How you can limit disputes in commercial leases
Litigation over a commercial lease can be expensive and time-consuming. Although some disputes are unavoidable, you can take steps when drafting the lease to help limit the scope of subsequent disputes.
Addressing some issues on the front end can save time and money in the long run. Here’s a few key points to consider:
- Don’t just state what is and what isn’t allowed. Go further and specify the consequences of a violation. For example, many retail leases grant the tenant an exclusive right to engage in certain business, but the leases don’t specify the consequence of a landlord breach. If a violation occurs, litigation is virtually inevitable because the tenant has no specific remedy under the lease.
- The tenant must sue to prove damages and the landlord potentially faces claims of unfair and deceptive trade practices. If the remedy is spelled out in the lease, that fight can be avoided.
- Clarity and specificity in all negotiated terms is important. For example, in an Exclusive Use clause, don’t just say tenant has the exclusive right to operate a sandwich shop. Lawyers can and will litigate whether a hot dog is a “sandwich.” Try to specify the exact parameters and limits of the rights granted. Similarly, an Exclusive Use clause might say the landlord will not allow any other tenant to sell a particular product in a space greater than 1,000 square feet. If that clause does not specify how to measure the area and whether aisle space between displays will be included in the calculation, disputes can occur.
- Common Area Maintenance clauses are a frequent source of litigation. Parties fight over whether certain expenses can be included in the CAM charges a tenant must pay. If a landlord or tenant feels strongly about management fees, capital expenditures, or other items, they should address that issue when negotiating the lease. Otherwise, the only option is litigation over an ambiguous clause, which requires examining the parties’ intent and can include costly depositions of the parties, their brokers and attorneys. The parties should also address whether the tenant has a right to audit landlord expense records, and whether any such right is subject to limitations.
- Landlords can use certain landlord-friendly clauses to short-circuit litigation. In North Carolina, commercial parties are given much deference to negotiate a lease, and a court typically will not impose its judgment or declare a lease to be unfair. For example, a lease can include language specifically allowing a landlord to simultaneously accept partial payments from the tenant while pursuing enforcement of a tenant default. A lease can also waive the landlord’s obligation to mitigate damages. Such clauses can reduce litigation by effectively eliminating typical tenant defenses before disputes even arise.
- A potentially risky way of reducing litigation is by including a mutual or unilateral waiver of consequential damages. Such waivers can limit the scope of recovery by either party, thereby diminishing the potential upside of litigation. However, such clauses can have harsh consequences. For instance, if a tenant wrongfully stays past its lease expiration and causes the landlord to lose a valuable replacement occupant, the landlord may not be able to seek recovery for that loss. Alternately, if the landlord’s failure to maintain the premises causes tenant to lose valuable business, this clause would potentially prevent recovery.
Overall, the more the parties can strive for clarity and detail on the front end, the greater the chance they can avoid subsequent litigation.