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COMMON LEGAL ISSUES FACING PARENTS WITH MINOR CHILDREN AND BUSINESS PERSONS by William Seeley, Attorney III. COMMERCIAL LEASES There are 3 basic types of commercial leases:
Now we will discuss each of these commercial lease types. 1. Gross lease: Most building owners do not use Gross Leases. Why? Because they can’t predict how many future taxes, insurance and building operating expenses will increase over the life of the lease. Also, if the Tenant is a restaurant, they are concerned about the high cost of water and electrical usage. Thus they want a lease that will pass on these expenses to the Tenant. The type of situation where an Owner is willing to the enter into a Gross Lease is where:
2. Base rent plus come additional operating expenses that the Leasee must pay, such as electrical and water usage. Some businesses, such as stand alone restaurants, use a lot of water for food preparation and cleaning dishes, as well as electricity for heating and air conditioning. Because a restaurant cannot operate without electricity even for short outage periods due to health standards for both food preparation and storage, lighting and air conditioning, building owners do not want to be held liable for any periods of electrical outage. They don’t want to have to estimate how much water a restaurant will use, since it significantly varies based on types of food prepared, volume of customers and cleaning methods. Thus the Owner will almost always insist on either a Base rent plus some additional operating expenses type lease or a Triple Net Lease. Following are some typical lease provisions in Base rent plus come additional operating expenses type restaurant lease. YOU SHOULD ALWAYS CONSULT WITH AN ATTORNEY BEFORE SIGNING OR PREPARING A LEASE: 1. Rental Terms. Lessee shall pay to Lessor as base rent the following sum:
- July 15, 2006 thru July 14, 2008 = $2,000/month. - July 15, 2008 thru July 14, 2010 = $3,000/month. (Option 1) A. Taxes. Lessor pays all real property taxes and installments of special assessments during the lease term and any extensions thereof. (Option 2 – more common) A. Taxes. Lessor pays all real property taxes and installments of special assessments during the first year of the lease term. Lessee shall pay any increases in taxes and installments of special assessments due during the remainder of the lease term and any extensions thereof. B. Heat/Air conditioning. Lessee pays 100% of the cost of heating and air-conditioning the premises.
C. Water/Sewer. Lessee pays 100% of the metered share of total building water/sewer charges for the premises. 2. Ordinances, Regulations. Lessee shall not use or occupy or permit the Leased premise to be used or occupied in any unlawful manner or for any illegal purposes or in such a manner as to constitute a nuisance. Lessee shall comply with all requirements of public authorities and of any liability or hazard insurance company by which insures Lessor, and shall hold Lessor harmless from penalties, fines, costs or damages caused by or resulting from Lessee’s occupancy. 2. Alterations, additions or improvements. Lessee may make such alterations, additions or improvements to the building as may be necessary for the conduct of its business, including partitions, lighting fixtures and doors. Alterations, additions and improvements shall be the property of Lessor and upon expiration or earlier termination of this Lease shall remain on the premises, with no further liability to Lessee related to their use, maintenance or removal. FIXTURES VS. PERSONAL PROPERTY USED IN THE BUSINESS: If the Tenant spends $100,000 on new built in tables, decorations attached to the walls, kitchen update, etc, at the end of this lease, all of this property belongs to the Owner, because these are all FIXTURES, or property that is attached to the premises. On the other hand, if the Tenant buys new tables and chairs that ARE NOT ATTACHED TO THE PERMISES, this type of personal property is not part of the building, and the Tenant can take it with him at the end of the lease, unless there is a special provision in the lease stating that even personal property used in operating the business is the property of the building owner.) 4. Maintenance. (a.) Lessee shall maintain the leased premises so that they are suitable for use as a restaurant and are in compliance with all laws, regulations and zoning codes. Except as expressly provided in this Lease, Lessee shall keep the entire leased premises clean and free from dirt, grease and refuse matter, and shall keep and maintain every part and portion of the leased premises in good order and repair, reasonable wear and tear excepted. Lessee shall furnish its own janitor service, shall maintain its own lights; electrical and plumbing systems, etc. (b.) Exterior maintenance. Lessor shall maintain in a timely manner the exterior of the premises limited to the roof, exterior walls, structural membranes, foundation, support beams, fire doors, and ingress/egress systems required throughout the building. Lessor hereby assumes responsibility for said exterior maintenance. Lessee is responsible for maintaining and repairing the parking lot, snow removal (on both the sidewalks and parking lot), landscaping and mowing the grass. (NOTE: You should have your attorney carefully review this section of a commercial lease to determine what maintenance responsibilities are those of the Tenant, and which are the building Owner’s duty. If the Lessor owns and manages many buildings, unless they have a very efficient property management operation, if your AC goes out on a hot summer day and you have to close your restaurant, you could lose thousands of dollars in revenues. Even if the Lease says the Lessor is responsible for maintaining and repairing the AC, the lease will usually state that the owner is NOT LIABLE FOR ANY CONSEQUENTAL DAMAGES …. Such as loss of business due to electrical outages, or a breakdown in the AC system. Thus you may be better off assuming the responsibility for maintaining and repairing the AC system. Try to negotiate a provision stating that if the Tenant must spend more than $5,000 in any year to repair or replace the AC units/system that Lessor will pay any amounts above $5,000, which Tenant can either get in cash from the Lessor or deduct from his monthly base rent. ) 5. Signs. Many leases have size limitations and the location, color and content of the sign must first be approved by the Lessor. This is more often true of strip malls with many businesses. These malls usually want uniform sized signs. They also want signs located on the lease premises or on a common sign board.) 6. Inspection. Building owners want the right to inspect the premises at their choosing; however Tenants want to maintain their privacy and not have their business interrupted by too frequent inspections. A BALANCE OF THESE TWO INTERESTS needs to be worked out in the lease agreement.) 7. Damage to Persons or Property. Building owners want to limit their liability for damage to the Lessee’s property and inventory. This is why it is important for Lessee’s to take out adequate insurance to protect their personal property, fixtures and inventory. 8. Indemnity for Damage to Persons or Property. Many leases will state that: “Lessee covenants at all times to save Lessor harmless from all loss, liability, costs or damages that may occur or be claimed by or with respect to any person, corporation, property or chattels, on or about the leased premises.” This is why is important for the Tenant to have adequate property and premises liability insurance. See Par 9 below. 9. Lessee Insurance. Lessee is usually required to carry a minimum of $1 million per person and $2 million per occurrence for injuries to customers, employees and other business invites using the building to protect the Tenant and building owner against liability claims arising out of negligence in the operation of the building, slip and fall injuries (e.g. banana peel on the floor or ice on parking lot). Tenants are usually also required to have property damage insurance to cover loses to both the building and personal property, including inventory, stored inside the building in the event of a fire, tornado, heavy rain, etc. The amount of insurance coverage varies according to the size of the business; value of the property and the demands of the Building owner. Amounts are usually negotiable; but it is wise for the Lessee to have at least 1 million in liability insurance and enough insurance to cover the value of their personal property and inventory in the event of a fire or other severe damage to the premises. 10. Damage to Premises and Security Deposit . The owner usually wants the right to cancel the lease if damage to the building is more than 50% of its rentable space. These provisions of the lease also give the Owner time to repair the building. If the Tenant is negligent in causing the damage, then the lease usually states that the Tenant’s insurance, or the Tenant, must pay for damage. THIS IS ANOTHER GOOD REASON WHY TENANTS SHOULD INCORPORATE, TO PROTECT THEIR PERSONAL ASSETS. 11. Condemnation. If the city decides to condemn the property for a public use, this gives the owner the right to terminate the lease early, even though the Tenant may lose lots of money due to loss of investment in fixing up the premises or good will from loss of customer when moving to a new location. This is what is happening to the Beijing Garden restaurant at Huron Blvd and Washington Ave, SE Minneapolis due to the University of Minnesota’s new football stadium project. 12. Demolition. Sometimes the building owner wants to demolish the leasehold space to build a new rental building or sell to a third party who wants to demolish and rebuild. This clause gives the owner the right to do this without paying the Tenant money for moving, improvements or loss of good will. You should have your attorney propose a clause stating that if the Owner wants to demolish the building, they need to pay the Tenant a relocation fee of a certain amount ($50,000 for example) or 50% of the rents due during the remaining term of the lease. 13. Default by Lessee. The building owner wants to protect themselves if the Tenant is not paying rent. To evict the Tenant for non payment of rent, the owner must start an Unlawful Detainer action and get an Eviction Order from the Housing Court. Both sides should be represented by an Attorney. 14. Late Payment Penalty. Late payment charges are negotiable. If the Tenant is a corporation then interest usury laws do not apply. That is, there is no upper limit to the interest that can be charged.) 3. Triple net lease, which is base rent plus tenant’s pro-rata share of all other expenses (taxes, insurance and operating expenses related to the management of the property, further explained below) 3.2. Additional Rent. Many commercial leases will have a provision stating: This Lease is a triple net lease wherein all costs and expenses including, but not limited to taxes, insurance, utilities, maintenance, repairs, operating expenses, and obligations of every kind relating to the Leased Premises which may arise or become due during the term of this Lease, unless expressly set forth otherwise in this Lease, shall be paid by Lessee. Said amounts shall be due concurrently with Base Rent. In other words, you will have to pay a base rent plus your % share of all operating costs for the building. Thus if you rent 30% of the rentable space in the building, you will pay 30% of the insurance, taxes, operating expenses, etc. Operating Costs: THIS IS A VERY IMPORTANT TERM THAT YOU SHOULD HAVE YOUR ATTORNEY CAREFULLY REVIEW. One lease recently reviewed defined “Operating Costs” as “any and all costs, expenses and disbursements of every kind and character which Lessor incurs, pays or becomes obligated to pay in connection with its management*, repair, replacement and security relative to the Premises. Lessee shall be liable for the payment of sum equal to twenty three and sixty three hundredths percent (23.63 %) of the annual aggregate operating expense incurred by Lessor in the operation, maintenance and repair of the Premises. Operating Costs specifically include but is not limited to taxes, costs of insurance, including loss-of-rents insurance coverage, maintenance, repair, replacement and care of all common area lighting, common area plumbing and roofs, parking and landscaped areas, snow removal except sidewalks, repair and maintenance of the exterior of the Building, management fees not to exceed three percent (3%) of all Lessees’ base rent and related expenses.* Operating Costs exclude costs required to be capitalized (other than such costs for capital improvements or equipment which can reasonably be expected to reduce operating costs, or to comply with governmental requirements adopted after the date of this Lease Agreement), expenses paid by net proceed of insurance and depreciation.” * Be careful of this term “management”. As a Tenant, how can you monitor what the owner charges for “management fees”? What if the owner decides to pay himself $300,000 per year for managing your building? If you leased 30% of the rentable space, then you would have to pay another $100,000 on top of your base rent and other operational expenses related to the building. This is why I negotiated the phrase highlighted above limiting management fees to “3% of all Lessees’ base rent and related expenses.” IV. COMMERCIAL LIABILITY: Primary liability issues in a retail business are: 1. Bodily injury claims by your customers and employees if anyone is injured while inside the premises. 2. Bodily injury claims by your customers and employees if anyone is injured while on the parking lot or sidewalk leading to the premises, but within the property limits of the retail business. But if your restaurant or business is part of a strip mall, then the mall owner’s insurance will cover damage/injury claims by persons injured on this common area space. 3. Property damage in the event of fire, wind storm, water damage, etc. Make sure that your insurance covers water damage to business fixtures, personal property and inventory if you have a burst pipe. Insurance policies distinguish between water damage cause by a violent rain storm and tornado that causes sudden damage versus a burst or leaky pipe that causes gradual damage overnight or a weekend when no one is there. 4. Worker’s compensation claims by employees injured while working on the premises. If an employee is coming to work, or leaving work after completing his shift, but is injured by slip and fall (or other causes) while in common area, then the Building Owners insurance would probably offer primary coverage. There are exceptions to this general rule, such as the employee delivering take out orders – in the middle of his shift – who slips and falls while making a delivery. He would be entitled to worker’s compensation coverage, but if he could prove gross negligence by the employer or property owner, then he could also make a damage claim against them. 5. Sexual harassment by the business owner or his employees against other employees or customers. It is impossible to discuss all situations and their legal consequences in a short space. Business owners can obtain insurance to protect them against negligent acts of employees, but such insurance will not cover criminal acts committed by the owner or employees. Prepared by William Seeley, Attorney SEELEY LEGAL SERVICES, P.A. 3416 University Ave SE, Suite 200 Minneapolis, MN 55414 Telephone: (612) 379-2440 e-mail: seeleylegal@hotmail.com FOR A COMPLETE COPY OF THIS PRESENTATION: click the link Estate and Business Planning (Copyright William S. Seeley 2006) |
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