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A HIGH-WIRE ACT WITHOUT A NET

Commercial real estate creates special answers to the question of why lawyers are necessary.

To the extent the discussion involves commercial property, real estate has two distinct characteristics. The one that gets most attention is the structure itself. How a property is built, whether it meets building codes, whether it is solidly and intelligently constructed, are all important. The Building Industry Associates (BIA) has as one of its objectives helping licensed builders improve the quality of new structures. Over the years, the BIA has done an excellent job of raising the industry from an uncontrolled rabble to a group of professionals who are far more technical about the way things are done, and who are as educated as any professional.

But their business is the quality of a structure. My office, and all other real estate legal specialists, deal in the other side of real estate – the paper side. How important is that? When you go shopping for shoes, you’re concerned about what they look like. That’s subjective. That’s why you take someone with you. Next, you wonder how it’s built and whether it might last until the credit card is paid. Finally, you wonder whether it fits. I know from painful experience that you can buy a beautiful, well-made shoe that doesn’t fit and you’d have been better off wearing flipflops to work. Real estate also has to fit. Whether it fits has everything to do with the conditions that govern what you can do with it, and that’s what lawyers are about.

I have said in a previous article that townhouse documents, for instance, are an unregulated minefield. If there are no established rules for repair of the exterior of the unit, outside maintenance, roof repair, or really anything else, then living next door to someone who doesn’t care about those and countless other issues, will ruin your investment. A perfectly constructed townhouse unit with a poor declaration of covenants and rules, will be exactly like that expensive Italian shoe that simply doesn’t fit.

There are other areas of real estate in which the parties have very little statutory protection or guidance. Last month you learned that easements is one of them. Easements have no form, they take unlimited variation, and they require you to define today all of the issues that may arise during the life of a property. Commercial leasing is another. The law assumes that the parties to a commercial lease will negotiate and look out for themselves. That’s what this article is about.

I have written about residential leasing. Space doesn’t permit us to reprint that article, but you can find it at our firm’s website under the title “Why The Rental Manager Will Be King”. https://www.chesserbarr.com/blog/2010/march/. The theme of that article is that Florida has a well-developed landlord-tenant statute that controls a great deal of the relationship between residential landlord and tenant. Whatever residential lease agreement is used, it will be required to incorporate or exceed the protections given to a tenant by the landlord-tenant statute. Your lease can do more, but the statute is the place you must start. By contrast, there are almost no statutes regarding most issues in commercial leasing. The terms of an agreement between landlord and tenant are to be made between the parties.

To understand the importance of that, most commercial tenants, whether for a professional office or a retail store, don’t intend to move every year. They intend to build business relationships and goodwill tied to a location, and moving is expensive and wastes time if the business is successful. Over time, the tenant will likely have as much invested in that space as the landlord. There are two kinds of commercial leasing. One involves large corporate, nationallyowned landlords. Those players have their own legal staffs, their own checklists and leases, and they understand the importance of the contents of these agreements. Their leases are also many- page documents developed by experience and time and by a legal staff that does nothing but the fine print in those leases. Those are good lawyers, from great schools, where they learn all about complex run-on sentences, over-bulging paragraphs, and fine print. There are also national tenants with their own legal staff. The other form of commercial landlord is local, and far less likely to have a staff that does nothing but leasing on documents that have been prepared and tested over years.

As in all of the discussion about the legal or paper side of real estate, the question has to arise: who does it protect to have clear and accurate leases? To answer that, remember that leases, like townhome documents and easements, are not a marriage relationship. Marriage is a union that happened with only three or four immutable rules, and even those immutable rules are sometimes up for negotiation. The understanding between the parties is that countless compromises will be required over years, and the good will of both of the parties will direct the extent of their willingness to silently strike those daily deals that keep them married. By contrast, commercial real estate is a business deal. Because both landlord and tenant each have sizeable investments in their locations, the agreement by which they go forward need more than casual attention up front. Typically in business, plain language and attention to detail up front benefits both sides.

The following is only a small sample of the questions that the parties have to answer in a commercial lease:

• Beginning and ending dates

• Rent rates

• Specific property to be leased

• Common area available to the tenant

• Who will be responsible for making the unit ready to occupy if it isn’t?

• Who will provide maintenance?

• Who will pay utilities, taxes, and insurance?

• What signage limitations should there be?

• How much parking is available to the tenant?

• Are there requirements for hours of operation?

• Utilities and garbage collection

• Indemnity

• Lighting requirements

• Delivery and employee parking

• Whether the lease will be personally guaranteed

This list can go on and on, and it should. The only way to make a commercial lease is to sit down without distraction and make every possible effort to consider the characteristics of the business to be done and the ways the building and the space within must relate to each other so the interest of both landlord and tenant are served over time.

Commercial leasing is so complex that a complete discussion requires a book, not an article. I have prepared a term sheet with many of the points that have to be discussed between landlords and tenants before they even begin to draft a lease. That term sheet is available from my office by email request to melissa@chesserbarr.com. I have intentionally not provided a lease form, in part because there are many, and in part because I want each landlord and tenant to speak to his or her own lawyer experienced in leasing whether they are preparing a lease or evaluating someone else’s. In any commercial lease, every term is negotiable, and every term should be intentional and deliberate. Both sides should have an attorney whose job is to sit somewhere in a quiet space and anticipate possibilities for that property over time. That will require the attorney to understand the business to be done and the location it will occupy. I say, as before, this article is not written to make realtors better draftsmen of commercial leases. You don’t get paid for that, and both your license and your insurance carrier will appreciate you staying out of that service. These words are instead intended to make realtors and their clients better partners with their lawyer in this critical side of commercial real estate.

Musicians understand the importance of having a sheet of music or, at least, an understanding of chord progression and notes within a chord. Otherwise, one musician can make music, maybe. Two musicians, even if they’re really good, make noise. The same thing is true for free range documents such as townhome control documents, easements, and commercial leases. Where there is no sheet of music, noise will surely follow.

This article was published in the Coastal Homes publication of the Northwest Florida Daily News on August 4, 2018: http://www.coastalhomesfla.com/Olive/ODN/NWFLDNCoastHomes/