By Kyle Grant
If you’re venturing into the world of commercial real estate, whether as a tenant or a landlord, there’s a plethora of terms you’ll come across. Among these is the seemingly simple idea of the “Lease Commencement Date.” While the date the lease commences may at first appear to be obvious, problems often arise from poor contract drafting. Defining the lease commencement is a crucial part of the work attorneys perform in drafting the lease agreement, as it has direct implications on matters whose timing stems from the commencement of the lease.
What Is Commencement?
To properly understand when a lease term commences, it helps to keep in mind what a lease is at its essence: a grant of a right to possess real property for a specified period of time. Accordingly, in its simplest form, we can say that a lease commences on the date the tenant first obtains its right to exclusive possession of the property. In the absence of any different defined terms in a lease, courts will deem a lease to commence on the date that the parties intend for the tenant to begin its right to exclusive possession, regardless of the date that rent begins or the date that tenant may first enter to use the property in preparation for possession.
In cases where this right to possession is some date in the future, the lease commencement date may also be different from the lease’s “effective date,” which is the date that the lease becomes binding on both parties. Additionally, there can be multiple “commencement dates” dealing with various aspects of the lease, and it is best to assign defined terms to each.
Ambiguities in the Date
Ideally, a date certain will be provided as the lease commencement date. This date can then be used to set the timing of periodic rent increases, notice time periods to terminate the lease, time periods under which the parties may exercise rights such as options or rights of first refusal, and other conditions based on exact timing. Additionally, defining the lease date is important for how the parties report the lease on their financial and accounting records.
Tenant’s Right to Use before Commencement
Confusion also arises when a lease grants a tenant the right to early use of the premises, often for the purpose of making tenant improvements or for the move in of tenant’s furniture, equipment or inventory. Again, the right to use the premises for these purposes is distinct in concept from the right to possess. Although the tenant may certainly be physically on the premises and may even be starting certain business activities, the lease would not commence as a legal matter until the tenant has a right to exclusive possession.
The date that the tenant is obligated to begin paying rent has no legal bearing on when the tenant’s right to possession begins. In certain cases where a lease is not clear on the date of commencement, the rent commencement may provide insight into the parties’ intentions. But this does not provide the kind of clarity to a court that the parties generally hope for when they first draft the lease agreement. More recently, in the wake of Covid-19 and bargaining power shifting towards tenants in the commercial context, rent will often be abated for a number of months. Going back to first principles, this does not change the date that the landlord intends to grant the tenant exclusive possession.
Conditional Commencement and Commencement Certificate
Many leases have a commencement date that is dependent on the occurrence of certain conditions, such as the landlord completing construction of a building, the display of tenant’s signage, or other similar conditions. This is particularly the case with retail leases where tenants often perform their own tenant improvements. This often requires the postponement of the commencement of certain lease covenants, the payment of rent, or both. Accordingly, there may be several “commencement dates,” such as a lease commencement date, the rent commencement date, and the move-in date, all of which may be dependent on other conditions being met.
For example, when a tenant will be building tenant improvements, the tenant will want to push for the latest possible rent commencement date, such as after improvements are completed and a space is open for business. The landlord, meanwhile, will work to prevent delays in the lease commencement date that the tenant causes. The tension between these two interests requires careful negotiation between the attorneys for the landlord and tenant. The outcome often results in a provision setting the rent commencement date when tenant opens for business, but in no event later than a hard deadline after delivery of possession.
After conditions are met and commencement is triggered, part of the drafting work of the attorneys is to include a Lease Commencement Certificate Form that the parties agree to complete once all conditions have occurred.
A clearly defined lease commencement date is the cornerstone of a successful commercial real estate transaction, ensuring smooth operations, financial clarity, and the avoidance of potential disputes down the road; when in doubt, be sure to contact your attorney.
1 Commercial Real Estate Leasing § 5:2 (2d ed.), Stuart M. Saft