Courts interpret commercial leases very differently than residential leases. Tenants in residential leases receive protections of local ordinances and consumer protection laws. There is often an assumption in commercial leases that both parties are on equal footing or have a certain level of sophistication in negotiating lease terms. Commercial leases are therefore interpreted more strictly.
Small businesses seeking leasing space should be aware of potential pitfalls in commercial lease agreements. Unlike residential leases where the law provides many consumer protections, tenants in commercial leases are free to negotiate nearly any terms – even if terrible consequences may result.
Below are five common lease terms that small business tenants should avoid:
1. Confession of Judgment
Pennsylvania is one of only a handful of states that still permit a Confession of Judgment. A confession of judgment clause is a lease term that permits the landlord to file a judgment with the court against the tenant if the tenant breaches the lease. A confession can be thought of as an automatic judgment that may include possession of the property, back-owed rent or liquidated damages. The tenant does not receive a hearing or opportunity to present a defense except under limited circumstances.
2. Personal Liability
A small business owner should limit liability in the lease to the business entity only, not in the personal name of the owner. Landlords often demand personal liability as disincentive for a tenant’s decision to default and walk away from the business. But a confession of judgment paired with personal liability is a terrible combination for a small business owner.
3. Responsibility for Repairs for Damages Caused by Another
The closure of many businesses across the country has placed severe pressure on the livelihood of small business owners. Businesses that were deemed “non-essential” such as real estate brokerages, certain retail stores, child day-care centers, and many more continue to feel the impact of the shutdown. The lost revenue has caused business owners to review their insurance policies for any coverage that might apply.
Business interruption insurance is often included as part of a property owner or renter’s insurance policy. BI insurance typically covers lost revenue when a business is interrupted due to damage to a property. For example, coverage may be available where a tree falls on the building preventing business operations during the period of repair.
Whether coverage will apply depends on the language of the particular policy and the circumstances around how revenue was lost. Here is an example of a typical policy: We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your “operations” during the “period of restoration”. The suspension must be caused by direct physical loss of or damage to property at the described premises.
Language such as the above example may exclude claims due to COVID because the business suspension results from public health orders and a virus, not direct physical loss to the property. The other major hurdle to recovery is a possible exclusion for viruses such as the following: “We will not pay for loss or damage caused directly or indirectly by… any virus or other microorganism that induces or is capable of inducing physical distress, illness or disease.”
It is important to review policies carefully because the language of individual policies varies from policy to policy. A business could recover for COVID losses if an endorsement for viruses was added to the policy, or if the language did not require direct physical damage to the property.
The COVID situation increased awareness that BI coverage may apply in many property damage situations. Business owners who lost revenue due to an interruption caused by property damage should protect their interests.
Timing is important, and failure to act quickly can cause severe delays. I recommend anyone interested in exploring a BI claim take the following steps:
Real estate developers who acquire deteriorated properties in Philadelphia are at risk of code enforcement lawsuits. Developers perform the important work of transforming underperforming buildings into productive assets. These properties are often over a hundred years old making it difficult to comply with city code requirements.
I have represented investors who were hit with enforcement actions despite significant efforts to correct violations. In my experience, violation of city codes is not usually wilful. Non-compliance is often due to cash flow, logistical problems, or the practicality of correcting a defect.
In the City of Philadelphia, the municipal code imposes a penalty of $300 per violation for every 30-day period from the date of the violation order to the date of correction. Each violation is a separate offense with a separate fine that accrues until the property owner resolves the violations.
Penalties can be assessed for many types of violations. Some violations are a simple matter of failing to obtain a particular license. But in the case of a property with severe structural problems, a court could order the property demolished with the cost of the demolition imposed against the owner.
Here are four tips to avoid the risks of municipal enforcement actions to your investment property: