Commercial Leases Pop Quiz And What You Need To Pass

In the spirit of heading back to school, we want to test our readers’ knowledge of the essential terms of commercial leases.

After all, most businesses will be a lessor or lessee at some point during their life cycle. Moreover, out of all the agreements a business will execute, commercial leases are often the most complex and least understood.

Q: Is it ok to use/sign a standard form?

A: Forms can be a good starting point, but they rarely address the unique circumstances of the parties. In addition, if you are not the one who provided the form, it is generally safe to assume that the terms will not be in your favor. Therefore, standard leases should serve as a starting point for lease negotiations and always be reviewed with experienced counsel prior to signing.

Q: What is a “triple net” lease?

A: Under this type of lease structure, the tenant is responsible for paying the net of the landlord’s operating expenses, including real estate taxes, property insurance, and maintenance (the three nets), in addition to base rent and other fees. Because the tenant essentially assumes the risk of ownership, it is important to understand how the operating expenses are calculated.

Q: What is the difference between a right of first offer and a right of first refusal?

A: Under a right of first refusal, when the landlord receives an acceptable offer to lease or purchase the property from a third party, the landlord must submit the offer to the tenant, who then has the right to lease or purchase the subject property on the same terms and conditions. By comparison, a right of first offer obligates the landlord to notify the tenant that the property is being made available for lease or purchase prior to marketing the property. The tenant then has the right to lease or purchase the property pursuant to that offer. In the case of either provision, care must be taken by the drafter to set forth the conditions that trigger the tenant’s rights, and the steps that tenant must take to exercise those rights.

Q: What are CAM expenses?

A: “CAM” refers to common area maintenance. Tenants are frequently required to contribute to the upkeep costs for hallways, stairways, elevators, parking lots, and other shared spaces. It is important to (i) understand how these fees are calculated and how each tenant’s share is apportioned; (ii) understand what is included and excluded from such fees; and (iii) secure a right to audit such fees in the event that they seem inappropriate.

Q: What is an SDNA?

A: An “SDNA” is a “subordination, nondisturbance and attornment agreement. Most standard lease agreements state that the lease is subordinate to any pre-existing mortgage on the property. To avoid being potentially evicted in the event of a foreclosure, tenants can condition the lease upon landlord securing an SDNA from the lender in which the lender agrees, among other issues, that it will not disturb the tenant’s possession of the premises, while the tenant agrees to continue paying rent and otherwise abiding by the terms of the lease.

If you have questions about commercial leases provisions or would like to discuss your company’s real estate interests, please contact me, Victor Kinon, or the Scarinci Hollenbeck Litigation attorney with whom you work.