Commercial Leasing - When you can’t buy

Location... Location... Location. How many of us haven’t heard that expression from our real estate agent when discussing the value of a property? The better the location, the higher the price and, conversely, a poor location will usually reduce the value of an otherwise ideal piece of property. Location is often the prime consideration of business owners in establishing their businesses.

Unfortunately, as the Route 422 business corridor rapidly develops, the prime business locations are no longer available for purchase by the new or even the established entrepreneur. Many owners are faced with the need to lease rather than purchase real estate in order to maximize their site considerations because of the rapid development of the suburban Philadelphia landscape. The balance of this article is intended to provide the businessperson with some helpful information when either preparing or reviewing a commercial lease.

Leases come in various shapes and sizes. They do not all look alike. In fact, leases may be legally enforceable even if not in writing. A lease is a contract and is controlled by principles of contract law. It is important to remember that the actual subject matter of most leases, whether commercial or residential, is the building leased, not the land upon which the building stands, and therefore contract law and not property law is applied to disputes between landlords and tenants. An oral lease is a lease agreement where the terms and conditions are not reduced to writing. A landlord-tenant relationship is created whether or not there is a written agreement, if all of the requirements of a valid contract are met. However, some leases must be in writing.

In 1677 England enacted the Statue of Frauds. Pennsylvania adopted a Statute of Frauds in 1772. Today the Statute of Frauds is still in effect. The idea behind the Statute of Frauds is to minimize the possibility of fraud by people orally claiming ownership of real property or the existence of a lease agreement. As it relates to leases, the Statute of Frauds has for the most part been repealed and recodified in the Pennsylvania Landlord-Tenant Act. However, one key requirement remains regarding leases under the Statute of Frauds: a lease for longer than three (3) years must be in writing and signed by the parties (the lessor and lessee). If it is determined that an oral lease agreement is in existence and the term is for more than three (3) years the lease is not invalid. Simply, a "tenancy at will" has been created and both the landlord and the tenant are bound to the lease.

The law recognizes several types of leases. A "tenancy at will" can be terminated at the will of either party. A "tenancy for years" is a lease which lasts for a definite period of time. A tenancy for years is characterized by the absolute termination of the lease at the end of the lease term. A "tenancy for year to year," or "month to month," etc., is distinguished from a tenancy for years by the fact that the parties to the tenancy for year to year lease intend for it to continue after the initial term.

Finally, there is a landlord-tenant relationship that is technically not a lease. This concept is created when a party who is lawfully in possession of real property "holds over," or fails to vacate from the leased premises at the conclusion of a lease term. The holdover tenant no longer has a legal right to possession but is not considered to be a trespasser. The tenant is obligated to pay rent and the landlord cannot summarily evict the party without following the statutory procedures set forth in the Pennsylvania Landlord-Tenant Act.

Of course, most sophisticated business people will demand a lease be in writing to avoid and hopefully prevent unnecessary misinterpretation of the terms agreed upon by the parties. The following topics, among others, should be considered before signing a lease:

Acceleration of rent. Often leases will contain language allowing the landlord to accelerate the total rent due for the remaining lease period following premature termination due to the tenant’s default, or breach of the lease. Furthermore, Pennsylvania law does not require commercial landlords to mitigate their damages after a tenant breaches a lease, absent a mitigation clause in the lease.

Anchor stores. Anchor stores may provide a significant flow of customer traffic in a shopping mall or strip center. If you are the tenant negotiating a lease, consider a reduction in rent clause if one or more anchor stores close or if a significant number of non-anchor tenants go out of business and their premises remain unleased.

Conditions of the premises. Most leases will require the tenant to accept the premises "as is." Be sure to thoroughly inspect the premises before signing the lease. Require the landlord to warrant that the premises comply with all applicable building and zoning codes, including the Americans with Disabilities Act. However, it is best for the tenant to personally ensure that the intended use of the premises is allowable within the property’s existing zoning designation.

Leasehold improvements. Be very specific as to what is the landlord’s work and what is the tenant’s work. Before the time comes to surrender the premises, agree in advance what fixtures, machinery, equipment, and other personal property are the property of the tenant.

The above topics are just a few of the many terms and conditions which should be considered in negotiating a commercial lease. As a prospective tenant, don’t be intimidated by the negotiating process. Careful thought and review prior to signing the lease will assuredly prevent a waste of time and money later. From the perspective of the landlord, a well-drafted lease will assist in protecting the value of the leased premises and keep tenants demanding the landlord’s "location, location, location."

The attorneys of Wolf, Baldwin & Associates, P.C. have counseled numerous clients, both landlords and tenants, on the establishment of commercial leases. Click here to contact us and schedule an appointment today.

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