Common Clauses in Commercial Leases

Most commercial leases in Texas are proposed and drafted by the landlord. There is no standard commercial lease form in Texas, and leases are often custom documents drafted by the landlord’s attorney to be heavily favored for the landlord. Prospective tenants usually retain an attorney to revise and negotiate the lease with the goal of executing a more neutral agreement. This article will explain some of the common clauses in Texas leases typically negotiated between landlords and tenants. 

Assignment and Subletting

Assignment happens when a tenant transfers their entire interest in the lease property for the duration of the lease.  Subletting is when a tenant transfers less than the remaining term or less than the entire leased property, thus leaving the original tenant with a reversionary interest in the lease. 

Commercial landlords impose strict limitations on both. They want to ensure that any future tenants are viable, whether through rent, repairs, etc. Landlord proposed leases typically forbid both assignment and subletting. Tenants, on the other hand, favor flexibility in the event of business change, and should push against an outright ban on assignment or subleases. Attorneys representing tenants will often propose a clause that allows assignment or subletting with approval by the landlord, such approval or consent to not be unreasonably withheld. 

Casualty and Condemnation

Casualty and condemnation are critical clauses in the event of catastrophes such as floods, fires, hurricanes, or eminent domain actions. Tenant oriented clauses should focus on rent abatement, termination rights, and allocation of proceeds. Landlords and tenants will seek to balance rent abatement and termination provisions in the event of casualty or condemnation. 

Construction of Tenant Improvements

In commercial leases either the landlord or the tenant can be responsible for construction to prepare the premises for the tenant. Lease language should clearly and specifically lay out the obligations of both parties. Common clauses might require the landlord to supervise all TI or reimburse the tenant for construction and authorize the tenant to perform any desired or necessary improvements. Close attention should be given to potential delays, term and rent commencement, and deadlines for completion. 

Default

Default clauses outline landlord’s and tenant’s remedies in the event of breach of lease by either party. The parties should be entitled to notice of default and a defined period to cure before remedies may be exercised. Indemnity provisions should not benefit the landlord in the event of default. This can lead to an improper double recovery by the landlord. Default clauses that outline landlord breach are typically sparse, as tenants can usually avail themselves of remedies outlined at common law. 

Operating Expenses

Landlords often offer properties to tenants on gross lease terms, net lease terms or a hybrid of the two. Many leases attempt to pass on costs to tenants by requiring tenants pay a pro rata share of operating expenses. In single tenant facilities, the tenant is normally, primarily responsible for all or most operating expenses. In multi-tenant facilities, the landlord is expected to shoulder various operating costs for the benefit of all tenants. Many commercial leases will have an extensive outline of operating expenses that the tenant may be required to cover. Tenants should understand how operating expense clauses function and pay close attention to the types of expenses, audit and notice provisions, and the base year. Tenants may be successful in negotiating a cap for some expenses exclusively under landlord control. 

Conclusion

Commercial leases often include terms between three and ten years that have lasting consequences on the success of a tenant’s business. It is critically important to retain an experienced real estate lawyer to negotiate a commercial lease in Texas.

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