By James S. Arico
Despite what a landlord may tell a prospective tenant, there is nothing “standard” about any lease form. This is true even for pre-printed leases labeled as “standard,” like the AIR Commercial Real Estate Association lease forms (collectively, the “AIR Form”) for both net (where tenant pays a base rent amount plus its share of taxes, maintenance and insurance) and gross (where tenant pays a base rent amount plus its share of increased taxes, maintenance and insurance over a base year amount) lease transactions. Traditionally, the AIR lease forms have been landlord orientated and designed to protect the commercial real estate brokerage community. While the AIR lease forms have become more tenant-friendly in recent years, tenants should take care in reviewing an AIR Form prepared by either landlord or landlord’s broker. Preferably, tenant should seek the assistance of commercial real estate counsel to review and negotiate the AIR provisions, since the form itself is generally favorable to landlord.
With respect to changes to the AIR Form made by landlord, any revisions using the copywrited AIR Form or AIR software are easily recognizable. Form language landlord wishes to delete will appear as strike throughs and additions or revisions will either appear in the AIR Form in conspicuous type (i.e. different from the form type font) or will be addressed in a separate lease addendum.
The following are some examples of lease items that you, the prospective tenant, should be aware of that are in both the net and gross AIR lease forms:
Condition of the Premises. In paragraph 2.2 of the AIR Form, landlord warrants that, among other things, the existing plumbing, electrical, and heating, ventilation and air conditioning (“HVAC”) systems are in good working order and the structural condition of the building in which the premises is located is free of material defects. While this landlord warranty is a benefit for tenant, the warranty period is only thirty (30) days, with the sole exception being the HVAC system, which carries a six (6) month warranty. Any problems incurred with these items following the expiration of the warranty period are tenant’s responsibility to fix at tenant’s sole cost. Since a prospective tenant needs to “live” in its new premises for some to determine which building systems may be defective, tenant should request that, at a minimum, landlord’s warranty for all building systems and the building structure be extended to six (6) months.
Security Deposit. The security deposit section of the AIR Form (paragraph 5) provides that if the base rent increases during the term of the lease, landlord has the right to increase the amount of tenant’s security deposit to maintain the same proportion as the initial security deposit bears to the initial base rent amount. To avoid surprises, tenant should seek to strike this provision of the lease.
Tenant Improvements and Surrender of Possession. Paragraph 7.3 of the AIR Form provides for tenant’s right to make alterations/improvements to the premises. Tenant should keep in mind that, except for movable items of personal property used in tenant’s business (called trade fixtures), landlord has the right to keep or require removal of any other alterations or improvements tenant makes to the premises at the end of the lease term. Since some alterations may be as expensive to remove as to install, tenant should request that all tenant improvements (other than trade fixtures) remain with the premises or, alternatively, that landlord make the “remove or remain” decision on all tenant improvements prior to installation.
Partial Damage that is an Insured Loss. Under paragraph 9.2 of the AIR Form, if damage to the premises occurs that is insured and the cost to repair is $10,000 or less, landlord has the option to give tenant the insurance proceeds and have tenant undertake the repairs. Two immediate issues arise with this concept. First, tenant is usually not in the construction business and undertaking repair responsibilities, even if of minor nature, is a distraction to the ability of tenant to conduct its business. Second, tenant may be responsible for any gap between the insurance proceeds received by landlord and the actual cost of the damage repair. Tenant should carefully review its responsibilities in the event of damage or destruction and make sure that the provisions are “even handed.”
Accessibility ADA. The last numbered paragraph of the AIR Form (Paragraph 50 on the net form and Paragraph 49 on the gross form) identifies three important things. First, whether the premises has been inspected by a Certified Access Specialist (a “CASp”); second, that landlord makes no guarantees that the premises is ADA compliant; and third, that any ADA modifications required by tenant’s use will be the sole responsibility of tenant. Tenant should consider the following: First, if the premises have not been inspected by a CASp, tenant may want to retain its own CASp to inspect the premises; and second, tenant should negotiate a fair resolution of the allocation of costs related to any required ADA modifications. For example, tenant should be responsible for only those non-structural modifications related to the unique nature of tenant’s use of the premises (as opposed to any other use of a tenant in the building, or a general office/warehouse use) and landlord should be responsible for all other modifications.
NOTE: THE ABOVE LEASE ITEMS ARE ONLY EXAMPLES OF POTENTIAL PITFALLS A TENANT MAY ENCOUNTER. For this reason I reiterate the suggestion to seek the assistance of a commercial real estate counsel.
Thank you for joining us on ClarkTalk! We look forward to seeing you again on this forum. Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. You should certainly consult legal counsel of your choice when considering your real estate needs. If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Jim Arico by email at firstname.lastname@example.org or telephonically by calling the author at (213) 629-5700.