ESSENTIAL RISK MANAGEMENT STRATEGIES IN COMMERCIAL LEASE AGREEMENTS
INTRODUCTION
When it comes to contracts and agreements, the saying holds true: “The devil is in the details.” There’s no such thing as a “bad contract”, you only get what you negotiate. That’s why it is absolutely critical to thoroughly review every clause in a commercial lease agreement before signing. Key contractual obligations, hidden costs, and operational limitations can often be buried in dense legal language. If overlooked, these details can lead to significant and unexpected expenses down the line.
For instance, unclear terms around maintenance responsibilities or termination conditions can become costly liabilities. To avoid these pitfalls, it is highly advisable to engage a legal practitioner. Whether you’re drafting a new lease or reviewing an existing one, professional legal insight ensures your interests are protected and that you are not unknowingly committing to unfavorable terms.
Remember, in commercial agreements, clarity is power, and preparation is protection. Commercial lease negotiations can be complex, and failure to pay close attention to the details often leads to costly mistakes. In this article, we will examine the top six pitfalls in commercial lease agreements, identify what to look out for, and explain how to effectively negotiate key clauses to prevent surprise costs and future conflicts. By addressing these issues early, both landlords and tenants can protect their interests and foster a transparent, cooperative relationship from the moment the lease agreement is signed.
WHAT IS A LEASE AGREEMENT
A lease agreement is a legally binding contract between a landlord (lessor) and a tenant (lessee). Under this agreement, the landlord grants the tenant the exclusive right to occupy and use a property for business or residential purposes for a specified period, in exchange for the payment of rent.
NIGERIA LEGAL FRAMEWORK ON COMMERCIAL LEASE AGREEMENTS
In the dynamic commercial landscape in Nigeria, leasing property is a fundamental aspect of doing business. Commercial lease agreements form the backbone of landlord-tenant relationships in offices, retail outlets, warehouses, and other business premises. While these agreements provide structure and security, they are not without risk. As a result, several legislations have been enacted to regulate and harmonize leasehold transactions in Nigeria. For example, the Lagos State Tenancy Law of 2011 was enacted to regulate and harmonize rental practices in Lagos. This legislation aims to regulate landlord-tenant relationships, ensuring fairness and clarity. However, both landlords and tenants must be aware of potential risks during negotiations and throughout the lease term.
Commercial Lease agreements are governed by the lease terms agreed on by the parties and the court is responsible for upholding the sanctity of the terms agreed in the event of any breach. Even after lease expiration, the lessor has security of tenure which means a statutory tenancy develops and the landlord has to provide official “notice to quit” and 7 days notice to recover premises before getting a court order to reclaim possession. It is also worthy to note that, any clause in the agreement permitting landlord’s recovery of premises via self-help without a court order is void ab initio.
TOP 6 PITFALLS IN COMMERCIAL LEASE NEGOTIATIONS
Below are six pitfalls for Landlords, tenants and legal advisors to identify and avoid in any commercial lease negotiation to enable parties make airtight decisions:
- Ambiguous Lease Terms
Vague language can lead to misunderstandings or disputes. These ambiguities can lead to confusion, disputes, or even legal challenges between landlords and tenants. This risk can be mitigated by clearly defining key terms like lease duration, renewal conditions, rent review, and maintenance responsibilities.
- Unfavorable Rent Review Clauses
Unfavorable rent review clauses are provisions in a lease agreement that automatically increase the tenant’s rent over time, often in ways that can become costly or burdensome. These clauses can significantly affect a tenant’s long-term occupancy costs, and if not carefully negotiated, they can lead to financial strain or early lease termination.
- Inadequate Repair and Maintenance Clauses
One of the most overlooked but critical components of a commercial lease is the repair and maintenance clause. When these responsibilities are not clearly defined, tenants may find themselves unexpectedly liable for costly repairs, especially for structural elements that are typically the landlord’s responsibility. Before finalizing any lease agreement, it’s essential to carefully review how repair and maintenance duties are allocated. If the lease agreement fails to outline this clearly, parties may be left covering expenses they never anticipated.Therefore, parties in the transaction must pay close attention to broad or vague language.
- Uncapped Rent Reviews
Never leave the rent review clause in the lease agreement to vague formulas or at the discretion of the other party. This is because in times of inflation as we are currently experiencing, landlords can unilaterally increase rent without tenants’ input or consideration. Therefore, negotiate a clear formula for rent reviews as well as the method of inviting reviews.
- Restrictive Assignment & Subletting Provisions
Ensure that your commercial lease agreement does not afford the landlord unchecked power to prohibit subletting. While the landlord can have the right to do so, it must not be unreasonably withheld.
- Weak Dispute Resolution Clauses
Ensure to add a dispute resolution clause for alternative dispute resolution and not just the default court litigation in the event of any breach or dispute concerning the lease agreement. This is important to consider as litigation can cost a lot and span for years unlike some forms of alternative dispute resolution.
CONCLUSION
Commercial leases agreements are complex legal documents that carry significant risks if not carefully reviewed and negotiated. As highlighted throughout this article, vague clauses, undefined responsibilities, and unfavorable financial terms can quickly turn a lease into a liability rather than an asset. To mitigate these risks, both landlords and tenants must approach lease negotiations with a critical eye, armed with proactive legal guidance. Clarity, transparency, and thorough due diligence are key to structuring agreements that not only protect both parties but also support long-term business viability. Ultimately, a well-drafted lease should serve as a foundation for solid lease term, and not a legal minefield waiting to be triggered.
Need help navigating lease agreements or bespoke property law support? Our real estate team at Adekunle Asaolu & Co. Is ready to guide you.
Email: adekunlejohnlaw@gmail.com
Authored by :
- Adekunle John Asaolu
- Moyosore Fajana – Partner Associate