Remember, Very Little Is Standard When It Comes To “Standard Forms”

by Ronald R. Rossi

March 13th, 2017

We published an article in June 2016 discussing some of the misconceptions about using a so-called "standard form" in any real estate transaction. In short, if you’re ever told "it’s fine" to sign a contract, lease, or other important legal document because "it’s just a standard form," you should stop, look, and listen. After all, who drafted that form, and who benefits from its terms and provisions? If you’re a buyer or a tenant, for instance, you could be signing a form that’s become "standard" amongst sellers and landlords because the form works to their advantage, not yours.

If you’re a commercial tenant, for instance, you should keep this advice in mind if you encounter the AIR Commercial Real Estate Association’s Standard Industrial Lease, which is published by the AIR Commercial Estate Association (AIRC).

One scenario we see frequently in real property litigation occurs when a smaller tenant is looking for more space, wanting, for example, to upgrade from 3,000 sq. ft. to 6,000 sq. ft. because their business is growing. They see a property listed by a commercial real estate company and contact that agent. After basic terms are agreed to, they are given the AIR lease to review and sign. They are told it is a standard lease, and, sure enough, the word "standard" is in the title of the document.

At this stage, prospective tenants are often lulled into the belief that they do not need to have a real estate attorney review the lease before they sign it, and not every agent will recommend that they do so. The real estate agent involved in this scenario represents the landlord, remember, because they have a listing, though that agent will often become a dual agent representing the tenant as well as the deal progresses. If the tenant doesn’t seek out independent legal advice before signing this document, they may find themselves at a disadvantage later. Also, the document we’re talking about is 17 pages long in its current print format –at least double that length in ordinary type – and even if the tenant is working with a very competent dual agent, only a real estate attorney can explain the significance of the contents of that lease and all the potential consequences.

What often happens in this scenario is that after the tenant moves in, problems develop, and either the landlord or tenant contemplates litigation. When the tenant finally does seek legal advice, a knowledgeable real estate attorney will point out the pitfalls of the language and terms in the current version of the AIR lease. At that point, the tenant, through the attorney, can attempt to negotiate an addendum to the lease that will eliminate or soften some of the pro-landlord terms, but it’s far better to get legal advice before signing and avoid ending up in some of the bad-lease situations we see.

Any number of issues can arise after a tenant signs a "standard" AIR lease. For example, regarding a premise’s square footage, Paragraph 2.1 of the lease states,

"While the appropriate square footage of the Premises may have been used in marketing of the Premises for purposes of comparison, the Base Rent stated herein is NOT tied to square footage and is not subject to adjustment should the actual size be determined to be different. NOTE: Lessee is advised to verify the actual size prior to executing this Lease."

At first glance, this provision doesn’t seem problematic. However, while they usually view the space, tenants often don’t actually have the square footage measured before signing the lease. Since Paragraph 2.1 clearly states that the rent is not tied to the square footage used to market the property, tenants can find themselves stuck paying for less space than they believed they were getting. In some circumstances, a tenant can negotiate for the right to measure the premises within a certain period of time and seek to avoid this problem, but litigation often develops when square-footage discrepancies are discovered and allegations are made that the landlord or broker misrepresented the square footage.

This type of dispute can get heated because while the reduced square footage may not prevent the tenant from using the space as intended, square footage is also often utilized to calculate the tenant’s share of common area expenses and other expenses under the lease. If a tenant is paying higher expenses while not getting the benefit of the greater square footage, sometimes litigation is the only way to settle the dispute and the disparity.

If you’re a tenant or landlord considering filing suit to settle a lease dispute, you should be aware of certain provisions included in the "standard" AIR lease. For instance, when it comes to suits against a landlord, Paragraph 20 of the lease limits the landlord’s liability in any lawsuit to the landlord’s interest in the leased premises – not the building as a whole, note, but just the premises being leased. Again, this "standard" lease is more landlord-friendly, which a prospective tenant may not realize without having it interpreted for them by a real estate attorney.

Also, if you’re an aggrieved tenant wanting a jury to hear your story, you should be aware that the AIR lease makes it possible for parties to give up their rights to a jury trial. Arbitration is not part of the lease itself, but Paragraph 48 allows the parties to attach and incorporate an arbitration agreement. It is wise to discuss the pros and cons of arbitration with a qualified real estate lawyer before agreeing or refusing to give up your right to a jury trial in Superior Court.

Tenants and landlords can also end up in court if the broker or agent handling the transaction breaches a duty or makes a mistake while assisting the tenant/landlord in negotiating the lease. However, if the parties are using the AIR lease, they need to be aware of Paragraph 25(b), which provides that no lawsuit may be brought against any of the brokers involved for any act or omission unless it is brought within one year after the start date of the lease. This paragraph also states that any liability assessed to the agent if a lawsuit is brought within a year (including court costs and attorneys’ fees) cannot exceed the actual real estate fee received by the broker. In other words, if a tenant sues his agent and the landlord and wins the case against the broker or agent, the amount of the tenant’s award cannot exceed the real estate agent’s fee for the transaction, which may be minimal in comparison to the actual damages sustained.

Another provision of the AIR lease that has proven to be a hot topic is the limitation period regarding hazardous substances (Paragraph 6.2). First of all, the lease imposes a duty on the tenant to inform the landlord of any hazardous substance that comes onto or is located within the premises. If the tenant discovers a hazardous substance on the premises and wants to terminate the lease, the lessor’s obligation to remove hazardous substances is strictly limited. If the cost to remediate the damage is greater than the monetary ceiling in the lease (i.e., "12 times the then monthly Base Rent or $100,000, whichever is greater"), the landlord has the right to terminate the lease, and the tenant’s options are limited at that point. As a prospective tenant, you need to be aware of your rights and lack thereof under this section of the AIR lease.

Another way in which the AIR lease tends to be more landlord-friendly was illustrated in a 2011 case entitled Frittelli, Inc. v. 350 North Canon Drive, LP. In Frittelli, the lease was the so-called standard AIR lease with addenda attached thereto. The lease not only granted the landlord the right to remodel the shopping center but also provided that if he did so and, in the course of the remodeling, damaged the tenant’s business, then the landlord’s liability for that damage would be significantly limited. The standard AIR lease also provided that the tenant was responsible for obtaining insurance to cover such situations. The lease also provided that the landlord would not be liable for certain injuries to the tenant, including injury to the tenant’s business in the form of loss of income or profits; the tenant’s sole recourse would be to file a claim under the insurance policy that the tenant itself was required to maintain. The Appellate Court upheld this clause as a fair limitation of liability, so, again, as a tenant, be sure you understand the terms you are committing to when you sign the AIR lease.

In an article of this length, I can’t examine all the AIR lease provisions and their possible adverse consequences, but the above examples should alert potential tenants to the lack of protection in certain areas and make it clear that it’s wise to seek legal advice before entering into a commitment, especially as commercial lease terms often run into decades, not merely a few years.

As you can see, there is often very little that is "standard" about so-called standard forms, and in all too many instances, "standard language" isn’t designed for your benefit. Consulting an experienced real estate attorney before signing one of these "common" forms may save you an uncommon amount of time and money.

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