The landlord’s lease may include an innocuous-sounding clause entitled “Compliance with Laws.” Contrary to what you might think, this does not mean that you are simply being asked to be a law-abiding business-person. Hidden within that clause are potential headaches and expenses that may have nothing to do with your business ethics.
The Meaning of “Code Compliance”
Space that is recently constructed, brand new, or about to be completed is hopefully "up to code," and satisfies state and local requirements for commercial construction; complies with the federal Americans With Disabilities Act (ADA) standards for access to buildings by disabled persons; and is free of environmental hazards, such as lead paint dust, asbestos, and chemical contaminants.
Unfortunately, you shouldn’t assume that any property will comply with building codes, ADA access requirements, or environmental standards. No matter the age, prestige, or expense of your rented space, it may not be up to par. It may have insufficient sprinklers in the ceilings, bathrooms that aren’t wheelchair-accessible, or ancient, crumbling asbestos in ceiling tiles. Perhaps the building was never in compliance and no one’s noticed, or the laws have become stricter since the property was built and there’s no “grandfather” provision exempting existing structures.
The financial consequences of renting commercial space that doesn’t measure up to building codes could be significant. For that reason, a sophisticated and powerful landlord may attempt to shift the risk of future compliance problems to you, the tenant.
Negotiating a Good Compliance Clause
Here are the approaches that the landlord’s lease might take and what’s best (and worst) for you, the tenant.
No compliance clause
If the landlord’s lease does not even have a “compliance with laws” clause, you’re in pretty good shape. If any compliance orders, settlements, judgments, or cleanup costs come down the line and you and the landlord can’t resolve who should pay for them, the law (a judge or your arbitrator, if you use a dispute resolution mechanism) will allocate them in a generally fair way.
Most of the time, if the noncompliance concerns the structure as a whole or is a result of action (or inaction) by the owner, the landlord will pay. For example, removing building-wide asbestos is usually the landlord’s responsibility, as is the cost of replacing the locks with new, more secure hardware mandated by local codes. You will be responsible for noncompliance that results from your use of the property or your alterations or improvements—for example, if you open a restaurant, the health codes may require an exhaust fan—the duty to comply and the expense are yours.
Landlord-friendly compliance clause
Most leases prepared by landlord lawyers include a compliance clause. If you’re lucky, the clause will simply repeat the general rules explained under the “no compliance clause” discussion, above. Many times, however, you’ll see a variation on the general rules, with the landlord shifting some or all of what should rightly be the owner’s compliance responsibilities to you, the tenant.
The most one-sided compliance clause will make you responsible for “compliance with all laws,” period. Unbelievable as it may seem, a judge could interpret such a phrase as meaning that preexisting or building-wide compliance duties are now yours. If so, you might have to pay to replace a leaking roof, widen the lobby doorways, or remove building-wide deteriorating asbestos—even though these noncompliance problems have nothing to do with how you’ve used your rented space.
Sometimes a landlord-friendly clause will take a different approach—instead of making you responsible for “all compliance,” the clause may go into detail concerning your compliance duties, including many jobs that ordinarily would be considered the owner’s responsibilities. For example, you may be asked to make sure all sprinkler systems, smoke detector appliances, and fire escape equipment are in place and up to code.
Tenant-friendly compliance clause
If your landlord’s lease includes an onerous compliance clause—one that makes you responsible for all compliance, or includes a lengthy or potentially infinite list of duties—do your best to bargain for one that doesn’t make you responsible for preexisting noncompliance, and limits your compliance responsibilities to what you do in your rented space.
A tenant-friendly compliance clause should include the following:
- Require the landlord to promise, or “warrant,” that the building is in compliance as of the time you take possession. This will help limit your responsibility for any noncompliance that existed before you moved in.
- If you are moving into a space previously occupied by a business like yours, require the landlord to warrant that your own space is code-compliant for your intended business activities. This will insure that you won’t have to engage in expensive remedial compliance work as part of your renovations.
- If you do take on additional compliance responsibilities, insist that they be specified in the lease. Do not accept a lease clause that includes the open-ended description “including but not limited to,” which will allow the landlord to increase your responsibilities at some point.
This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman.