Commercial leasing requires that both the tenant and the landlord consider various complex factors. There is no standard form that commercial leases are required to follow, and therefore the lease agreements vary widely from transaction to transaction. This is why it is important for a prudent tenant to be well-versed in the various aspects, steps, and timing of the particular commercial lease being considered. One issue in commercial leasing that deserves special consideration is the delivery of the leased premises, as explained in this article.
What is the Delivery Date in a Commercial Lease?
Under North Carolina law, a landlord has an obligation to deliver possession of the leased premises to the tenant at the commencement of the lease term. Shelton v. Clinard, 187 N.C. 664, 667 (1924). The “Delivery Date,” then, is the date by which the landlord is legally obligated to turn over the leased premises to the tenant.
The Delivery Date can be, but does not have to be, the date when the lease is executed by the parties and becomes effective. If the leased premises is in a condition that is ready for a tenant to move in, the Delivery Date is simple: it will be the same date as the commencement of the term, and the tenant will be able to take over the leased premises when the lease is signed.
However, that is not often the case in commercial leasing. There may be a previous tenant who is in the process of moving out; repairs may need to be done to the leased premises, or, in the case of new leased premises or a shopping center development, the leased premises and their improvements may not yet have been completed.
Thus, it is common for the Delivery Date to be delayed to a date that is after the lease has been signed.
Why the Delivery Date Matters
It is common (and prudent) for the Rent Commencement Date, the date upon which the tenant’s obligation to begin paying rent to the landlord for the leased premises, to be tied to the Delivery Date. This makes practical sense. Rent payments are the consideration given by the tenant for their right to lease and occupy a space owned by another. See, e.g., Pass v. Brown, 2016 N.C. App. LEXIS 1333, at *14 (N.C. App. Dec. 30, 2016) (“The fact that the contract defines each monthly payment as rent indicates that the payment of such amount is in consideration for the occupation of the Premises.”).
Thus, the tenant should not be responsible for making rent payments unless and until they can occupy the leased premises. A prudent tenant will, therefore, seek to define the Rent Commencement Date as the Delivery Date – or even better, a certain number of days after the Delivery Date.
If the landlord is required to do certain work to prepare the leased premises for the tenant, sometimes called the “buildout” (and often defined in the lease as “Landlord’s Work” and customarily negotiated before the stage of the lease drafting process) then the Delivery Date will customarily be defined as the date that the landlord has completed the Landlord’s Work.
However, the tenant has an obvious interest in this work being completed expeditiously so that the tenant can start their business operations. Thus, a prudent tenant will seek to include a stated deadline for the landlord's completion of this work, often defined as the “Outside Delivery Date.” If delivery of the leased premises with the Landlord’s Work is not completed by the Outside Delivery Date, the tenant would have a right to terminate or get out of the lease.
Condition of the Leased Premises
Beyond dictating when the obligation to pay rent begins, the lease provisions on the landlord’s delivery of the leased premises will also dictate the condition that the leased premises should be in when it is delivered. Most landlords, to protect their interests, will look to limit or eliminate any representations and warranties regarding the condition of the leased premises at the Delivery Date. Instead, landlords often seek language stating that the tenant is leasing the space “as is” without any warranty or representation pertaining to the physical condition of the leased premises. With this type of language, if the tenant takes possession of the leased premises and thereafter discovers a defect, it will likely be the tenant’s responsibility, at the tenant’s cost, to fix this defect. This is especially true considering that most commercial leases require the tenant to be responsible for most maintenance and repairs to the leased premises after the Delivery Date.
Accordingly, a prudent tenant will seek the landlord to represent and warrant that the leased premises are in good order and have been repaired as of the Delivery Date. At the very least, a prudent tenant will seek for the landlord to represent and warrant that the leased premises will be delivered with certain important systems in good order and repair, such as the HVAC systems, utilities systems, or roof.
If the landlord does not make such representations and warranties, there are other strategies that a prudent tenant can use to protect themselves from such unwarranted expenses. Language can be included stating that the tenant will not be deemed to have accepted the leased premises until they have had the opportunity to inspect the leased premises. Alternatively, language can be included that provides exceptions to the tenant’s acceptance of the leased premises “as is.” These exceptions can include latent defects, which are defects that are not “obvious or discoverable upon a reasonable inspection[,]” Oates v. JAG, Inc., 314 N.C. 276, 281 (1985), or items that the tenant provides the landlord with written notice of within a certain number of days after the Delivery Date. These types of provisions provide the tenant with an opportunity to identify and address, at the landlord’s cost, defective conditions before the tenant’s repair obligation is triggered.
Conclusion
The provisions surrounding the landlord’s delivery of the leased premises are an often-overlooked part of a commercial lease. However, a tenant who wants to protect their own interests are protected should, among other things, ensure that necessary language is in place to avoid being obligated to pay rent for a space that is not ready for their business or being forced to make repairs that the landlord should have addressed. A great way to do this is by retaining an experienced attorney who understands the importance of these provisions.
This is the first article in our series, The Prudent Tenant in Commercial Leasing. Follow us on IG/FB/LinkedIn at @dyeculik for updates on the series and more important aspects you should consider when signing a commercial lease for your business.
Dye Culik PC is a Charlotte, North Carolina, business and litigation law firm that assists commercial tenants and landlords with leases and lease-related matters. If you are a business or entrepreneur who has questions or concerns about your lease, contact us to see how we can assist.
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