Commercial Leases & License Agreements
Commercial leases & license agreements have the same basic function as residential leases or Lease-Purchase Contracts. The primary distinction, though, is that because business is being done on the underlying property, there are usually quite a bit of ancillary terms and conditions. The cumulative effect of such provisions complicates the contract in that there are more possibilities for breaches and disputes. Some examples are below.
Almost always a commercial agreement will require that liability insurance be carried by the lessee /licensee, particularly workers’ compensation insurance, to protect the lessor/licensor. Similarly, additional indemnification — so called “hold harmless” provisions — may be included in the Agreement so as to insulate the landlord/licensor against legal liability fully or at least up to a certain point.
Further, with respect to monetary obligations, it is not uncommon to see common area maintenance clauses requiring that the licensee/tenant be financially responsible, in whole or in part, for the utilities or repairs in the main areas of a building. To give an example, a “CAM” provision may require than a tenant in a shopping mall be required to contribute to the utilities or repairs of the mall’s main walkways on a pro rata basis. Another way financial obligations will differ is that it is often the case, particularly for commercial retail leases, is that the landlord/licensor may also sneak in provisions whereby they would be entitled to a percentage of the tenant/licensee’s gross monthly income after they hit certain “benchmarks.” This is most common in shopping mall leases.
Perhaps the most subtle provision that you need to be on guard for in a commercial agreement is whether the agreement is defined as a license agreement or lease agreement. I have, in the foregoing, been using the terms interchangeably, but legally there is a big difference. A license is a grant of permission to do something. A driver’s license, for instance, is permission by the State to drive a car on its roads. The driver’s license does not give you any ownership or possessory interest in the roads; you can’t just stand in the middle of the road and prohibit people from driving by virtue of your license. A lease, on the other hand, creates a landlord-tenant relationship whereby the tenant has possession and use of the leased premises. In short, the tenant has a leasehold estate — which comes with a bundle of property rights. The short of it is that a building owner or commercial property owner will often try to be sneaky and characterize the agreement as a license agreement, thereby negating many possessory interests in the property and circumventing many legal rights, duties, and obligations which would normally be present in a landlord-tenant relationship.
Commercial lease agreements involve quite a bit of money month-to-month and year-to-year. It is often the case that one provision or clause can make the entire agreement unfavorable for either of the parties to the contract. Whether you are a commercial landlord/licensor or tenant/licensee, we can help. We have been involved in the drafting and litigation of commercial lease/license disputes and offer free initial consultations.