Red lights in leases – what contractual provisions should warehouse tenants watch out for?

The old saying of the commercial leasing industry is: an agreement is written for bad times, not good times. As long as the parties are in agreement and the cooperation is undisturbed, both parties usually do not refer to the content of the agreement on a daily basis. A feverish study of its provisions begins at the moment of unexpected expenses on the part of the tenant, questioning of the landlord’s actions or financial troubles.

Already at the stage of concluding the agreement, the tenant should pay particular attention to several key issues. Below we present a brief description of selected issues.

Service charge – a bottomless pit?

Seemingly standard, unsuspicious contractual provisions regarding the service charge may become a real financial pain for the tenant. In addition to studying the content of the agreement, it is necessary to refer to the schedule specifying the list of items to which the tenants contribute. Controversial is certainly not participation in the costs of clearing snow from the complex, replacement of lighting, maintenance of common areas, but what about the legal fund, maintenance of the manager’s office, or creating a reserve for unplanned expenses of the landlord? Or what about “capex” (capital expenditure), which is not for ongoing maintenance, but for improving the facility or its surroundings?

You’ve made your bed, now lie in it. If at the stage of negotiating the terms of the agreement we do not take care to have a good understanding of what costs are included in the service charge, we may be in for a surprise during the annual settlement. Pay particular attention to the fact that the low monthly advance payment for common costs offered by the landlord, not always reflecting the real monthly costs, will simply result in a high additional payment after the settlement period.

Another issue is thedivision of costs – appropriate for multi-building warehouse complexes – into categories: pertaining to a given building (distributed to its tenants in proportion to the area of premises) and common for the entire complex (usually distributed to individual buildings and then – within their framework – to individual tenants of premises located in them). A well-planned distribution of the latter costs should prevent their “duplication” to the tenants of different buildings. 

Finally, it is worth checking whether the land on which the warehouse complex is located is the property of the landlord or whether the landlord is merely the usufructuary. If the storage facility is based on perpetual usufruct, the cost of the annual fee that the landlord is obliged to pay for it will certainly form part of the common charges. Why is it so important? Well, the amount of the fee can be updated, which means that it will increase, and therefore the tenant’s service charge will also increase.

Performance bond – why so much and so expensive?

It is market standard for the landlord to demand instruments securing the proper performance of the lease agreement. Starting with a cash deposit, a wide range of demands by the landlord may also include the provision of a bank guarantee, a declaration on submission to enforcement under a notarial deed for the handover of the premises or the payment of certain amounts, or – less and less frequently – a bill of exchange.

In principle, these provisions have become standard in the market, but what can be done to reduce the severity of the security for the tenant and its costliness? 

The standard provision for the amount of the security is that it should correspond to a certain number of times of the rent and service charges (usually three times). Given the annual indexation of the rent and the advance payments for service charges, this can result in the need to repeatedly apply to the bank for an increase in the bank guarantee, which is not a cost-free operation. In order to reduce these costs, it is worth agreeing with the landlord on the possibility of using a mixed form of security and supplementing the deposit (in cash) to the existing guarantee (without increasing it). Another way is to provide for a guarantee amount that is slightly higher than the typical three times the rent, in order to avoid having to increase it after a slight increase in rent/service charges. 

It is also worth negotiating with the landlord the tenant’s freedom to exchange the guarantee for a deposit (and vice versa).

Care must also be taken with regard to the period during which the landlord can make use of the security. The landlord will strive for a period that extends beyond the term of the lease as long as possible. It will be in the tenant’s interest to ensure that the term does not extend too far (2-3 months are in most cases sufficient to settle all costs that may have to be paid by the tenant). 

In case of submission to enforcement by notarial deed, it is advisable to cooperate with a notary who knows the commercial leasing sector and verify in advance the cost of drawing up the deed – rates vary among notaries – it is worth checking them in several notary offices (especially in view of the practice of some notaries to make the fee for the deed securing the return of the premises dependent on the value of the property). 

Termination of agreement – should the tenant live in fear of eviction?

Tenants are often afraid of termination of the lease for a trivial reason – understandably. Taking into account the cost of investment in moving, equipment, people working in the warehouse, the lease itself, as well as the contractual penalties usually stipulated in the lease in case of early termination, it is simply not worthwhile for the tenant to expose itself to termination by the landlord. 

On the other hand, landlords insist on retaining the option to terminate in many cases. The following code grounds for termination are not controversial: delay in rent payment, using the subject of the lease in a manner contrary to the lease agreement (e.g. for production rather than storage purposes), or contractual provision that the tenant’s failure to provide the required contractual security entitles the landlord to terminate the agreement. Other grounds, however, can be more controversial – for example, those that relate to housekeeping matters, such as the use of shared ramps, blocking of driveways, and compliance with fire regulations. In such cases, two positions clash: that of the tenant claiming “this is a reason too trivial to result in such a severe consequence as termination”, and that of the landlord claiming: “I have to manage the entire logistics park and if the action of any tenant makes life difficult for neighbours (ramp, blocked driveway) or puts them at risk (fire regulations), then I must have effective means of intervention”. In such cases, a possible compromise is to retain the “housekeeping” grounds for termination of the agreement, but to supplement them with a regulation that termination is not possible without a prior request to the tenant to remedy the breaches (with a minimum deadline).  

How long do I have to wait for the premises?

Model lease agreements prepared by the landlord usually provide that, in a situation where the landlord delays the handover of the premises (e.g. in the event of a delay in the construction of the complex), the tenant is to wait patiently for a signal from the landlord that it is ready for handover.

On the part of the tenant, the question arises: what to do in such a situation, when the possibility of using the premises is postponed for an unspecified period of time and it is necessary to take the steps to start the business (hiring staff, transporting machinery, etc.)? In this case, it is a good idea to set a deadline after which the tenant can withdraw from the lease and look for other solutions. It may be expected that the landlord will insist on a distant date, but even such a date is better than none at all, as it gives the parties the opportunity to settle the situation in the event of unforeseen situations during the construction of the warehouse.

When regulating withdrawal, it is important for the effectiveness of this right to precisely indicate the deadline for withdrawal – e.g. “by 12 May 2025” or “within 30 days from the date of delivery of the premises as indicated in clause XYZ of the agreement”.

Minefield to be defused 

The model lease agreement is intended to safeguard the interests of the landlord (and its financing bank). Sometimes it becomes a minefield for the tenant. We have presented above only a few issues that may cause considerable trouble to the tenant, therefore it may be important to use experienced advisors (brokers, lawyers). The mature real estate market in Poland makes it possible to find help to reduce risks and guide the tenant through the transaction without explosive surprises.

The authors of the text are Magdalena Wierzbicka-Zagrajek and Sławomir Lisiecki. The article in Polish was published in Eurologistics magazine on October 1, 2021.

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