Commercial Leases: Commencing the Commencement
Commercial leases contain many important dates that trigger landlord’s and tenant’s obligations. Three important dates that are related to each other that are sometimes confused, but are separate and distinct, are the commencement date, the delivery date and the rent commencement date. In a very simple lease, all 3 of these dates can fall on the same date – perhaps the date that the lease is executed. However, in many leases, these are separate events and have important meanings to both landlord and tenant and should be carefully considered during lease negotiations.
Commencement Date: The date that the lease becomes a legally binding obligation of landlord and tenant. Usually, this is the date that the lease is fully executed by both landlord and tenant. The commencement date can be used as an anchor date for many dates going forward. But, do not confuse the commencement date with the rent commencement date unless the lease specifically states that tenant’s obligation to begin paying rent begins on the commencement date. Further, determine whether the term is calculated from the commencement date or the rent commencement date. This will affect when rental increases occur and when renewal terms begin.
Delivery Date: The date that landlord delivers possession of the premises to tenant. While this date can be the commencement date or the rent commencement date, it does not have to be either date because in many leases, landlord has to finish building the premises or the tenant has improvements to complete or approvals or permits to obtain before its obligations commence. Where tenant is responsible for obtaining approvals or completing buildout, the delivery date is generally the triggering date for the completion of tenant’s obligations and ultimately, the rent commencement date.
Rent Commencement Date: The date that tenant is obligated to begin paying rent. Here, landlord and tenant have different goals. Tenants want as much flexibility as possible in establishing the rent commencement date in order to account for the delivery of the premises from landlord, landlord’s work, landlord’s approval of tenant’s plans, governmental approvals for commencement of tenant’s work (including building permit) as well as completion of work (including C.O.) and, tenant’s opening for business. On the other hand, landlords prefer that the rent commencement date be a set date. Landlord must consider timing, prior occupancy of the premises, likelihood of success of obtaining permits and how desirable the tenant is and tenant’s bargaining power.
In a recent negotiation on behalf of a tenant, my client was obligated to do 100% of the buildout at an estimated cost of $600,000. Landlord insisted that the rent commencement date occur 1 year following the commencement date, which was also the delivery date. In our due diligence prior to lease execution, we determined that the zoning was not correct for the client’s intended use and landlord’s assumptions for the time required were therefore incorrect. As a result, completion of the space would take at least an additional 3 months past the rent commencement date. I argued that the rent commencement date should be 30 days following C.O. and offered to shorten the construction period by 90 days following completion of zoning. We anticipated this would put the rent commencement date at about 14 months instead of the original 12, but it would be a floating date and give us comfort. And, the time table would be less than the 15-16 months that would be required because of our discovery. Unfortunately, Landlord refused to make the change and my client, anxious to lock up the property, buckled and will likely pay rent for 90-120 days prior to opening for business. Clearly, this is not the perfect situation but it is an excellent example of the importance of understanding the difference between commencement date and rent commencement date. When negotiating these dates, understand your needs and do your due diligence prior to signing your lease.