Colorado Commercial Lease Law
LEGAL + BUSINESS KNOWLEDGE FOR STRATEGIC REPRESENTATION
Specialized Commercial Lease Attorneys
The Differentiating Factor
We are the leading attorneys in Colorado for commercial real estate leases. You will not have trouble finding someone who claims to be a commercial real estate attorney, or even a law firm specializing in commercial real estate leases. So, what separates True Counsel Law from the other guys?
CRE is one of our passions! We understand not only the legal side but the business side equally well. Not too many attorneys understand real estate law and topics such as financial modeling and investment decisions. While it is not our place to give business advice, we love to hear about what projects our clients are working on.
In today’s age, businesses create websites to sell themselves. While this is certainly understandable, we believe a website should also be educational in the process. We have designed this website for attorneys, brokers, real estate professionals, and our clients who take part in commercial leasing in Colorado.
Our goal is to provide practical and easy-to-understand information for both landlords and tenants in commercial leasing transactions. We recognize the interests of landlords and tenants concerning types of leases and specific lease clauses. On this website, we explain the significance of the various provisions in the typical commercial lease and offer tips for drafting and negotiating commercial leases in Colorado. Additionally, we address options that often exist in leases such as assignment, subleasing, and term extensions. Of course, no website would be complete without also handling potential pitfalls and commercial lease disputes.
Questions? Don’t hesitate to reach out to us! No one should ever attempt to negotiate a commercial lease without being advised by an attorney. Covenants and obligations can easily be buried in the specific phrasing of clauses that the average person will glance over. On the flip side, we hope other attorneys will find this information useful as well as a quick refresher and reference guide.
Our Role as the Attorney
We believe our role as the commercial lease attorney is a combination of educator, advisor, analyst, negotiator, and drafter. The specific challenges we take on often depend on whether we are representing the landlord or the tenant.
As you can see from the volume of content on our website, we believe in educating our clients so they can make better-informed decisions in the future. Whether that involves clarifying the legal significance of specific clauses in the lease agreement, explaining options of getting out of a lease, or bringing a lawsuit as a result of a major breach of the lease, we never stop helping our clients understand the process and implications of the law as applied to their specific situation.
When it comes to advising, we respect the role that we are in. Our clients know what is best for them and their business, but do not always appreciate the legal side of their choices. We bring our decades of experience with us to the table to advise how the law will play a role in whatever path they choose to pursue. We focus on helping our clients minimize risk when entering into a commercial lease, as well as those that exist once the term has begun.
As to negotiating, we will step in to handle all negotiations with the other parties, including their attorneys and broker. We take the time to understand you, your business, and the opportunities the lease brings so that we can effectively see that your dreams are realized without giving in.
How is a Commercial Lease Drafted?
It is fairly rare to draft a commercial lease from scratch. We developed a bank of nearly a hundred sample lease agreements that we can rely on as a strong starting point to protecting our clients. Our pride and joy is a master lease written exclusively for landlords who want the utmost protection and is about as close to bulletproof as the law will allow. Our master lease is available for a flat rate and will be tailored to your specific needs.
When we do add in custom provisions, we are big on proper drafting etiquette. Clarity, succinctness, and brevity are crucial to accurately honoring the wishes of the parties and to ensuring a Judge will find in our client’s favor should they find themselves in litigation over a lease dispute.
Commercial Lease Review Attorney
The primary purpose our clients retain True Counsel is for our lease review services. We make a point to review every single sentence of the lease and never skip over standard clauses or boilerplate provisions. It is easy for the opposing party to slip in language in these areas that have big legal consequences. From there, we also identify provisions and clauses that are missing. We balance the desires of our clients to get the deal done with managing the risks. This is where we focus on education and letting our clients make the best decisions for themselves.
Artificial Intelligence for Commercial Lease Reviewing
We are one of Colorado’s only law firms using software with built-in artificial intelligence to identify key clauses and potential red flags. While we read and analyze every single word in the lease, this software plays a key role in focusing on the primary sticking points for our clients. You can all but guarantee no other law firm is using this software!
The Value of On-Site Inspection
An onsite inspection is often invaluable to fully understand how the lease should be written and constructed. We offer this service to all our clients. While it is typically not necessary for smaller office spaces, it can be key in managing risks for larger properties.
Getting the Deal Done
A contract is about managing risks. Neither side will get all of the provisions written in their favor, typically. At the end of the day, our clients have determined the property is a good fit for their needs and are expending time, effort, and money to see that a deal is put together. It is our goal to see that our client’s goals are achieved, which is why we walk a delicate line between wanting to overprotect our client’s interests but not destroying the deal and scaring away the other party. This is where great relationships see that we make concessions only when necessary but also focus on getting the deal done.
Colorado Law of Commercial Leases
When it comes to determining the law that applies to contracts, we have a mixture of what we refer to as common law and statutory law. Common law is the result of parties bringing lawsuits and the Colorado Court of Appeals and Colorado Supreme Court determining how legal issues should be resolved. The opinions they write as a result of these cases are referred to as common law, often referred to as case law.
Statutory law on the other hand refers to specific law (statutes) that our state government has implemented. Cases involving statutory issues still find their way into the appeals process and the Court will be left with the task to determine if the statute applies or how it should be interpreted based on the facts before it. Colorado has very few statutes that apply to commercial lease law. Most of what we rely on is common law.
Premises Liability Law and Commercial Spaces
The law is clear in Colorado that if you own, operate, or exercise control over a piece of property in this state, you also accept the risk of others being injured on the property. The law outlines very specific responsibilities you have as a property owner and tenant and without understanding what they are, you could potentially face a multi-million dollar lawsuit alleging you were negligent in maintaining the property.
We are not shy of stating we know and understand premises liability law better than any attorney in the state. Both landlords and tenants need to understand the risks they face and we love to educate our clients on how to minimize these risks.
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The Colorado Commercial Lease
The Purpose of the Commercial Lease
One of the few statutes pertaining to commercial eases involves the requirement that they be in writing if the term of the lease is longer than one (1) year. Beyond this requirement, it is simply good business practice to put everything in writing. It holds people accountable, cements in writing that the parties are in agreement on the issues, and provides reference for how the parties are to interact with one another.
Leases are contracts. The law that applies to purchase contracts is the same as to lease agreements. You want to know what your options and obligations are when entering into a lease, and you have a lot of them in the commercial space. Without it being identified in the agreement, a party’s actions may go against the wishes of the other party.
TYPES OF COMMERCIAL LEASES IN COLORADO
When we talk about types of commercial leases, we are referring to the types of properties that are being leased. Each type of property has a different type of contract that is typically used as they each have unique needs and applications that have to be addressed in the agreement.
The primary types of leases you will come across are space leases, building leases, and ground leases. Space leases are by far the most common as they include office leases, retail leases, shopping center leases, restaurant leases, industrial and warehouse leases, flex space leases, and medical office leases. The vast majority of commercial real estate deals that are done every year fall into one of these categories.
Ground leases give rights to the land itself. Often the tenant in a ground lease intends to erect their building that caters to their specific needs. This can be anything from a fast-food restaurant, medical practice, and industrial warehouse. Ground leases are typically a minimum of twenty (20) years since the tenant will need several years for the investment to pay off. It is not uncommon for them to last upwards of fifty (50) years in some cases. Like space leases, ground leases are usually a fixed amount with yearly escalations.
Build-to-suit leases are a form of a ground lease where the landlord will erect the building at their expense to the needs and specifications of the tenant. The landlord will then lease the building and ground to the tenant. You may also see the reverse situation occur where the tenant constructs the building, sells it to the landlord, and then leases it from the landlord.
As the name implies, building leases are contracts for the entire building and not just a specific suite or floor. Often these situations give the tenant much great freedom for tenant improvements to fit their needs. The agreement will closely resemble the rent structure of a NNN space lease.
Space leases are for a specific space within a larger building. The tenant is only getting the specified portion of the building that they contract for. Along with space, they will usually have equal rights to the common areas of the building along with other tenants.
The Landlord and the Tenant
When entering into a commercial lease, it is often a battle of competing interests. Each party wants to be fully protected and minimize their risk. Clauses that protect one party will increase the risk for the other. Contracts are about answering the question about the amount of risk a person is willing to undertake to get the benefits out of the deal. We make sure to understand your needs and desires and tailor the lease review and drafting to see that they are realized.
Entering Into a Commercial Lease
Authority to Enter into a Lease
An interesting issue that can arise is who within a company has the authority to enter into a lease on behalf of that company. It would be unreasonable to believe a secretary could do so, but what about a district manager or vice president. Since actual authority will be difficult to discern in most situations, the Courts have determined when a person can reasonably rely on an employee’s representations to bind a company. This is referred to as apparent authority.
The Effect of a Commercial Lease
A modern-day lease is both a conveyance and a contract. A tenant is being granted an interest in real property from a landlord and along with this comes rights, obligations, and liabilities. The obligations in the lease are often referred to in the lease as covenants and conditions. The conditions are best to think of as limitations that come with your right to be on the property. Should you not adhere to these limitations, the landlord may have the right to terminate the lease and hold you liable for a portion of the remaining lease term. On the flip side, a lease also imposes obligations on the landlord that if breached may give the tenant a right to monetary sums.
Lease Requirements | Commercial Real Estate
Commercial leases in Colorado have three primary requirements that we will discuss in this section: insurance, security deposits, and personal guarantees.
It has become commonplace within the last decade for landlords to require personal guarantees in commercial leases. This is something a tenant likely cannot get away from in today’s market but should not keep them up at night should they find their business struggling. A lot of factors will determine the liability of a tenant who cannot see out their lease term as agreed upon.
When it comes to security deposits, they are standard practice as well. This is the amount of money you are depositing with the landlord that acts as a credit towards unpaid rent or damage to the premises. The amount a landlord requires will vary greatly from one to the other and can be negotiated if a tenant believes it is necessary.
Personal Guarantees for Commercial Real Estate Leases
Except for large credit tenants, you can expect to be required to sign a personal guaranty for the property. This worries a lot of tenants because their minds immediately begin to wonder if they will lose all of their assets should they become unable to pay the rent. While it is exceptionally rare for this to happen, they are something to take seriously.
Personal guarantees can be as simple as one sentence included at the end of the lease. You may also see it as a full exhibit incorporated into the overall lease agreement.
The purpose of the guaranty is to give the landlord the option to pursue the tenant personally for unpaid rent. With that being said, a landlord will be required to market the property and make reasonable efforts to find a new tenant. Consider the following example, if three months pass and a new tenant is found to occupy the space, the landlord can only pursue the previous tenant for the three months of rent lost plus their expenses in finding the new tenant.
For the guaranty to be valid, it must be accurately worded in the lease as a personal guaranty and be backed by consideration. When we say consideration, we are referring to both money and the relationship between the landlord and tenant. Generally speaking, the requirement to pay rent is sufficient consideration to support the personal guaranty.
Security Deposits for Commercial Real Estate Leases
Issues often arise on the topic of security deposits. You will be hard-pressed to find a landlord who does not require it as a condition of entering into a lease. Typically, these issues come to light at the end of the lease, such as in the case of alleged damage done to the premises, interest accumulated from the deposit sitting in a trust account, and how soon the deposit should be returned.
Most of these issues can be prevented from the start through proper lease drafting.
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Lease Options | Commercial Real Estate
Assignment and Subleasing Commercial Spaces
As the tenant, you will want an exit strategy should your business have a major shift in operations or downfall. The option to sublease or assign your commercial lease will provide you with this option. In the interest of the landlord, they will want control over whether they allow this, or at the very least, retain control over who you assign or sublease to.
Assignment is different than subleasing. When you assign a lease, you are giving all of the rights and obligations to the new tenant. You will no longer be responsible for the obligations and cannot be held responsible if the new tenant defaults on the lease.
When you sublease a portion of your space or the entire space, you giving rights over to the new tenant but you are ultimately responsible if the new tenant does not pay. If you are looking to get out of the space entirely, you will want to attempt to negotiate with the landlord to allow you to assign the lease so you are free and clear of the liability.
Landlord’s Consent to Assignment and Subletting
The landlord has the right to allow or disallow subletting and assignment in the commercial lease. Generally, the landlord will want to restrict the tenant’s rights and the tenant will want the option to freely assign and sublease. With that being said, the landlord will desire to allow it should it come down to the tenant being unable to pay.
The law here in Colorado has historically not favored restrictive clauses. In most situations, the landlord will need to exhibit reasonableness in allowing a new tenant to occupy the space, and in finding a new tenant should the primary tenant default on the lease.
Option to Expand a Commercial Lease in Colorado
It is common for ambitious businesses to want the option for the first right of refusal on additional space that becomes available. You will commonly see this with adjoining office spaces on the same floor of the building, but can also include non-adjoining spaces that the landlord may
Option to Extend or Renew a Commercial Lease in Colorado
Most commercial leases will allow tenants to extend or renew their space lease after the initial term. This drastically reduces overhead for the landlord in marketing the property and gives the tenant peace of mind that they will not have to search for a new space in the near future. Issues can arise around this if not properly laid out in the lease.
Option to Purchase During a Commercial Lease in Colorado
While it is less common, tenants occasionally want the option to purchase the property should the landlord desire to sell it. The way a first right to purchase works is give the tenant the first right to refuse an offer from the owner. The terms around that clause will be more specific of course. Typically, the offer must be reasonable or even be based on an official appraisal of the property. Click the link below to learn more about this topic.
The Premises | Commercial Real Estate
As we discussed above, the three (3) primary types of leases are ground leases, building leases, and space leases. With a ground lease, the legal description of the property is what will define the area to be leased. This is typically in the form of a “lot and block” description but may also be a “metes and bounds” description created by a surveyor.
In the lease of a building, the description will follow a similar structure along with the street address. As your attorney, we will compare the street address with the legal description of the property on file with the County’s clerk and recorder’s office.
When it comes to space leases, the street address coupled with the suite number is usually sufficient to adequately identify the space to be leased. We highly recommend you obtain a floor plan of the space that can be included as an attachment or exhibit to the lease. Most of us are visual learners and there is no substitute for getting a visual drawing to go along with the legal mumbo jumbo.
Measuring the Premises
Something that surprises a lot of first-time tenants is that rentable square feet of the space may differ from the actual square footage of the suite, referred to as gross leasable area vs. net leasable area. This varies from building to building and landlord to landlord as to whether additional areas are included in the rentable square foot total. Additional areas may include a prorated share of common areas in the building. The larger the space, the more important this calculation becomes.
Regardless, the standard that should apply to all leases is the BOMA Standard. This is essentially the science of measuring space for office leases. It has seen wide acceptance by landlords and has become relatively uniform in Colorado. It is referred to as ANSI/BOMA Z65.1 Standard Method for Measuring Floor Area in Office Buildings, prepared by the Building Owners and Managers Association (a trade association referred to as “BOMA”). The 2017 version is more favorable for tenants and they will be wise to request that it is used for measuring their space.
The Tenant’s Acceptance of the Premises
Every commercial lease drafted for a landlord will have a clause that the tenant accepts the premises. This clause identifies whether work will be done in the space, who will perform that work, and often the most important, who will pay for the work.
Substitution of the Premises
A clause that will certainly take most tenants by surprise should it be in the lease is a clause that gives the landlord the right to relocate the tenant to a different space in the building. The benefit of this clause for landlords is it gives them the option to group separate suites together to accommodate larger tenants. Larger tenants are usually more financially stable, agree to longer lease terms, and generally preferred all-around to smaller tenants. As a result, you may find yourself shuffled around in a building. We recommend that our tenant clients do not agree to such clauses unless they get something out of the deal, such as free rent should substitution occur.
For just about every tenant, parking is of major importance to their operation. How the parties agree to parking provisions in the lease is often negotiated. It is critical to understand the specific needs of the business to see that it is reflected in the lease agreement. Office spaces are often advertised as one space per 1,000 square feet. The actual number per 1,000 sqft. will often vary. Your broker will be in the best position to advise you in this area.
Common Areas in Office Buildings
The common areas in a building reflect those spaces to which all tenants have certain rights. A lobby is typically for ingress and egress, as well as access to building security in larger office buildings. Restrooms are available for all that need those services. It would be reasonable to think that it is fairly straightforward that you have a right to these areas, but what happens when the landlord decides to cut the lobby space in half and remove a bank of restrooms to increase the suite of another tenant? If it is not addressed in the lease, you likely will not have a say in the matter. This is why we will want to include provisions in the lease that protect your access to these areas.
The Condition of the Premises
It is common for the parties to agree for work to be completed on the space before the tenant moving into the space. These expectations are often highly litigated. We say expectations because they often do not get included in the lease. When they are not included in the contract, the parties are free to say they remember the conversation going differently.
It is paramount to accurately describe in the contract exactly what work will be done, who will do it, who is responsible for managing the project, and most importantly, who will pay for it. How this gets worded will always vary, but we will make sure it gets accurately represented in the lease so there are no surprises down the road.
Maintenance and Repair Issues
Who is responsible for maintenance and repairs is generally determined by the type of space being leased. In a ground lease where the tenant has control over the entire property, the tenant will be entirely responsible for the maintenance and repairs. With a space lease, the responsibility falls wholly on the landlord.
Both the landlord and tenant want the same thing, issues fixed in the most efficient and financially feasible way. Yet, neither wants to be responsible for the time and cost involved. While the landlord will be responsible in most leases for ensuring issues are addressed and paid upfront, the cost will ultimately be passed on to the tenant in most situations.
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