Limit Pre-Lease Inspection Right

A prospective tenant that’s negotiating to lease an entire building or a large space may want to inspect the condition of the space or the underlying property before signing the lease. For example, it might want to do environmental testing or have an engineer or contractor check the condition of certain aspects of the property. Don’t give a tenant unfettered access to enter the building before you’ve signed a lease with it. Instead, set up a pre-lease inspection agreement (either in the letter of intent or in an access and indemnity agreement) and follow these Dos & Don’ts for protecting yourself.

12 DOS & DON’TS

Limit Period of Access

Set an inspection period that runs from the date you sign the agreement until a set date. Or, better yet, say in the agreement that the tenant has until the earlier of a set date or the date on which you terminate the inspection period—which you can terminate at any time. Although the prospective tenant may balk at this termination right, it’s reasonable, given that there’s no binding lease at this point.

Model Language

During the period (said period of time being referred to herein as the “Inspection Period”) from the date of this Agreement until the earlier of:

i. the date upon which Licensor gives written notice to Licensee that Licensor has terminated the Inspection Period, which Licensor may do at any time and for any reason or no reason in its sole discretion, or

ii. [insert date], Licensee shall have the right…

Don’t Allow Tenant Unlimited Inspections

Avoid allowing the tenant to simply perform whatever inspections it wants. Specifying the type of inspection that the tenant may do helps you keep control over its activity in the space or on the property. For example, if the prospective tenant wants to perform an environmental assessment of the space, spell out what tests this will involve.

Model Language

…Licensee shall have the right, at its sole cost and expense, to enter the Premises for the sole purpose of [insert detailed description of inspection, e.g., making topographical surveys and environmental reports] and such other non-invasive tests as are pre-approved in writing by Licensor (any and all of such activities by Licensee being referred to herein as “Due Diligence Activities”).

Require Insurance Before Inspection

Require the prospective tenant to get insurance to cover any damage or injury that results from its pre-lease inspection. Make sure this insurance is in effect before the inspection begins. Also, have the agreement: (1) set the minimum amount of insurance coverage the prospective tenant must get; (2) require the prospective tenant to provide proof of insurance that’s acceptable to you; and (3) say you must be an additional insured and must be notified before there’s any change in or cancellation of the insurance.

Don’t Allow Surprise Inspections

Make the prospective tenant give you advance written notice of the date, time, and scope of any particular inspection. That gives you an opportunity to prepare the space, alert any tenants, and be present to monitor the activities. Try to get at least 24 hours’ notice.

  Model Language

Licensee shall provide Licensor with at least [insert #, e.g., twenty-four (24)] hours’ written notice before entering the Premises for the purpose of conducting any Due Diligence Activities.

Get Indemnification

Make the prospective tenant indemnify you and your agents from any claims, fines, liens, or damages that may arise directly or indirectly from its activities. To do this, add a standard indemnity clause to the agreement. And disclaim any responsibility for the tenant’s safety.

To make sure you’re not responsible for the safety of the prospective tenant or its employees during the inspection, say that the prospective tenant is entering the space at its sole risk and expressly disclaim any responsibility for the safety or property of the prospective tenant (or its agents). Also, have the prospective tenant agree to release you and to hold you and your agents harmless if any injury or damage occurs.

  Model Language

Licensee’s Due Diligence Activities shall be at its sole risk, and neither Licensor nor its employees or agents shall be responsible for the safety of Licensee or its employees or agents, or for the condition or loss of any items of personal property brought onto the Premises by Licensee or its employees or agents. Licensee does hereby expressly release and agree to hold Licensor and its agents and employees harmless from and against any claim or damage to the person or property of Licensee or any of its employees or agents.

Don’t Absorb Costs for Damage

It’s important to make the tenant responsible for any damage done while it’s in the space or on the property. This should include any damages or losses suffered by you, the prospective tenant, or any contractors or employees it brings in. It should also cover any damage that the prospective tenant causes elsewhere in the building or on the property—not just in the space.

  Model Language

Licensee assumes full responsibility for the Due Diligence Activities and for all damages or losses occurring in the Premises or any other part of the Building that are suffered by Licensee, Licensor, or either party’s agents, contractors, employees, or invitees, which damages or losses arise from Licensee’s entry onto the Premises or performance of the Due Diligence Activities.

Get Right to Accompany Tenant

Give yourself the right to accompany the prospective tenant during the inspection. This lets you keep an eye on the inspection work so that you can lessen the odds of trouble.

  Model Language

Licensor may require, at its sole option, Licensee to be accompanied by Licensor or its agents or employees while in the Premises or elsewhere in the Building during the Inspection Period.

Don’t Allow Use of Other Parts of Building

The prospective tenant isn’t a tenant yet, so don’t let it use any of the building amenities that are available to your current tenants. If the prospective tenant needs access to some part of the common area, such as the loading dock, it should get your prior consent.

  Model Language

The rights granted to Licensee by this Agreement shall be restricted solely to the Premises and shall not extend to any other portion of the Building without Licensor’s prior written consent.

Bar Disruption of Building

If there are current tenants, bar the prospective tenant from interfering with their businesses during its inspection.

  Model Language

Licensee shall perform, or cause to be performed, the Due Diligence Activities in an orderly manner so as to avoid unreasonably interfering with or interrupting the normal business operations and quiet enjoyment of the other occupants of the Building.

Don’t Allow Tenant to Talk About Information

Require the prospective tenant to keep any information it discovers confidential. You don’t want it telling other tenants or prospective tenants about any problems it discovers, without your first having had a chance to address these problems yourself.

  Model Language

Licensee acknowledges the confidential nature of any information developed or obtained by Licensee with regard to the Premises. Licensee shall keep all information and data confidential and shall refrain from disclosing such information and data to any third party not retained or utilized by Licensee in connection with this Agreement or the proposed lease and shall obtain agreement of any such third party to maintain such confidentiality.

Require Space to Be Returned in Original Condition

Require the prospective tenant to return the space to you in its original condition.

  Model Language

Upon completion of the Due Diligence Activities or the earlier termination of the Inspection Period, Licensee shall promptly restore the Premises to its condition (subject to ordinary wear and tear) as it exists upon the date of this Agreement.

Don’t Overlook ‘Boilerplate’ Clauses

Make sure the agreement also includes typical miscellaneous provisions such as:

• The agreement isn’t binding unless you and the prospective tenant sign it;
• The person signing on behalf of the prospective tenant is authorized to sign the agreement;
• The prospective tenant’s obligations, where appropriate (such as the indemnification obligation), will survive the termination or expiration of the agreement;
• The agreement can’t be modified unless the modification is in writing and signed by you and the prospective tenant; and
• The agreement will be binding on both your successors and the prospective tenant’s successors.