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Monday, October 6, 2008

Lease Drafting: Avoid Common Mistakes

As part of its Commercial Landlord practice, Northern Virginia's Gross & Romanick is dedicated to educating its clients about various aspects of Business Law. The following article is not, however, meant to replace legal counsel. If you'd like to speak to a lawyer about your commercial property or other business matter, please contact Gross & Romanick today.

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Nothing is more frustrating to a landlord than providing an expensive build-out and a rental abatement period, only to have the tenant fail to make any payments once the free rent period has expired. The landlord's anger boils over when the attorney informs him that the lease does not provide for return of the build-out costs or the abated rent and, therefore, the court will not award these damages. This is a common error of lease drafting and can be easily avoided by a properly worded default clause.

Another common error is the failure to provide for a specific interest rate upon default. Virginia courts will not award prejudgment interest without such a lease provision. We suggest an 18% interest rate, rather than complex rates keyed to a bank's prime rates which fluctuate during the term of default and may be difficult to prove at trial.

Although Virginia law allows for a self-help, lockout remedy, it is advisable to have such a provision in your lease to assure that this right has not been waived by the landlord.

Default money damages should provide the landlord with an option to choose:
  1. current rent as it becomes due
  2. acceleration of the rent during the remaining term of the lease
  3. the "present value" of the lease

Always allow attorney's fees in the "event of default", not only if sent to collection or suit.

Avoid complex notification provisions by not requiring notices for late payments or other defaults. Furthermore, any required notices should be effective when sent by regular mail to the address included in the lease.

Try very hard to obtain personal guarantees by a husband and wife, especially for small corporate tenants. Even apparently solvent corporations and limited partnerships can become unable or unwilling to pay rent.

These suggestions are only a brief summary of some of the more common lease drafting mistakes that we see in our office. All provisions of the lease are important and should not be drafted or changed by leasing personnel without careful consideration or an attorney's opinion.