Legal Pitfall Prevention in Commercial Property Management

Navigating the legal complexities of CRE isn’t just about avoiding problems; it’s about proactively creating an environment where tenants thrive and your assets grow. 

Imagine leasing office space to a tech startup that plans for rapid expansion. If your lease agreement doesn’t clearly outline provisions for subleasing or early termination, you might face pushback when they outgrow their space and attempt to leave or re-assign their lease. Proactively including flexibility while also protecting your interests ensures better tenant relationships — and helps you avoid the wrong fit from the get-go. 

Tracking Your Legal Duties

Disputes, fines, and high turnover can arise when legal duties fall through the cracks. Every property manager comes up with their own system for identifying and mitigating their risks. Yours will depend on the size of your staff, number of properties you manage, and the complexities of local code and regulations. 

A few ways you can make sure legal duties are taken care of include implementing: 

• A compliance calendar that tracks critical deadlines for inspections, permit renewals, and regulatory changes specific to your jurisdiction.
• A secure document management system that stores compliance records in advance of inspections or tenant inquiries.
• Industry newsletters and professional organizations like BOMA (Building Owners and Managers Association) that offer important reminders and resources.
• Local seminars that may be offered when zoning laws, building codes, and environmental standards are updated or changed. 
• High property standards that keep you ahead of the “bare minimum” requirements of ADA compliance, fire safety standards, and energy efficiency regulations. 

Ultimately, you’ll also need to cultivate strong relationships with legal counsel and consultants who specialize in commercial real estate so you can receive timely guidance when issues arise. 

Key Legal Terms for CRE 

• Rent Escalation Clause: A provision allowing for periodic rent increases, often tied to inflation or market rates.
• Exclusive Use Clause: Protects tenants by preventing landlords from leasing adjacent spaces to competitors.
• Holdover Tenant: A tenant who stays in the property after the lease term expires without renewal.
• Cure Period: The time given to tenants to rectify lease breaches before eviction proceedings can begin.

• Certificate of Insurance (COI): Proof of insurance coverage, typically required from tenants before lease signing to verify compliance with requirements.
• Errors and Omissions Insurance (E&O): Protects property managers from claims of negligence or mistakes in their professional services.
• Common Area Maintenance (CAM): Shared costs for maintaining common spaces, typically billed to tenants.

Lease Agreements & Tenant Rights

Lease agreements should set expectations for property use, payment obligations, and operational boundaries. But they can’t cover every possible eventuality, especially if you’re dealing with a high-volume of tenants. Establishing strong relationships with your tenants, and having legal counsel on call, are both essential to making sure leases go smoothly.

Among other things, your clauses should leave no room for guessing when it comes to who is responsible for:

• Routine maintenance
• The types of insurance each party must carry
• What happens in case of exceptional events like a structure fire
• Escalation mechanisms that can affect rent before the lease renews (e.g., annual increases tied to CPI). 

Regulatory Compliance

Compliance with zoning and building codes is non-negotiable — and it’s important to know whose shoulders these responsibilities fall on. A retail space welcoming a new boutique may need additional signage, parking accommodations, or compliance updates. Is that up to the tenant or the landlord? It majorly depends on how the lease is written as both parties often share equal responsibility otherwise. 

For instance, in a Triple Net (NNN) lease, maintenance tasks and expenses are passed on to the tenant. But legal and safety obligations are usually still up to the landlord, including maintaining accessibility and safety standards. 

Insurance & Liability Considerations

A slippery floor in a common area leads to a customer injury. If liability insurance requirements haven’t been properly communicated to tenants, you could face expensive litigation. 

Regular risk assessments, proper documentation of complaints (and resolutions), and special clauses all come into play when managing liability. For instance, your lease might need a clause mandating that both landlord and property management company are listed as additional insureds on the tenant’s policy, extending their protection. 

Handling Disputes & Litigations

A lease shouldn’t state broad operating hours like 5am to midnight if municipal noise ordinances say retail stores need to be closed by 10pm. Contradictions like this in a lease can cause confusion and lead to disputes. 

Beyond conflicts like this, there are other areas where disputes often arise. For instance, a tenant operating a restaurant may begin offering live entertainment, which was not included in the lease’s permitted use clause. The landlord could claim that this constitutes a violation of the lease, while the tenant argues it’s not uncommon for a dining establishment to bring in musical acts. 

Without clear guidelines, disagreements can turn serious, and costly. Always state rules for things like space modifications, lease modifications, renewals, and terminations. And make sure notice periods, penalties, and the procedure for handling disputes are also clarified. 

Eviction and Tenant Removals

If a commercial tenant’s lease expires, and despite receiving reminders, they fail to vacate the space, they’re considered a “Holdover Tenant.” Depending on the lease terms, the tenant may owe an increased rent during the period they remain in the property without a renewed lease. 

While eviction may seem like the obvious next step, property managers usually must first provide the tenant with a “Cure Period.” Then, if the tenant fails to resolve their violations within that period, eviction proceedings can begin. 

Understanding when and how a tenant can be evicted is one of the most difficult parts of property management. Tenant rights, like how anti-discrimination laws and protections against retaliatory eviction apply, add even more complexity. Even small oversights, like neglecting to document each step of the eviction process, can put a property manager at risk. That’s why legal counsel should always be involved in evictions. 

Property Upkeep

Whether a tenant is expected to take on maintenance tasks or not, they do play an essential role in property upkeep. They are on-premises every day, and should know how to alert you of any potential problems — be it a pothole, non-working outlet, or drafty window — as soon as possible. 

Providing a tenant handbook can streamline reports and resolutions by giving tenants easy access to maintenance procedures, emergency contacts, and shared space rules. You can also provide written forms and processes to help tenants when they need to file an official dispute or complaint. 

Security Concerns 

Regular audits should be conducted to identify weak spots in a property’s security infrastructure, like how non-public entries are being utilized by vendors or whether existing surveillance is sufficient given the layout of a new tenant’s retail store.  

Tenants should also know who to contact for help and be encouraged to report any suspicious activity or concerns, like a light that’s gone out in the parking lot. Fostering a safe, secure environment for your tenants will lead to less turnover and help you demand higher rent. 

Conclusion

Reviewing these considerations, how does your current approach measure up? Could clarity in your leases or enhancements to compliance practices unlock more opportunities for growth? Are there gaps that have to your attention that you need to cover to avoid hefty fines and penalties?

Taking these precautions will help protect your investments, streamline property management, and build trust with your tenants. So invest the time and resources necessary to make sure none of them slip under your radar.