Similar to that unavoidable credit card slogan constantly reminding you that your wallet should contain that credit card, it is essential for you, as either a landlord or a tenant, to both understand all of the terms in your lease and to ensure that your lease properly documents the duties and obligations of each party.

Aside from dictating where, when and how to pay rent and each party’s maintenance obligations for the leased premises, a commercial lease should be drafted to incorporate all of the responsibilities and expectations both a landlord and tenant have with regard to the business the tenant is conducting, or intends to conduct, at the premises. For instance, in the recent Florida case of Genuinely Loving Childcare, LLC v. Bre Mariner Conway Crossings, LLC, Case No. 5D15-4168, 2017 WL 127645 (Fla. 5th DCA Jan. 13, 2017), Genuinely Loving Childcare, LLC, as tenant, intended to operate a childcare center in store space consisting of 2,800 square feet at a shopping center in Orlando and entered into a 5-year commercial lease with landlord, Bre Mariner Conway Crossings, LLC.

The lease stated that the tenant leased the premises “solely for the purpose of the operation of a child day care center” for children and limited the leased premises to indoor areas. However, the State of Florida requires a license if a child care center cares for more than five (5) registered children. A business applying for that licensure must prove that it has minimum outdoor play space for each child unless there is documentation from a local governing body that the area where the center is located has been declared an “urban area” in which case, indoor play space may be substituted for the required outdoor space. The lease also required the tenant to comply “with all applicable codes and licensing requirements.”

The tenant attempted to obtain the above-referenced urban area exemption from the Florida Department of Children and Families (“DCF”), but was denied a permanent license despite the fact that the Orange County government previously provided the tenant with documentation confirming that the premises were located in an urban geographic area. The tenant subsequently notified the landlord that it would be vacating the premises if it could not obtain a permanent license and thereafter abandoned the premises in year one of the lease. The landlord then sued for damages resulting from tenant’s breach of the lease and breach of two personal guaranty agreements guaranteeing the tenant’s full performance of the lease. The tenant asserted the affirmative defenses of impossibility of performance, impracticality, frustration of purpose, and commercial frustration, alleging that its performance under the lease became impossible when DCF denied its child care license due to the lack of outdoor play space at the premises.

The landlord argued that the tenant’s inability to secure a permanent license from DCF was a foreseeable risk at the execution of the lease and did not excuse its performance of the lease because the lease made clear that it was solely the tenant’s responsibility to obtain the license required by DCF to operate its business. Although the trial court agreed with the landlord and granted summary judgment, the tenant appealed.

The Fifth District Court of Appeals reversed the trial court’s ruling and held that the trial court must re-examine whether it was reasonably foreseeable for the tenant to be denied licensing approval to operate its day care center at the premises. The appellate court specifically noted that a genuine issue of material fact remained as to whether it was foreseeable at the time of execution of the lease by the parties that DCF would deny the tenant’s permanent license due to the fact that the lease did not allocate the risk of obtaining a permanent DCF license for operation of a day care facility at the premises. (emphasis added).

This decision reinforces the importance of drafting intentional and specific lease language to properly allocate the risk between a landlord and its tenant in each particular commercial tenancy. Had the lease expressly stated that the lease would be enforceable notwithstanding any failure on the part of the tenant to obtain the necessary licensure, the court almost undoubtedly would have reached a different result. Because the lease was silent on the topic, however, the landlord and tenant become embroiled in time consuming and expensive litigation while being forced to operate with continuing uncertainty about how the court would ultimately decide the case. Irrespective of the actual language in the lease, having this conversation on the front end would have presumably settled the landlord’s and tenant’s expectations in a way that would have avoided litigation about the topic.

Additionally, landlords and tenants should have an understanding of all terms and conditions contained in a lease, such as clauses regarding risk of loss or indemnification. Failing to understand, and properly negotiate and draft, these terms at the time of entering into the lease can lead to very unwelcome surprises in the event that a dispute arises. While “standard” contract provisions such as these are often given limited attention, they frequently impact the outcomes of disputes in material ways or may even serve to avoid the dispute altogether.

The real estate attorneys at Watson Sloane have many years of experience drafting and negotiating all types of commercial leases and have represented landlords and tenants in retail, industrial, warehouse and other commercial real estate matters. Please feel free to call us to discuss your needs if we can be of assistance.