Commercial Property: Legal Rules Every Investor and Tenant Must Know

The triple net lease is the most commonly used commercial lease structure in the United States for single-tenant net-leased properties and is increasingly prevalent in multi-tenant retail and office settings, and under a standard NNN lease the tenant is responsible for paying, in addition to base rent, its proportionate share of real property taxes, building insurance premiums, and common area maintenance costs, which together are referred to as operating expenses or triple net expenses, and the tenant who does not negotiate a cap on annual increases in operating expenses may find that the total occupancy cost of the lease rises significantly above the initial base rent figure over the course of a long-term tenancy. Commercial property and commercial lease agreement counsel can evaluate whether the specific terms of a proposed triple net lease or gross lease agreement adequately protect the client's economic interests, assess whether any provision of the lease creates an unacceptable legal or financial risk, and advise on the specific lease modifications needed to bring the agreement into compliance with the client's investment objectives and applicable state law.

The table below identifies the four principal commercial lease structures used in the US market, identifies who pays the operating expenses under each structure, identifies the type of transaction for which each structure is best suited, and identifies the most important legal risk that must be addressed in the lease negotiation for each structure.

Commercial lease review and commercial lease dispute counsel can advise on the specific legal requirements applicable to a letter of intent for a commercial lease transaction, assess whether the LOI's terms are legally binding or legally non-binding under the applicable state law, and develop the negotiation strategy for converting the LOI's agreed deal points into a fully executed lease that protects the client's interests.

The zoning and land use regulations applicable to a commercial property are one of the most important due diligence items in any commercial property acquisition, because a property that is not zoned for the buyer's intended use cannot be legally operated for that use without first obtaining a zoning variance, a conditional use permit, or a rezoning from the applicable local government, and the buyer who discovers after closing that the property is not zoned for the intended use has limited recourse against the seller unless the purchase agreement contained a specific representation and warranty regarding the property's permitted uses. Land use and zoning and real estate acquisitions and dispositions counsel can advise on the specific zoning and land use regulations applicable to the client's intended use of the commercial property, assess whether the property's current zoning permits the intended use or whether a variance, conditional use permit, or rezoning application is required, and develop the entitlement strategy for obtaining the required approvals.

The commercial property due diligence process encompasses a comprehensive review of the property's title through an ALTA survey and title insurance commitment, a phase one environmental site assessment to identify the presence of hazardous materials or contamination, a physical inspection by licensed contractors to identify structural deficiencies, deferred maintenance, and code compliance issues, a review of all existing leases, service contracts, and operating agreements that will survive closing, and a review of all permits, approvals, and certificates of occupancy that are required for the property's current use. Real estate transaction and real estate development counsel can advise on the specific due diligence items that must be reviewed before a commercial property acquisition can close, assess whether any title defect, environmental condition, structural issue, or zoning non-conformity discovered during due diligence justifies renegotiating the purchase price or terminating the transaction, and develop the due diligence closing checklist.

The commercial tenant eviction process differs significantly from the residential eviction process because commercial leases are governed by contract law rather than by consumer protection statutes, and the commercial landlord typically has broader remedies available under the lease than a residential landlord has under the applicable landlord-tenant statute, including the right to accelerate the entire remaining rent obligation, to retake possession through self-help in some states, to pursue a deficiency judgment for the difference between the remaining lease obligation and the landlord's actual recovery from re-leasing the space. Commercial property eviction and commercial tenant improvements counsel can advise on the specific legal procedures applicable to the eviction of a commercial tenant in the applicable jurisdiction, assess whether the landlord has complied with all applicable notice requirements and lease default provisions before commencing the eviction proceeding, and develop the unlawful detainer strategy for obtaining possession with minimum cost and delay.

The specific performance remedy is uniquely important in commercial real estate disputes because each commercial property is legally considered to be unique, which means that a buyer or tenant who has been wrongfully denied the benefit of a negotiated purchase agreement or lease has a legal remedy that requires the breaching party to perform the agreement rather than simply pay monetary damages, and the commercial property party who understands this remedy is in a stronger bargaining position when a counterparty attempts to back out of a fully negotiated and executed agreement. Real estate litigation and real estate civil lawsuit counsel can advise on the specific legal remedies available to a commercial property owner or tenant whose counterparty has breached the lease or purchase agreement, assess whether the available evidence is sufficient to support a breach of contract claim and a demand for specific performance or damages, and develop the commercial real estate litigation strategy.

A real estate investment trust is a company that owns, operates, or finances income-producing commercial real estate and that qualifies for favorable federal tax treatment under Internal Revenue Code Sections 856 through 860 by distributing at least ninety percent of its taxable income to shareholders annually, and the REIT structure is one of the most important organizational vehicles for institutional commercial real estate investment because it allows investors to access the returns from diversified commercial real estate portfolios without the management burden of direct property ownership. REITs and industrial real estate transactions counsel can advise on the specific legal requirements applicable to a REIT's acquisition or disposition of commercial property, assess whether the REIT's planned transaction complies with the applicable Internal Revenue Code qualification requirements and securities law disclosure obligations, and develop the transaction strategy within the REIT's legal and tax framework.

The estoppel certificate is a critical document in commercial real estate transactions because it is a sworn statement by a tenant confirming the key terms of the lease as of a specific date, and the new owner or lender who obtains estoppel certificates from all significant tenants at the time of acquisition or refinancing has documentary proof of the economic terms of the tenancy that the tenant cannot subsequently dispute, and the failure to require estoppel certificates from all material tenants before closing is one of the most common and potentially costly oversights in commercial property due diligence. Real estate laws and real estate dispute resolution counsel can advise on the full range of legal issues arising in the ownership, leasing, and disposition of commercial property, assess whether the specific transaction or dispute implicates any state-specific property code requirement or ALTA title standard, and develop the integrated legal strategy for protecting the client's commercial property interests.