How to Read a Commercial Lease Without Getting Lost

Set up three things, and the reading will go faster. First, gather the full package: the lease, all exhibits and riders, your signed letter of intent, and, if this is a renewal, the original lease and every amendment. Second, open a blank document for a simple issues list with four columns: section, what it says, why it matters, and who should answer. Third, make the file searchable if you can. Searching for words like "sole discretion" or "notwithstanding" can save a lot of time.

Remember what you are doing. You are not trying to act as your own attorney. You are making sure the document matches your business deal and understanding where your money and flexibility are exposed. New York law firm Adam Leitman Bailey notes that many judges will follow the strict construction of a lease no matter how poorly written, and that New York courts have enforced harsh terms. The takeaway applies wherever you are: read the words on the page, and do not count on a court to correct them later.

If you want a description of what each part of a lease does, start with our section-by-section guide. This one covers the order and method for reading.

1. First pass, the deal. Read the summary page or first article and compare it with your letter of intent, line by line. Mark any difference, even a small one.
2. Second pass, the money. Trace every dollar: base rent, increases, operating expenses, taxes, utilities, parking, after-hours HVAC, late fees and any charges in the rules or exhibits. Note what any free rent does and does not cover.
3. Third pass, the dates. List every date and notice window: commencement, rent start, expiration, renewal, termination, expansion, allowance deadlines and audit deadlines.
4. Fourth pass, flexibility. Read assignment and subletting, use, alterations, renewal, expansion and termination. Ask whether you could sell the company, shrink, grow or move under these terms.
5. Fifth pass, risk. Read default, remedies, insurance, indemnity, casualty, subordination, estoppel and any guaranty. Ask what is the worst plausible outcome and who would pay for it.
6. Sixth pass, exhibits. Read the work letter, rules, floor plan and guaranty. A rule hidden in an exhibit can have the same effect as a clause in the main document.
7. Last pass, the boilerplate. Check the notice clause, governing law, attorney fee and waiver provisions, then send your list to your attorney.

If you have limited time, do the first three passes yourself, then give your attorney your questions together with the lease rather than asking for a general opinion.

Leases are hard to read because they use a web of definitions and cross-references. A few habits help.

• Look up capitalized words. "Operating Expenses" or "Substantial Completion" may have a defined meaning that differs from common usage. The definition might be pages away or in an exhibit.
• Follow every cross-reference. A rent section that refers to Article 7 only makes sense with Article 7 open.
• Watch the words that override others. "Notwithstanding" and "except as otherwise provided" can reverse the sentence you just read.
• Notice who decides. "Sole discretion" and "reasonable" give very different power. A.Y. Strauss contrasts consent in the landlord’s sole discretion with consent that cannot be unreasonably withheld, conditioned or delayed.
• Read "may" and "shall" carefully. One gives an option and the other creates an obligation.
• Ask what is missing. If the lease is silent on late delivery, an audit right or a landlord default, that silence is part of your deal, and you need to know what it means under the governing law.
• Summarize as you go. Writing one plain sentence about each section quickly shows you where you do not yet understand it.

Not every sentence deserves a comment, so focus on what can cost real money or restrict your options. Published law firm commentary points to several places where tenants tend to pay too little attention. A.Y. Strauss says the assignment clause often receives less attention than rent or operating expenses, even though it can carry recapture rights, profit sharing, continuing liability and change of control consequences. Silberman Law Firm suggests that tenants look for notice and cure rights before default remedies apply, and pay close attention to delay, rent start and completion terms in the build-out language. Holland & Knight says limited guaranties can come with conditions, and these can change what looks like a capped exposure.

Other items we would mark:

• Anything that differs from your letter of intent.
• Any cost without a limit, such as uncapped expense categories or restoration of the premises.
• Any landlord right that can move you, cut services or change the building at its choice.
• Automatic renewals or options that require strict notice.
• Waivers of rights, offsets or claims, and any limit on what the landlord owes if it defaults.
• Terms that give the landlord remedies but give you none.
• Blank spaces, missing exhibits, and references to documents you have not seen.

Tenant Advisory Group represents tenants and buyers, and when we work on a lease draft we go through it for the business terms and coordinate with your attorney on the legal issues, so both reviews cover the same list.

A focused set of questions gets a more useful review, and often a less expensive one. Consider asking these:

• ✓Which state’s law governs, and is there anything in that law that changes how we should read this lease?
• ✓What can the landlord do if we miss a payment, and how fast can it happen?
• ✓Do the notice and cure periods work for how our company operates?
• ✓What do we owe if we default early in the term, including any repayment of concessions or acceleration of rent?
• ✓If the landlord defaults, what can we actually do about it?
• ✓Do we have a non-disturbance agreement from the landlord’s lender, and if not, what is our exposure?
• ✓What exposure does our guaranty create, and does anything in it survive the end of the lease?
• ✓Would a sale of our company count as an assignment?
• ✓Are there insurance or indemnity terms our insurance broker needs to review?
• ✓Are we waiving any rights that we would want to keep?
• ✓Which of our comments should we insist on, and which can we give up?

Separate these from business questions, such as whether the rent is competitive or a concession is worth trading. Your broker and leadership answer those. Clear roles keep the review from going around in circles, and they make it easier to explain to a landlord which points truly matter to you.

Finally, read the final version, not just the first. Compare the execution copy with the last draft you reviewed, and confirm the changes you agreed to are in it. Then summarize the signed lease in a lease abstract so the work you just did is still useful years from now.