Lease Agreements
Background and Assumptions
You have just moved from beautiful Mill Valley, California to Ashland, Oregon to escape the Bay Area congestion and settle into good schools, a better social environment, and a “less frenzied” business lifestyle. You have heard that the locals are easy-going people who are more concerned about quality of life than those in the mercenary, “dog-eat-dog” business environment in California.
You have decided to open an art gallery at a vacant retail space on the Ashland plaza and sell “Thomas Kinckade” paintings exclusively. You believe the demand for these paintings will be brisk. Using the “Legal Entities for Dummies” book, you have started a new corporation called “Thomas Kinkade of Ashland,” which you hope to use as the owner and operator of the business so that you can safeguard your personal assets in case business is not quite as profitable as planned.
The folksy owner of the vacant retail space has given you what he calls the “standard lease” for the space. The owner has stressed that he has prepared the lease “in good faith and in reliance“ on you signing the lease. The owner asks that you take the lease home and drop it off with your signature first thing tomorrow morning because “there are others interested in the space” and “you had better act quickly.”
The lease is very short. The owner has stated that “that’s how we do business up here—short and simple, mostly with a handshake.” The lease includes the following provisions:
1. Rent is “the greater of (1) $1.25 per square foot per month or (2) 5% of gross revenue of the business of any kind or nature whatsoever, whether such business occurs on the premises or off, and whether or not the business is or is not connected with the approved use. All rent will increase each year by the increase, if any, in the consumer price index.”
2. The lease states that rent is based on 1,150 per square feet, measured from outside wall to outside wall of the rented space. The space occupies the first floor of a multi-story building, and there are several support structures (columns) included inside the space. There is also a utility closet housing a boiler.
3. The “permitted use” provision of the lease specifies that the space “may be used solely for the sale of Thomas Kincaid paintings.”
4. The lease states that the term will be one year. However, the owner has stated to you in person that he would be happy to extend the term “if things work out to our mutual satisfaction.”
5. The lease states that there are no restrooms on the premises, but that the owner and customers may use the “common area” restrooms next to an adjacent building on the second floor of the building. There are no elevators—just stairways.
6. The lease states that tenant will pay “its proportionate share of all building expenses, including, but not limited to heating, air-conditioning, electricity, sewer and other utility expenses, property taxes, common area charges, building insurance, building administration expenses, and government assessments of any kind.”
7. The lease states that the tenant will “not besmirch the good name of the building, which bears the owner’s name.”
8. The lease states that lease, sublease or assignment is prohibited without the prior permission of the owner.
9. The lease states that tenant shall “keep, repair, and maintain the premises in good structural repair and working order.”
10. The lease has two signature blocks for the Tenant:
Tenant:
Thomas Kincade of Ashland
.
By: (Your name, President)
.
Your name.
Assignment
Please respond to the following (single space lines):
1. Describe the uncertainties and other problems associated with each of the ten clauses above. A paragraph or two will suffice for each clause.
2. Identify other clauses and boilerplate provisions that should be included with this lease (a simple list is all that is needed).
3. Find a “tenant-oriented” retail lease online. Find a “landlord-oriented” retail lease online. Review each briefly. Provide the web addresses for both.
4. Be prepared in class to describe the owner’s negotiating style? (No need to respond–let’s discuss in class.)
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