Leasing of commercial space carries with it numerous issues and concerns for landlords. Many of these concerns are the same in the case of the lease of retail, office, or industrial properties; however, there are provisions for each of these property types that parties need to carefully consider when negotiating lease agreements. And even more consideration needs to be given when you take into account the specific industry of the tenant.
Fire sprinklers are oftentimes a hidden cost for industrial space. Sprinkler heads are not randomly located and their height is oftentimes very strategic. The height and configuration of racking has a great impact on the function of the system and oftentimes parties are caught off guard when they find that major investment needs to be made to a previously existing system. Recently, companies that lease space for cannabis grow and processing operations have been faced with issues on the sprinkler systems. Cannabis operations tend to require material deviation to the sprinkler systems in an existing building, and when cannabis processing is occurring, the issues become even more significant.
Insurance and Indemnity
Because significant business-related activities occur outside the walls of the leased space in an industrial park, it is important to ensure that the lease language related to insurance and indemnity properly protects the landlord against property damage and third-party claims for claims related to the operations of the tenant both inside and outside their demised premises. As with the lease of warehouse space to distributors of spirits, landlords should be concerned about the potential for increased crime in and around premises leased to those who intend to grow, store, or process cannabis. If increased security is needed or contemplated, the lease should allow the landlord to charge the tenant for the increased costs – or they run the risk of upsetting other tenants at the property that end up subsidizing these increased costs. Of additional concern is the potential risk that because cannabis is still illegal on the federal level, permitting an activity to occur on the property that is in violation of federal law may invalidate insurance policies, especially if the nature of the claim arises because of events that arise due to activities that are in violation of federal law.
One of the most important features of industrial space is the warehouse floor. After multiple remodels and tenant turns, the floor slab can become less serviceable due to patches on the floor and other modifications. After ensuring that the slab remains serviceable, it is important to ensure that the slab was designed to handle the loads and stresses that the tenant’s operations will place on the slab. Landlords need to ensure that tenants protect the floor slab for the duration of the lease and properly repair the slab upon surrender of the premises or removal of any improvements that may have been affixed to the floor.
As with any lease, landlords need to ensure that the lease that is ultimately executed is a bankable lease. Even if the landlord doesn’t intend to sell or refinance, maintaining a project full of financeable leases will ensure that the value of the asset is protected. Aside from the considerations that need to be given to the balance sheet and credit of the tenant, the tenant’s use of the space and the nature of the tenant’s business is important. While the federal government has no history of taking enforcement actions against landlords who do business with parties operating a business in violation of federal law, a landlord risks civil forfeiture in these circumstances. Lease agreements should provide sufficient exit strategies for landlords in the event the Department of Justice changes its enforcement priorities in the future.
Despite the existence of numerous, well-written forms, landlords need to take special care to ensure that any lease document is properly drafted to address the risks that may be unique to their asset type as well as to the tenant’s use of the property.
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