Leases are simply contracts, the focus of which is to grant a leasehold estate—the right to possession of the leased premises for the term of the lease.
Good transactional lawyers understand that a great form contract is a staple in any practice area. A transactional real estate lawyer should maintain a landlord-favorable lease and should understand tenant-favorable provisions in both the residential and commercial contexts. Most attorneys will use the landlord-favorable document far more frequently because landlords 1) more frequently hire attorneys and 2) more frequently bring their own forms to the negotiation. Tenants usually request lease review, not lease drafting.
The goal of any lease should be to make the obligations of the parties clear. Other than clarity, the goals of a landlord and tenant tend to be directly divergent. A tenant wants the premises at a low cost with minimal obligations. By contrast, a landlord negotiates for maximum revenues with minimum obligation and risk.
By understanding the components of a solid lease form, a practitioner can provide solid advice about appropriate changes and modifications to the form for landlords and tenants. Anyone can print a lease form, but only an attorney can provide legal advice about how each component of the form impacts a client’s goals, which is to achieve a predicable result based on the client’s expectations.
Note: Landlords don’t always need a written lease, unless this statute applies:
A landlord of a residential building with 12 or more residential units must have a written lease for each unit rented to a residential tenant. Notwithstanding any other state law or city ordinance to the contrary, a landlord may ask for the tenant’s full name and date of birth on the lease and application. A landlord who fails to provide a lease, as required under this section, is guilty of a petty misdemeanor.
Minn. Stat. § 504B.111 (2015) (emphasis added).
A. Rental agreement.
1. Property leased.
Some mistakenly presume that a lease must contain a legal description in order to be enforceable. That is not true, but unless you have a free litigator on retainer, it is best be precise when describing the leased premises.
Note: A legal description is required if the lease will be recorded. When recording is anticipated, it is typical to record a short-form memorandum of lease that contains no financial terms.
a. Residential leases.
Most residential leases include a street address and apartment number. This is usually enough, and questions about which property is subject to the lease is rarely an issue.
b. Commercial leases.
Identify the space with as much specificity as is needed to avoid disputes over what space is part of the leasehold estate or the “premises.” Be specific in describing the space, including the square footage for the space and any common areas that are included in the definition of “premises.”
The goal is to avoid misunderstandings. Be aware of differences between the as-built structure and the plan or visualization of it in the lease. Is it accurate? Also be aware of mistaken estimates as to the rentable area in a project to be built and try to avoid them. Tenants should consider whether additional elements should be included in the “premises,” such as parking. Also, considerations of storage space and expansion rights is appropriate in this section.
Commercial leases often require a build-out, which will require inclusion of a construction exhibit to the lease. Lawyers should generally not be handling construction matters but should encourage clients to focus on these details with contractors (who are the experts on this topic).
2. Parties to the lease.
Minnesota law defines a “landlord” as “an owner of real property, a contract for deed vendee, receiver, executor, trustee, lessee, agent, or other person directly or indirectly in control of rental property.” Minn. Stat. § 504B.001 (2015).
b. Residential tenant: The more the merrier, usually.
In residential leases, landlords prefer to see all adults sign the lease. The more individuals there are listed on a lease, the more likely it is that a landlord will be paid. Good guest rules and provisions will prevent abuse and overuse of the premises. Residential septic systems can be overtaxed if 15 people are living under one roof.
c. Commercial tenant: Who is it?
Some commercial landlords do not carefully vet or scrutinize the identity of the tenant. This is a mistake. In addition to considering financials for a potential tenant, a landlord should always ask these simple questions up front:
What is the legal name of the entity?
Who is the president or CEO?
If the person signing is not the president or CEO, does the person have authority to sign (although evidence of authority is not routinely required in lease transactions)?
A landlord should always verify that the entity involved in a commercial lease is registered to do business in Minnesota. Check the Minnesota Secretary of State’s Web site and conduct a name search to confirm the exact legal name of the entity and the good standing status.
A simple way to assure that the potential tenant is in good standing is to require a Certificate of Good Standing. These can easily be obtained from the Secretary of State by the tenant candidate.
d. The guarantor.
In nearly all cases, a commercial lease should have a guarantor. Best Buy probably doesn’t need to have its CEO guaranty its leases, but a dentist or lawyer should probably be signing a personal guaranty for space they are renting. Commercial property is frequently valued on the basis of tenant occupancy. Guaranties strengthen the value of the leases, which, in turn add value to the property itself.
e. The management company.
Landlords must disclose to tenants certain information about who is authorized to manage the premises and who is authorized to receive service of process for the landlord. Minn. Stat. § 504B.181. If a management company is managing property for a landlord, the management company should be clearly identified in the lease.
About the Author
Matthew Schaap is a litigation attorney who lives and works in Apple Valley. He routinely assists landlords and tenants with Minnesota unlawful detainer proceedings. He has been named to the Minnesota Rising Stars® list for the past eight consecutive years.
About Dougherty Molenda
Dougherty Molenda provides the experience and capabilities of a large law firm, with the personal service, value and attention clients expect in a small-firm environment. Visit us online at www.dmshb.com.