10 Commercial Lease Agreement Clauses: Risks and Practical Solutions from REVERA
- 1. Flooding: liability for structural elements
- 2. Turnover rent without a minimum threshold
- 3. No right to unilateral withdrawal
- 4. Termination and unilateral withdrawal are different legal mechanisms
- 5. A penalty as a mandatory condition for exercising the right of unilateral withdrawal
- 6. The right to close the premises without a clearly defined legal framework
- 7. Forced downtime: settlement procedure not defined
- 8. Utility shut-off: the inadequacy of general civil law remedies
- 9. Fire safety: whose area of responsibility is it?
- 10. Permitted use: the price of broad wording
- Key conclusions
Most disputes in commercial leasing arise not because of breaches or obvious bad faith on the part of either party, but because of gaps in the lease agreement. The parties failed to regulate the situation in advance, and the court resolves it under general legal provisions, which rarely align with the expectations of the aggrieved party.
Below are 10 real client situations and recommendations from REVERA’s lawyers on how to minimise potential, and sometimes non-obvious, risks through contractual drafting.
1. Flooding: liability for structural elements
Situation. Abnormal rainfall damaged the tenant’s property located in a leased basement premises. The landlord relied on force majeure, while the tenant referred to the inadequate condition of the drainage system.
Problem. The agreement did not allocate liability for the safekeeping of property in such a situation.
Solution. The lease agreement should allocate liability for the safekeeping of property in such circumstances and establish an out-of-court dispute resolution procedure, as well as a procedure for determining the causes of the damage and the causal link.
2. Turnover rent without a minimum threshold
Situation. External circumstances forced the tenant to shut down all retail outlets. Turnover fell to zero, and so did the rent.
Problem. Variable rent calculated solely as a percentage of turnover, with no minimum guaranteed threshold, effectively transfers the tenant’s business risk to the landlord.
In the absence of express contractual regulation, any different allocation of risk will have to be proven in court.
Solution. Provide for a minimum guaranteed rent threshold and the conditions under which the rent may be reviewed in circumstances specified in the agreement.
3. No right to unilateral withdrawal
Situation. The tenant ceases trading due to external circumstances, but the lease remains in force for another 10 years.
Problem. Without a contractual exit mechanism, the only way to terminate the obligations is to negotiate on the landlord’s terms.
Solution. Provide for a list of exceptional circumstances entitling a party to unilaterally withdraw, with the amount of compensation for termination specified in the agreement.
4. Termination and unilateral withdrawal are different legal mechanisms
Situation. The agreement provided for the right to “terminate the agreement by giving 30 days’ notice”.
Problem. Such wording does not create a right of unilateral withdrawal within the meaning of civil law and established court practice. The clause did not work.
Solution. The tenant did not recognise the termination — the agreement must expressly provide for a right of unilateral withdrawal from performance.
5. A penalty as a mandatory condition for exercising the right of unilateral withdrawal
Situation. The agreement allowed unilateral withdrawal from performance of the agreement subject to payment of a penalty. The landlord served notice but did not pay the penalty.
Problem. The court treated payment of the penalty as a mandatory condition for exercising the right of unilateral withdrawal, rather than as a consequence of such withdrawal. The court held that the withdrawal had not taken effect because the required conditions had not been fulfilled.
Solution. Clearly define the nature of the compensatory payment: whether it is a precondition for the right to arise or a liability measure following an effective withdrawal. It is advisable to use the term compensatory payment rather than penalty.
6. The right to close the premises without a clearly defined legal framework
Situation. The agreement grants the landlord the right to restrict access to the premises in the event of a fire risk or where repairs are required.
Problem. A vague provision creates a risk of abuse of rights, allowing the landlord to close the premises at any time; the tenant will incur losses.
Solution. Provide for specific conditions under which the premises may be closed: the procedure for notifying the tenant, supporting documents, the commencement dates of the works, and the procedure for compensating losses resulting from downtime. It is also advisable to specify that, unless the defined legal criteria have been satisfied, no such decision may be taken and the tenant is entitled to continue using the premises.
It is also advisable to provide for the procedure for recalculating the rent during such period and whether or not the premises must be returned under a handover and acceptance certificate.
7. Forced downtime: settlement procedure not defined
Situation. A bomb threat led to the evacuation of the premises for one day. The parties disagreed as to whether that day was payable.
Problem. The agreement did not regulate settlements during downtime caused by circumstances beyond the parties’ control. Resolution of the dispute will depend on the court’s discretion.
Solution. Set out a list of circumstances in which rent is not payable.
8. Utility shut-off: the inadequacy of general civil law remedies
Situation. The landlord cut off the electricity supply, and the tenant was forced to suspend operations.
Problem. Recovery of damages under general legal provisions requires proof of the amount of loss, leaving the tenant in a weak position even where the breach is obvious. In practice, proving the quantum of loss is the most difficult element of the dispute.
Solution. Include an express prohibition on utility shut-offs and a contractual mechanism for determining the amount of damages or another type of compensatory payment for each day of the breach.
In such a situation, the minimum objective is not to pay rent and utility charges; the maximum objective is to recover loss of profit for each day of forced downtime.
9. Fire safety: whose area of responsibility is it?
Situation. During an inspection by the supervisory authority, the parties understood who, by agreement between them, was responsible for compliance with fire safety requirements, but the agreement itself did not contain that arrangement. The Ministry of Emergency Situations looked at the documents rather than listening to oral explanations. As a general rule, liability for breaches of fire safety legislation in buildings rests with their owners, unless otherwise provided by the lease agreement or by law.
Problem. The law determines the responsible person according to general criteria, but these do not always coincide with the parties’ actual arrangements.
Solution. The agreement should expressly allocate responsibility for fire safety by area: the premises, common areas, and engineering systems.
10. Permitted use: the price of broad wording
Situation. A tenant in a business centre relied on a broad permitted-use clause to change its business profile to a related one.
Problem. The courts formally found no breach, and as a result the landlord lost the ability to manage the concept of the property.
Solution. Specify the exact type of business activity the tenant may carry on. Provide for consequences of deviation from the permitted use, up to and including the landlord’s right of unilateral withdrawal.
Key conclusions
- the lease agreement should regulate the allocation of risks in detail;
- wording on termination requires particular legal precision;
- the absence of loss-compensation mechanisms makes protection of the tenant significantly more difficult.
REVERA’s lawyers regularly advise on commercial lease transactions and conduct legal reviews of lease agreements.
As part of this work, potential legal and commercial risks are identified, and contractual mechanisms for preventing them are developed before the agreement is signed.
Author: Sergey Suschenya, Elina Hardziyenka.
