Modify Standard Form Lease to Fit Commercial Condo Tenant

While the terms of commercial leases will vary to some degree depending on the owners, tenants, and types of businesses involved, most of the same items are on the agenda for negotiations. Renewal or expansion options, common area maintenance exclusions, use clauses, and assignment and subletting requirements are some of the commonly seen issues that get hashed out. But increasingly, tenants are seeking novel ideas for where to set up shop, and so-called commercial condos are rising in popularity for businesses.

While traditional commercial space leases differ, their terms typically are known variables that you’ll be able to navigate. But you might not know as much—or anything—about how to negotiate and draft a lease for commercial condo space that you’re offering to a tenant. Your standard form lease just won’t cut it, because it won’t cover some of the important points that are relevant to this unique type of property. So when drafting your leases for commercial condo space with which you have little experience or exposure, make sure that you address three unique issues that don’t pop up in standard leases. Like our Model Lease Clause: Shift Association Compliance to Commercial Condo Tenant, yours should include accommodations for the specific operations and management structure of a condominium association.

Minimize Risk of Association Violations

While most standard form commercial leases will work pretty well as a starting basis for a commercial condominium, there are three issues that merit special consideration. Make sure to: 

Acknowledge governing documents. The lease should specifically state that the tenant’s rights under the lease are subject and subordinate to the provisions of all governing documents, recorded and unrecorded (such as the original declaration and any rules issued by the association) [Clause, par. a].

Not only will this protect you in the event the governing documents conflict with the terms of the lease, it will also allow you to force the tenant to cease any operations that conflict with the governing documents, thus minimizing your potential exposure for condominium rules violations. In fact, to best minimize any future disputes, all governing documents should be delivered to the tenant before the lease is signed.

In addition, the governing documents should be incorporated into the lease. That way, if the tenant violates the provisions of any of the documents, such a violation would be a lease default as well. The tenant should indemnify—that is, defend and reimburse—you for any damages arising out of these violations. For example, if the association fines you because the tenant has been storing items outside of the premises, these fines should be the tenant’s responsibility [Clause, par. d]. And remember to make the tenant aware of any applicable parking rules in the governing documents [Clause, par. 3].

Treat assessments as operating expenses. Periodic condominium assessments are like real estate taxes, and should be treated in the same fashion. These assessments help to pay for the services provided to the unit as a part of the entire development. Therefore, in a net lease, assessments should be passed through to the tenant as a legitimate occupancy expense [Clause, par. b].

Limit your maintenance liability. This could be the most important aspect of a condominium lease. The owner of a multi-tenanted building is required by a typical commercial lease to maintain all structural aspects of the building, as well as its common areas. The owner of a condominium, however, typically has no control over these items. Such maintenance is usually the responsibility of the condo association, of which you’re one member. Therefore, if the association fails to perform this maintenance, the tenant may be able to sue you for damages, withhold rent, or even terminate the lease.

To eliminate this risk, the lease should explicitly state that you have no actual control over repairs, but that you’ll make good-faith attempts to force the association to perform its duties [Clause, par. c]. While it’s a good idea to limit the scope of these good-faith attempts, be aware that a tenant with more bargaining power may insist that the lease require you to sue the association if the failure is egregious.