A typical commercial office or industrial lease states something to the effect that the “The Commencement Date of the Lease shall be the later of X date or the date that the Landlord delivers the Premises to the Tenant.” (Note: If it says the “earlier of X date ….”, your landlord is really giving you a raw deal. Do not ever allow it.)
This Commencement Date language protects you in case the Landlord is late in completing construction and you don’t get possession when planned. Right? Wrong. Here’s why:
Suppose that you are planning to take possession of a property on or before June 1st and your existing lease expires May 31st. As is not unusual in commercial real estate lease transactions, getting the construction completed on time is a push but appears not unrealistic.
A week or two before June 1st, the Landlord informs you that the space will be delivered June 5th. Your new rent will be prorated so that you don’t pay for June 1 – 4. That’s fair, isn’t it? Probably not.
You will be forced into a holdover position in your existing space. If your lease is silent on the subject, most States provide that a landlord can charge double rent during a holdover period. Many commercial leases address this issue and specify some increased rent penalty from between 125% (if you negotiated it up front) to 200%. In addition, since rent is paid monthly, you are obligated to pay for the entire month – there is almost NEVER a provision for a daily prorated holdover rent. Further, you may be liable for other costs incurred by the landlord.
If he has leased the space and plans to commence build out for a new tenant, you’ll likely get charged for the overtime incurred to get them back on schedule. If you are delayed long enough for his prospective new tenant to bail, you may get sued for the entire value of the failed lease. Meanwhile, your new landlord’s liability is limited to compensating you by not charging for the four days of rent that you didn’t have use of the premises. Ouch.
So how do you protect yourself? The lease should state that “the Commencement Date will be later of June 1st (in this example) or the first of the month following delivery of the Premises by the Landlord with substantial completion and and a Certificate of Occupancy. In the event that the Commencement Date is other than June 1st, the Landlord will pay $X for each month or each partial month of delay.”
The $X should equal the new rent plus your holdover penalty, and should include any damages charged by the existing landlord if the tenant is liable for such costs.
In addition, you should state that, in the event that the lease has not commenced by X date, the tenant may terminate the agreement on X days notice. You can’t wait around forever.