties Group v. Fard, 35 Cal Rptr 3d 343 (Court of Appeals, 2005). See also Robert A. Schoshinski, America Law of Landlord and Tenant, §5:18 at 271 (1980). In the ASP case, a lease amendment was prepared after the lease was signed, to add the roof to the list of items that the tenant was to repair and maintain in good and safe condition. However, the Court determined the list to be a list of repair obligations, not replacement obligations for the tenant. Simply stated, “the courts have held that an express covenant to repair will not be enlarged by [language] construction…a covenant to repair does not include a covenant to replace”. Ohio Real Property Law and Practice, Sec. 20.08 [1]-[3] (2007).

The moral of today’s lesson? Don’t worry so much about what you call the lease; make sure you know what it says, and that your intent, especially regards who pays for what and who makes repairs and./or replacements is clearly spelled out. In other words, "watch your language" and “Say what you mean, precisely, or a judge will decide what you meant.”