Beware the Rules and Regulations

Attention spans are finite, especially when confronted with an exhaustively detailed commercial lease. While it may be tempting for brokers and advisors of prospective tenants to focus solely on the “big ticket items” of a lease, it is always important, and sometimes critical, to thoughtfully consider how each covenant will impact the tenant’s use of the space. This includes those found beyond the signature pages and into the exhibits. 

A prime example of a frequently under-emphasized category of covenants is the landlord’s rules and regulations. Traditionally, landlord’s rules and regulations are incorporated into the lease through an exhibit attached to the end of the lease often by means of a simple covenant requiring tenant’s compliance with landlord’s rules and regulations (e.g. “Tenant shall faithfully observe and comply with all rules and regulations set forth on Exhibit ‘X’ attached hereto.”). Because of their less-than-prominent location, tenants and their advisors may be tempted to gloss over or ignore the rules and regulations in a lease negotiation. 

Brokers should be aware that the rules and regulations carry serious implications for their clients, including the potential to trigger a default under the lease—just like the conditions receiving top billing in the body of the lease. Brokers should therefore ensure that tenants and their advisors spend the same negotiation effort on the restrictions on a tenant’s operations found in the rules and regulations as the same restrictions found in the body of a lease.

The potential impacts of rules and regulations

Most brokers are familiar with covenants addressing a lease’s typical “big ticket items,” in large part because of the emphasis such items receive in negotiating a letter of intent and the lease itself. These often include the rent, term, permitted use, maintenance and repair obligations, tenant improvement and signage provisions. While these covenants constrain a tenant’s behavior, the rules and regulations of a landlord for the property can often implicate a tenant’s day-to-day operations with a heavier and much more invasive hand, lending a troubling amount of subjectivity to a landlord’s enforcement decisions. 

For instance, common topics addressed in the rules and regulations include: hours of operation; “greening” measures (e.g. requiring efficient light fixtures, environmentally friendly cleaning products or low VOC paints); how late after closing the lights must remain on in a space; conducting tenant’s business “in a manner consistent with a first-rate building”; parking conditions—just to scratch the surface.

With that in mind, consider the plight of a tenant who wishes to operate a machine shop but signed a lease under which the rules and regulations include a generic prohibition on “annoying” sounds and vibrations. Or the predicament of a last mile fulfillment center operator whose lease includes rules and regulations restricting the times and locations permitted for loading and unloading trucks. Even innocuous restrictions on “noxious” odors and open flames could create problems for a wood-fired restaurant operating in the ground floor of an office building.

Virtually any commercial tenant can find itself in a position where its normal operations could violate standard, and often untailored, rules and regulations. We therefore encourage brokers to push their clients to think critically as negotiations begin about whether the client’s intended operations are compatible with the restrictions or requirements found in the rules and regulations. If the gulf between the client’s intended operations and those restrictions cannot be bridged, a tenant may consider seeking a more suitable space.

Protecting tenant interests

Rules and regulations can be fair and necessary for the smooth operation of a development, especially one with multiple tenants. If possible, brokers should push to implement the suggestions below during the negotiation of an LOI to avoid conflicts:

Insist upon express, attached rules and regulations: The landlord’s preferred lease form may require compliance with “all rules and regulations promulgated by landlord from time to time” without further detail. To avoid this becoming an issue later in negotiations or later during the lease term, brokers should insist upon receiving an express list of landlord’s rules and regulations while negotiating the LOI and ultimately have it incorporated into the lease. The list should minimize subjectivity and landlord’s discretion. Otherwise, a tenant may find itself subject to landlord’s enforcement whims.

Curb landlord’s modifications: Commercial leases often allow landlords to freely modify the rules and regulations. If possible, brokers should push for the inclusion of provisions requiring tenant’s consent where such modification would cause an adverse change in or unreasonably interfere with tenant’s business operations. As a compromise position, a broker might push for provisions whereby landlord must provide written notice to tenant of any modifications, which would give rise to tenant’s right to dispute the modification as not reasonably relating to certain factors (e.g. good order, security, efficient management, safety, cleanliness).

Add protective provisions to the lease: Brokers with awareness of the tenant-favorable concepts below, which sometimes can be hard won, can facilitate positive outcomes for their clients:

• In the event of a conflict between the language of the lease and the rules and regulations, the lease language will control.
• Modifications of the rules and regulations will equally apply to and be enforced equally upon all tenants.
• Modifications of the rules and regulations will not increase the obligations or decrease the rights of the tenant under the lease.

Though often an afterthought, devoting time and attention to the rules and regulations of a lease during the initial stages of a lease negotiation is crucial in ensuring a commercial tenant’s use of and compatibility with a given space. By implementing some or all of the protective measures described above, brokers can protect their clients from arbitrary enforcement and help them to avoid unintended violations of the rules and regulations.

Stefanie R. Chamberlain is an associate with Bass, Berry & Sims PLC. She assists clients with commercial real estate and debt financing transactions. Stefanie can be reached at [email protected].

Kean W. Devine is an associate with Bass, Berry & Sims PLC. He represents clients on commercial finance transactions and real estate matters. Kean can be reached at [email protected].

Tommy Gossett is a member with Bass, Berry & Sims PLC. He counsels public companies, private companies, private equity firms, individuals, real estate joint ventures and various other clients across the country on commercial real estate transactions and associated debt financings. Tommy can be reached at [email protected].