What Hidden Liabilities Exist in Commercial Lease Agreements in New York?
Jan. 7, 2025
Exploring the intricacies of commercial real estate agreements in New York can be challenging for business owners and property managers.
While the terms may appear straightforward, hidden liabilities often lurk beneath the surface, potentially exposing tenants and landlords to unforeseen risks.
By understanding these liabilities, you may be able to avoid costly disputes, financial losses, and legal complications. Our experienced lawyers at the Law Office of Corey J. Rossi, PLLC, located in Tonawanda, New York, will explain the hidden liabilities commonly found in New York commercial real estate agreements, providing advice to safeguard your interests.
Maintenance and Repair Obligations
One of the most common sources of hidden liabilities in commercial real estate leases is unclear language around maintenance and repair responsibilities. While many leases specify whether the landlord or tenant is responsible for upkeep, ambiguous clauses can lead to disputes. For example:
Structural repairs: Tenants might assume the landlord is responsible for major structural repairs, such as roof or foundation issues, only to discover that the lease places this burden on them.
HVAC systems: Many leases assign HVAC maintenance to tenants, but costly system replacements might also fall under their purview if the language is vague.
We recommend carefully reviewing and negotiating the maintenance and repair clauses. By making sure the division of responsibilities is explicitly outlined, you can help protect your interests. Consider requesting caps on tenant obligations for major repairs.
Next, let’s go over what you should know about Common Area Maintenance charges.
Common Area Maintenance (CAM) Charges
Along with general maintenance obligations, CAM, or Common Area Maintenance, charges can be another significant hidden liability. These charges cover shared space expenses such as lobbies, hallways, parking lots, and landscaping for commercial real estate agreements. While CAM charges are standard, they can include unexpected costs like:
Major capital improvements (e.g., new roofing or parking lot repaving).
Management fees that are disproportionate to actual services provided.
Charges for services that benefit only certain tenants but are distributed among all tenants.
Our experienced commercial real estate attorneys suggest that you request an itemized breakdown of CAM charges. Negotiate exclusions for capital improvements or unrelated expenses, and include an audit right to review how these charges are calculated. The attorneys at the Law Office of Corey J. Rossi, PLLC can help you with this process.
You’ll additionally want to be aware of any applicable subleasing restrictions or liabilities.
Subleasing Restrictions and Liabilities
Subleasing can provide tenants with flexibility, particularly if they need to downsize or relocate. However, other hidden liabilities often arise in subleasing clauses, such as:
Landlord approval: Leases often require landlord consent for subleases, which might be withheld arbitrarily.
Continued responsibility: Tenants may remain liable for the actions of subtenants, including damage or violations of lease terms.
To protect yourself from these hidden liabilities in a commercial real estate contract, negotiate reasonable criteria for landlord approval and include terms that limit your liability once the sublease is in effect. You should also pay close attention to environmental liabilities.
Environmental Liabilities
Additionally, environmental issues can pose significant risks in commercial leases. Even if a tenant has not caused contamination, they may be held liable for pre-existing conditions or be required to remediate environmental damage under certain lease provisions. Key concerns include:
Responsibility for hazardous materials on-site.
Compliance with evolving environmental laws, which may impose additional costs.
In order to solve this issue, we recommend conducting thorough due diligence before signing. Request environmental assessments and include indemnification clauses that protect you from pre-existing conditions. An experienced commercial real estate attorney can help you with this process, as well as assist you with matters pertaining to insurance.
Insurance Obligations
Commercial leases often include detailed insurance requirements, but hidden liabilities can emerge from unclear or excessive obligations. Some examples include:
Scope of coverage: Tenants might be required to maintain insurance for events outside their control, such as natural disasters.
Landlord’s interest: Some leases require tenants to include the landlord as an additional insured, which could affect claims processing.
It’s important to review insurance clauses carefully with a commercial real estate lawyer. Make sure your coverage aligns with industry standards and negotiate any unreasonable requirements. Our lawyers will protect your interests throughout this process.
Next, let’s consider how relocation clauses may lead to liabilities.
Relocation Clauses
Aside from maintenance and insurance obligations, relocation clauses may be written. Relocation clauses allow landlords to move tenants to a different space within the property. While these clauses can provide landlords with flexibility, they can create hidden liabilities for tenants, such as:
Business disruption during the move.
Additional costs for altering the new space to meet operational needs.
Loss of customer foot traffic or visibility.
It’s in your best interest to negotiate limits on relocation clauses, such as advance notice requirements, reimbursement for moving costs, and making sure the new space is comparable in size and functionality.
Next, let’s take a look at the impact of operating expenses and pass-through costs.
Operating Expenses and Pass-Through Costs
In addition to base rent, tenants may be responsible for a share of operating expenses. However, hidden liabilities arise when leases include pass-through costs without adequate transparency. Common pitfalls include:
Charges for unrelated properties or expenses.
Lack of caps on annual increases.
Prepare for these expenses in advance so they aren’t a surprise when they come up. Negotiate a cap on annual increases and request detailed explanations of operating expenses. Check that the lease includes provisions for auditing these costs. By doing so, you’ll be prepared for hidden liabilities.
It’s also important to be aware of default and termination clauses that may be present in a commercial lease.
Default and Termination Clauses
Default clauses in commercial leases often impose harsh penalties on tenants, creating significant liabilities. Common issues include:
Acceleration clauses: If a tenant defaults, they may be required to pay the entire remaining rent for the lease term.
Landlord remedies: Landlords may have the right to terminate the lease and seize tenant property without adequate notice.
We suggest seeking a negotiation for fair default provisions, such as grace periods for late payments and reasonable penalties as well as assessing if the termination rights are balanced and include a mutual obligation to mitigate damages.
In addition to default and termination clauses, leases may also contain assignment clauses.
Assignment Clauses
Assignment clauses govern the transfer of lease rights to another party. Hidden liabilities often arise because:
Landlords retain the right to reject assignments without valid reasons.
Tenants may remain liable even after the assignment is completed.
It’s important to negotiate terms that require the landlord to act reasonably when approving assignments and release the original tenant from liability post-assignment.
Personal guarantees are another key factor to keep in mind.
Personal Guarantees
Many landlords require personal guarantees, particularly for small businesses or startups. These guarantees can extend a tenant’s liability beyond the lease term, even to personal assets.
Communication between the landlord and tenant can help determine a limit on the scope and duration of personal guarantees. For example, you may request a “burn-off” provision that ends the guarantee after a set period of compliance.
Build-Out and Improvement Obligations
Commercial leases often address tenant build-outs or improvements, but hidden liabilities can arise from:
Responsibility for permits: Tenants might be tasked with securing permits, facing delays or fines if requirements are unclear.
Restoration obligations: Leases may require tenants to return the space to its original condition, incurring significant costs.
Clarify build-out responsibilities and negotiate reasonable restoration terms. Then, seek landlord contributions for improvements that enhance property value.
Leases may also come with legal and regulatory compliance obligations, which we’ll explore in further detail below.
Legal and Regulatory Compliance
Leases may impose broad compliance obligations on tenants, exposing them to hidden liabilities for:
Zoning and code violations.
ADA compliance costs for property features not under tenant control.
Make sure that compliance obligations are limited to areas within your control. Include indemnification clauses to protect against landlord negligence.
In addition to the obligations above, leases may also include quiet enjoyment clauses.
Quiet Enjoyment Clauses
While quiet enjoyment clauses may guarantee tenants’ right to use the property without interference, they often exclude significant exceptions, such as:
Landlord’s rights to access the property for inspections or repairs.
Utility disruptions caused by building-wide maintenance.
Discuss specific limitations on landlord access and require advance notice for non-emergency entries.
Reach Out to an Attorney in Tonawanda, New York Today
Commercial lease agreements in New York are intricate and laden with potential hidden liabilities. Consulting with experienced legal professionals to review and negotiate lease terms is a prudent step for tenants and landlords alike to mitigate risks and protect their interests. Our commercial real estate law firm serves clients in Tonawanda, New York; Amherst County; Wheatfield County; Erie County; and Niagra County. Reach out to the Law Office of Corey J. Rossi, PLLC today.