Michigan Commercial Leases: Let’s Start From the Beginning
Many, if not most, commercial leases clearly define when a tenant can first occupy the leasehold premises and when the tenant’s rent obligation surfaces. One can probably find those conventional terms toward the beginning of the lease document, and they seldom require a lawyer’s assistance in drafting or interpretation.
However, several circumstances complicate commercial lease commencement terms in Michigan. Navigating these drafting and negotiation challenges helps both parties steer clear of the potentially damaging consequences of improper or incomplete leases.
Different Commencement Dates
All commencement dates are not the same, such as when the lease’s commencement date (CD) differs from the date the tenant must start paying rent, usually referred to as the rent commencement date (RCD).
The CD usually dictates when the parties’ obligations under the lease begin, but the RCD may start later, such as when the tenant negotiates a free-rent period or satisfies certain pre-conditions.
Construction and Improvements
Another common reason for the delta between the CD and the RCD is construction or improvement to the leasehold premises, to be completed by the landlord’s or tenant’s contractor. If this occurs, it is essential the parties clearly delineate exactly which milestone in the construction process must be met before the rent obligation begins. Equally important, the parties must establish a method to prove the responsible party met its pre-condition.
For example, consider a lease in which the RCD occurs after “Substantial Completion” of the project has been performed. What does “Substantial Completion” mean? How will the landlord or tenant communicate it to the other? What documentation will serve as proof?
These are necessary terms and conditions requiring precise wording. Sometimes, the parties can delegate this obligation to a contractor; other times, the onus is on the obligated party. Regardless, the parties must be diligent when drafting the lease. Failing to make this effort can cause, at best, confusion and, at worst, litigation.
Permitting and Licensing
Another example of a disparity between commencement dates is when the RCD depends on a permit or license. This, too, necessitates expressly identifying in writing who bears the responsibility for procuring the permit, which permits must be obtained, and how the procurement triggers the RCD. For instance, the issuance of the license or permit itself may initiate the RCD, or perhaps the landlord’s receipt starts the clock.
Termination for Non-Performance of a Pre-Condition
To protect themselves, landlords should also be careful to provide an opportunity to terminate a lease should the tenant fail to satisfy a pre-RCD condition. The landlord should also include language requiring the tenant to exercise their “best efforts” or at least “reasonable effort” in satisfying their pre-RCD obligations.
The timeline for a tenant to complete an obligation is a lease-by-lease
consideration, but the landlord should have clear rights to regain possession and recover damages for the tenant’s non-performance. Otherwise, a dilatory tenant could invoke ambiguous or incomplete lease language to delay a project and avoid paying rent, resulting in long delays for the landlord to reclaim the premises.
Payment Avoidance
A carefully contemplated and well-drafted lease will also precisely describe what the tenant does not have to pay between the CD and RCD. One first thinks of base rent, but this should not be the only payment obligation the lease addresses.
Landlords should consider whether the tenant must pay operating expenses, common area expenses (CAM), taxes, insurance, or utilities during the CD-RCD interval. The lease should clarify which party—landlord or tenant—is responsible for these expenses in this period.
Using a Commencement Form Exhibit
Anytime there is a difference between the CD and RCD, a prudent lease drafter will include a Commencement Form Exhibit for both the landlord and tenant to execute once they specify and agree to the critical dates. This template form includes blank spaces for the CD, RCD, and lease termination date (which can be adjusted by the RCD), and it can easily eliminate confusion or prevent litigation later in the lease term.
Maximization of Landlord Rights
It’s not unusual for provisions describing a landlord’s remedies in the event of a default to appear elsewhere in the document, far from the CD and RCD terms. That doesn’t mean they are less effective or relevant.
Say a landlord provides free rent or incurs a portion of the construction or improvement expense. The default remedy section of the lease should protect the landlord’s rights to recover these damages. The absence of this language can limit the landlord’s maximum recovery.
Ensuring the Lease Contains the Proper Responsibilities and Protections
Drafting a lease is an exercise in contingency planning and envisioning what-if scenarios. The landlord must contemplate many scenarios by addressing all aspects of the parties’ contractual relationship in the body of the lease. This attention to lease detail certainly applies to commencement language and, when properly done, will establish clear expectations of the parties’ respective rights and obligations. It can also simultaneously safeguard against unnecessary conflict and prevent an unwanted trip to the courthouse.