Commercial lease transaction? Tenant, beware!

By Joshua B. Vann

Commercial leases present particular headaches to potential tenants in South Carolina.  There is often a great disparity between potential landlord and potential tenant in bargaining power and in knowledge regarding what is and what is not customary. To further complicate matters, inexperienced tenants in commercial leases often are unaware that they are not afforded the numerous protections of South Carolina’s Residential Landlord Tenant Act.

While reading a commercial lease, particularly a shopping center lease, can often be like reading Greek to many tenants, there are a few issues for tenants to take time to understand and carefully consider before signing.

Hidden rent costs in a commercial lease

Many commercial leases require tenants to pay base rent and to pay, as additional rent, the tenant’s share of common area maintenance, taxes, and insurance for the building or shopping center.

Some landlords try to make the pro-rata share equal to the tenant’s proportion of the total space leased within the building.  This can put a monumental burden on the tenant. If there is empty space within the building, the tenant could end up carrying most or all of the load for these charges, providing the landlord with little incentive to find new tenants.

A proper formula for tenant’s additional rent should be based not upon the total space actually leased by tenants within the building, but rather upon the leasable space within the building.  Under this formula, the tenant’s share will not go up if there is unleased space within the building, and the landlord will be responsible for covering tax, insurance, and common area maintenance charges attributable to unleased space within the building.

Landlords and foreclosures

When considering a commercial lease, a tenant should also be aware that complications can arise if the landlord does not fully own the property.

If the landlord defaults on a mortgage and is foreclosed upon, the potentially has the right to terminate the tenant’s lease as a part of the foreclosure. This can happen even though the tenant is not in default under the lease and has performed all obligations.  A properly drafted lease can address this potential situation and provide some protection for the tenant if this scenario occurs.

A well thought-out lease will require the landlord to deliver to the tenant a subordination, non-disturbance and attornment agreement. Among other things, this means that in the event of foreclosure the landlord’s mortgage holder will not terminate the lease as long as the tenant is not in default.

There are many other potential perils to tenants in commercial lease transactions.  It is always a good idea for any tenant entering into a commercial lease to first seek the advice of an experienced attorney, who represents the interests of the tenant, not the landlord.  Should you or anyone you know need representation in this area, feel free to contact us.

Joshua Vann is a partner at Morton & Gettys whose practice focuses on commercial real estate and development and real estate finance. You can reach him at 803.366.3341 or at joshua.vann@mortongettys.com.

Information or interaction on this page should not be construed as establishing a client-attorney relationship or as legal advice. For advice about your specific situation, please consult one of our attorneys.

Joshua B. Vann

Partner

P 803.366.3341  F 803. 366.4044