Understanding Boilerplate Commercial Lease Agreements: An Overview

What is a Boilerplate Commercial Lease?

What is a Boilerplate Commercial Lease?
When it comes to commercial leases, no two are alike. The terms of a commercial lease will be dictated by the facts and circumstances of each particular deal. Nevertheless, there is a particular category of commercial leases which have become colloquially known as "boilerplate" leases. The way a boilerplate commercial lease operates is that it has been pre-determined by the landlord and is being used in its existing form for a number of different tenants and situations. In essence, the boilerplate leases are the landlord’s form lease document and any changes to its form must be negotiated between the landlord’s counsel and the tenant’s counsel before they can be properly modified and executed by the parties and their counsel. In most cases, the boilerplate lease is the starting point and the negotiations are between the landlord’s counsel and the tenant with respect to the various portions of the lease which include rules and regulations, additional rent, tenant improvements and alterations, utility expenses, parking, signage, operating expenses and other common area expenses, maintenance and repair obligations, removal of insurance and … you guessed it, indemnification provisions in favor of the landlord, the landlord’s agents and mortgagees.
The Landlord will use a form lease generally based upon the existing lease agreements in use by its affiliated buildings. In the case of a large institutional landlord, its buildings could number anywhere from a hundred to a thousand different office buildings. In such a case , the landlord will have a base form lease which will be reused for all of its similar office buildings. Then the landlord’s attorneys will modify the boilerplate form lease to address the needs of each individual transaction. A landlord who uses these types of boilerplate leases will build into its standard form lease the forms of provisions or options which it will consider under the circumstances. For example, if the landlord knows that it will generally agree to give the tenant a certain amount of free rent at the beginning of the term or it will pay any tenant improvement allowance or give the tenant a right of first refusal to lease contiguous space or an option to either extend the term or terminate the lease, such provisions will be built into the boilerplate lease agreement. The blank areas of the boilerplate lease will be filled in by the forms of the tenant concessions, tenant improvement allowances, rent abatements or other requests received from the tenant.
Fortunately for tenants, landlords with varying sized portfolios will have sets of boilerplate leases which contain both tenant favorable as well as landlord favorable terms. In some instances, a tenant may be lucky enough to obtain a boilerplate form lease which has provisions amenable to a tenant. In these cases, the tenant’s negotiating position will be strong and will often lead to tenant favorable terms. On the other hand, where the tenant is not as favored and the landlord’s lease form is one which is less favorable to tenants, the tenant needs to be extremely careful so as to not lose its rights under the landlord’s form in the process of negotiating so-called tenant concessions.

Particular Provisions of Boilerplate Leases

Typically, a boilerplate commercial lease agreement consists of four major components: terms, conditions, liabilities, and rights of the parties.
Leases usually begin by identifying the parties and the subject property. Oftentimes, agreements have a provision that enumerates the specific right of possession to the subject property granted to tenants. Sometimes referred to as language that "creates an estate," this provision might also designate the term, or time, of the lease.
The term of the lease is the second major component of an agreement. There are establishing terms for a lease period on two levels: practical and legal. On the practical level, a lease needs to establish how long the tenant will be renting the unit. Fifty-three percent of all leases are for one year, although there are other common alternative terms, such as five years with two five-year options. On the legal level, a lease establishes the commencement and termination dates of the lease. An agreement fails to be effective when these dates are not established at the outset because it is considered too imprecise to be legally enforceable. All leases also require the parties to agree to a renewal of the lease once the term has been met. While leases are required to specify a term, they are not required to specify a renewal; renewal provisions are optional.
The third major component of a boilerplate agreement concerns the conditions under which the lease will be made, fulfilled, and/or terminated. The lease should identify any external factors that may affect the ability of either party to carry out the terms of the contract. These include tenants’ responsibilities to pay taxes, maintain insurance, and care for and repair the property. It should also discuss rent, additional services, utilities, and the ability of the landlord to enter the premises.
The fourth major component of a lease involves the liabilities and rights of the parties. This includes procedures for handling non-performances, defaults, and remedies for violations of the agreement.

Pros and Cons for Landlords and Tenants

For landlords, boilerplate commercial leases can save time and money. These leases are already written, so you can avoid the time-consuming (and, therefore, billable) activity of drafting a new document from scratch. Further, they avoid the cost of paying an attorney to draft a lease document based on your descriptions of the elements to be included. Finally, if you choose the right form lease, it will permit you to avoid excessive negotiations if you like the form terms, as many landlords do. Unfortunately, if the form lease is a bad candidate, you may find yourself in drawn-out negotiations with a tenant who does not benefit from the terms included in the lease form.
For tenants, boilerplate commercial leases can benefit you by saving you time and legal fees. Since you don’t have to negotiate the terms of a lease and the rent amount is predetermined, you’ll never have to concern yourself with potentially losing a desired space just because you and the landlord cannot agree on the form of the lease. The downside for a tenant is that you’re stuck with a lease form written overwhelmingly from the landlord’s viewpoint. You may find unintended repercussions if the boilerplate terms skew too much in favor of the landlord, such as excessive restrictions on your rights to use the premises in the way you want and need to use the space, or adding too many rent increases telling you a formula for future rents.

Common Mistakes to Watch Out For

Opting out of boilerplate lease terms can be tempting for both landlords and tenants alike. But foregoing boilerplate clauses means that the lease is more open to legal interpretation, which can lead to difficulties further down the road.
Common issues we see with boilerplate commercial leases are:

Failure to file a certificate of occupancy. Sometimes landlords may fail to file a tenant application for a Certificate of Occupancy (CCO), which means they are unable to legally occupy the building. If the tenant has completed buildout and it becomes uninhabitable, then the cost to re-build becomes costly and time consuming. You may be left with no alternatives other than paying hold-over rent to the landlord.
Failure to identify the space properly. In a boilerplate lease, the space should have a description of the space leased within the body of the lease, but if the landlord conducted a space measurement the details become further complicated. A standard R/O applies: Rentable Area + Useable Area / Usable Area = Load Factor. Common area is often excluded from the rentable area, which is where the landlord has added value. Tenant reps should negotiate for the load factor to be no higher than 1.2.
The subleasing provision can become tricky. Sometimes, although the lease allows subleasing, the landlord will charge the tenant a 10-15% brokerage fee of the market rate rent, or that the tenant must bring the landlord a credit worthy tenant. This can become costly for tenants looking for flexibility with future subleases.
The lease has no flexibility for tenant enhancements or expansions. A good example is in the tech industry, where rapid growth can occur. If a tenant is signing a 5-10 year lease with escalating rent increases (8-15%) then their plan to expand becomes costly.
The termination clause can be onerous on a tenant. For example, some leases require advance notice as much as 15 months in advance, which can be a burden to a tenant in terms of the lease obligations remaining. Negotiate this clause to ensure you aren’t forced to conduct a costly outlier between the expiration of the lease term and the commencement of the new lease.

Some landlords prefer dealing with a tenant that has no agent, considering it a win-win; however, the risks are significant. Having an experienced tenant rep saves the tenant time and money and protects them from mistakes that can cause costly down time.

Modification of Boilerplate Leases

Tenants and landlords should understand that boilerplate leases can be customized and altered to address both parties’ needs. Typically, tenants wanting a more elaborate lease will ask the landlord to add language to a lease addendum or provide the landlord with a secondary lease with specific requested language. These language additions can include additional covenants, rights of first refusal, purchase options, renewal options, etc.
Tenants may want a longer rental term than is included in a boilerplate lease, or may want to ensure that the rent will not increase unless a specified market criteria is met. Another common example of tenant customization is request by tenants to be able to assign its rights under the lease to a parent company or affiliate without first obtaining a landlord’s consent. Similarly , tenants may want the flexibility to sublease space to a related entity without the consent of the landlord.
Many boilerplate leases contain clauses that may be benefited, or offended, by the drafting of new documents. For instance, a boilerplate lease may require a tenant to obtain a letter of credit from a letter of credit company subscribed by the American Society for Testing and Materials. However, the letter of credit application may inadvertently exclude tenant, and therefore make performance impossible. The tenant should have a right to consent to all contracts signed by it.
In sum, boilerplate leases will often only cover lease provisions that are commonly negotiable on a universal and statewide basis, but tenants and landlords usually have the ability to modify boilerplate leases to better fit their needs or desires.

Legal Implications and Regulatory Compliance

A thorough understanding of a boilerplate commercial lease agreement goes hand in hand with a complete grasp of applicable legal considerations. Commercial lease agreements, like other contracts, are subject to a plethora of laws—both federal and state—and a true understanding of the document at hand requires a firm grip on legal requirements. Although this article offers no substitute for consulting with an attorney, it notes some important legal obligations related to boilerplate commercial leases.
As a general rule, a boilerplate commercial lease agreement must comply with all relevant local laws. Both commercial landlords and tenants should familiarize themselves with these laws and work closely with competent attorneys before signing any document. Federal law concerns impacting even boilerplate commercial lease agreements include antitrust law, Americans with Disabilities Act provisions, federal civil rights law and federal environmental regulations. Federal tax and business operation laws may also apply. State and local laws governing commercial leases are analogous to federal regulations in many ways, including offering protections related to employment and environmental issues.
Violations of federal and state laws related to real property and/or business operations can create issues for all parties involved in a commercial lease agreement, not just for those who hold the position of tenant. For example, nondiscrimination laws apply to commercial landlords as well as tenants—and they don’t just apply to employment. Violating such provisions can result in claims from the government, and it can also give rise to a personal cause of action from an aggrieved individual.
The terms and conditions of a commercial lease agreement might impact an individual’s ability to recover maximum damages for serious, personal injuries. For example, a landlord who fails to maintain property conditions that would allow for universal accessibility may be liable to a tenant who becomes trapped in a fire. A boilerplate commercial lease agreement must adequately address, or better yet, anticipate and eliminate potential roadblocks to obtaining such damages. Likewise, a commercial lease should not impose on either party the kind of liability that courts generally find unduly burdensome. A landlord cannot, for example, seek to regulate the use of a tenant’s truck, even if the tenant uses it on the landlord’s property.
Disputes are common in commercial leases, and boilerplate agreements are not immune from the perils created by poorly-written documents. Any commercial lease agreement with "boilerplate" language should be carefully scrutinized to ensure that it doesn’t include any overly broad covenants, unreasonable indemnities, unconscionable provisions or unconscionable rent escalators. Without attention to detail, a boilerplate commercial lease can open itself to ambiguity, vagueness, redundancy and/or irrelevance. This does not mean the boilerplate commercial lease agreement should be free from ambiguities, but it should not contain terms that are ambiguous to the point of encouraging disputes. For clarification, after all, parties should refer to their lawyers and the local laws that control.

Best Practices for Negotiating Boilerplate Leases

Negotiating boilerplate lease terms can be a challenge, whether you are a landlord or tenant. Here are some tips to help you navigate these key sections and negotiate a lease that is favorable to you.
Tip #1: Scrutinize the Conditions Precedent
A typical boilerplate lease will contain the clause "this lease is subject to and not binding upon either party until all conditions precedent [to its execution] have been satisfied." There are a number of common conditions precedent, including: the tenant’s receipt of a copy of the lease signed by the landlord (which is different from an emailed or scanned image of a copy of the lease that is signed by the landlord); obtaining the required consents or approvals (e.g., from a landlord of an adjoining building for an excavation by the tenant); and the tenant’s receipt of its construction loan (it is not uncommon for a landlord to be the source of a tenant’s construction financing). However, we caution that businesses do not always pursue financing sources who are unfamiliar with the nature of construction projects. If the tenant is seeking to secure its own financing, it is advisable to incorporate the contingency into the lease to the benefit of the tenant, as opposed to the other way around.
Tip #2: Good Faith and Best Efforts
The boilerplate lease often will contain a covenant to act in good faith or make best efforts (usually with respect to approvals). The obligation to act in good faith is generally well understood, but an obligation to use good faith and best efforts may not be so clear and can be difficult to interpret. What is required of one and what is required of the other should be considered and negotiated, in particular if either you or the other party is entitled to terminate the lease.
Tip #3: Notices
It is common for landlords to pay little attention to notice provisions in leases, assuming they are inconsequential. In fact, notice provisions are extremely important. Notice provisions often require notices to be hand-delivered or sent by certified mail, return receipt requested. A tenant must consider whether it wants to be required to pay rent while notices are in transit, even if the mail is not delivered to the tenant. From a landlord’s perspective, similarly onerous requirements can be used as a club to coerce a tenant to pay rent even when the rent was not properly billed (e.g., the tenant fails to pay its rent simply because it did not get its bill; the landlord later bills the tenant for late charges and the tenant refuses to pay).
Tip #4: Review Additional Boilerplate Provisions
There are a number of other boilerplate lease provisions that can impact the negotiation of a lease. These include, among other items:
• If failure by the landlord to give possession of the leased premises on the lease commencement date results in a rental abatement, will such rental abatement be in addition to any other rental abatement?
• Be familiar with the subordination, nondisturbance and attornment provision and the significance of a waiver of the right to record the lease.
• Consider whether to include a nondisclosure provision, which is common in technology-based leases.
A boilerplate commercial lease agreement frequently is treated as a pro forma document, but it in fact is important to pay attention to boilerplate provisions. In many cases, the parties’ ownership of real estate is predicated upon the terms of the boilerplate section of one party’s lease, as determined by a court of law.

When to Consult with a Lawyer

In the course of signing a lease for a new commercial space, most tenants will be dealing with what’s known as a a boilerplate or pre-existing commercial lease agreement. These agreements are presented as a fair and legal compromise between the needs of a business (tenant) and the needs of a landlord. While much of the information in these leases will be legally required or common to the geographic area, you should still read carefully, and discuss with a legal representative if necessary, any items in the lease that may apply differently to your business. Including some of the following considerations may reduce the need for expert legal judgment.
Duration If you have a clear idea of where you’re going and the kind of space you want, then a lease with a duration of up to 10 years is acceptable, but longer leases are recommended for more established businesses—to make sure that significant capital improvements, like building an office , have the opportunity to pay off over time. If your business is considering becoming a "going concern" or opening a branch of a franchise within a year, you may want to discuss these with a legal professional.
Modifications Commercial leases can be modified with the consent of both tenant and landlord. Unless a modification directly impacts your ability to run your business, say greater than 30 days notice required for construction on premises, special clauses do not require legal review—although it may help your lawyer locate any potential legal pitfalls buried in the fine print.
Renewals Most commercial leases contain clauses that allow for one or both parties to renew the agreement after a set period of time, often at the original pricing structure or current market price. If you have discussed the commercial space in question with a potential partner, it is wise to consult with a lawyer before you sign, especially if you plan on expanding in the future or moving your business to a different location.