Common Issues in Commercial Lease Agreements for Landlords AND Tenants in Tennessee

Common Issues in Commercial Lease Agreements for Landlords AND Tenants in Tennessee

The leasing of property can be an important aspect to the creation of a successful business venture. However, as focus turns to more tangible things like location, appearance, products and employees, details can get lost along the way. In Tennessee the primary factor determining the responsibilities of the landlord and tenant in the leasing of commercial property will be the lease agreement and the details contained therein. The following are a few general tips and ideas to keep in mind regarding the leasing of commercial property, whether you are a landlord or tenant.

(1) Maintenance and Repair

In Tennessee, a landlord generally has no obligation to repair leased commercial premises. With the exception of fraudulent statements to the contrary, specific misrepresentations as to the relevant conditions of the leased premises, or the express assumption of responsibility and duty to repair by a landlord, it is typically a tenant's responsibility to repair and maintain the premises. As a tenant normally has the opportunity to inspect the premises, the premises and their condition are generally accepted at the Lessee's risk.

To avoid any uncertainty as to who is responsible for maintaining the condition of the premises, a well drafted lease should include a clause or clauses as to the condition of premises as accepted, the expected condition of the premises upon termination of the lease, and who will be responsible for maintenance and repairs during the term.

(2) Constructive Eviction

Improper landlord conduct which interferes with a commercial tenant's beneficial enjoyment of the premises may constitute constructive eviction. Constructive eviction is generally a question of fact determined by the circumstances. To be considered constructive eviction, a landlord's improper conduct must substantially interfere with the tenant's beneficial enjoyment of the premises and the interference must be of a permanent nature. Further, a tenant must abandon the premises within a reasonable amount of time after the constructive eviction causing incident takes place.

Constructive eviction often arises due to some form of disagreement or misunderstanding between the landlord and tenant. Therefore, it is important to ensure all terms and conditions that are important to a party and might create such disagreements make it into written form in the lease agreement. It is also just as important to ensure that the parties understand the terms of the lease agreement being entered into and their respective obligations associated therewith.

(3) Offset

It is important to remember that in Tennessee the responsibilities of a landlord and the responsibilities of a tenant under a commercial lease agreement are separate obligations. Should a landlord not live up to its end of the bargain, the tenant does not have the right to unilaterally offset with rent. There may be other options for recourse available to a tenant based upon the circumstances, but the withholding of rent is generally not the appropriate response.

This also applies to repairs and improvements voluntarily made to the premises by the tenant. The general rule is that a tenant who voluntarily makes improvements on leased property is not entitled to reimbursement. Absent an agreement to the contrary, a tenant who voluntarily assumes responsibilities for those repairs and improvements cannot then seek recoupment, setoff or damages for the expenditures incurred.

Landlords for commercial property often rely on rent payments to make the payments on their mortgages or loan encumbrances. This has been recognized by the courts and the general rule reflects an attitude that prohibits the unilateral withholding of rents as a result.

(4) Self-Help

In the event of default by a tenant, Tennessee law does not allow a landlord to exercise "self-help" to remedy the situation. The typical scenario usually requires a landlord to seek entitlement to possession through the legal system before reentering upon the land to retake possession. This process would require having the tenant appear in court and showing to the judge that the tenant is in breach of the agreement to an extent that would warrant the landlord's entitlement to regaining possession.

While right-of-reentry provisions in commercial lease agreements may be suitable options in other states, in Tennessee they are not. In fact, they are viewed contrary to Tennessee law, and public policy in general, which seeks to promote peaceful process.

(5) Holdover Provisions

A common problem most landlords must address at some point is the holdover by a tenant beyond the expiration of the term of the lease agreement. Generally, lease agreements attempt to address this problem through the use of a holdover provision. A holdover provision will establish a penalty for the holdover period in order to deter the tenant from holding over to begin with. However, Tennessee law generally disfavors, and will not enforce, penalty and damages provisions that are unreasonable, even if agreed upon by the parties. A double rent holdover provision has been previously found enforceable and not an unreasonable penalty for the holdover. It is important to understand that the facts of a particular case may be determinative as to reasonableness though.

In the absence of a holdover provision, a tenant may typically become liable for the fair market rental value of the premises during the period in which the premises were occupied beyond the terms of the lease agreement.

(6) Non-Waiver Provisions

A standard to any commercial lease agreement is the addition of a non-waiver provision. These are usually overlooked provisions that are typically not a point of any contention. However, they are a valuable provision which can be of benefit to a landlord. Essentially, a non-waiver provision will provide that the failure of the landlord to insist upon strict performance of any of the terms of the lease agreement shall not be a waiver of the tenant's default in not performing in respect to those terms or any subsequent breach.

(7) Renewal Provisions

What happens at the end of the expiration of a lease agreement should be clearly spelled out within the terms of a lease agreement. Is the renewal automatic? Is there an option to renew the lease? How is that option exercised? When must it be exercised? What is the length of the new term? Is the rental rate the same or has it changed? If so, what is it or how is it determined? These are all relevant questions that should be taken into consideration when drafting a renewal provision for a commercial lease. In the absence of a well drafted provision, vagueness can lead to room for dispute and disagreement.

For example, dispute may arise when a tenant holds over following the expiration of the lease term, but continues to pay the previously agreed rental rate. Has the tenant extended the lease for an additional lease term and by accepting those payments has the landlord agreed to the extension of the additional term? Or does accepting those payments extend the lease for an additional rental payment term? Often the facts of the situation are determinative

(8) Damages

An important consideration for every commercial landlord is the recoupment of damages from a tenant who defaults on a lease agreement. In this regard, Tennessee utilizes the contract theory approach in determining what damages are owed and to whom. Under this approach, upon the breach of the lease agreement by a tenant, the landlord is entitled to receive damages in order to compensate for what the landlord expected to receive under the agreement.

Important to this approach, is the landlord's duty to mitigate damages. This means that the landlord has an obligation to find a replacement tenant, and the efforts to which a landlord must put forth in finding a replacement tenant are largely dependent upon the circumstances. Generally, however, a landlord must exercise reasonable care and due diligence in order to avoid additional losses or to minimize the damages after suffering an injury.

(9) Attorney Fees

Like most states, Tennessee only allows for the awarding of attorney fees in a civil action under limited circumstances. Typically, unless some other recognized exception applies, in order to recover attorney fees there must be a statutory or contractual provision which provides for their recovery.

The practical implication of this rule, when it comes the leasing of commercial property, is that the inclusion of a provision providing for the award of attorney fees in the event of default is a necessity for any lease agreement.

Based on the 2015 article Nine Tennessee Commercial Leasing Issues by Brooks R. Smith, Peter C. Sales and Frankie Spero. 17 Tenn. J. Bus. L. (2015)

DISCLAIMER: This article is intended to convey general information and considerations regarding the leasing of commercial property in Tennessee. Nothing in this article is intended to be construed as legal advice. For answers to specific questions or concerns please contact a licensed Tennessee attorney directly.

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Thursday, 17 June 2021