Pre-Lease Inspection Rights

A prospective tenant that is negotiating to lease an entire building or a large space may want to inspect the condition of the space or the underlying property before signing the lease. For example, a prospective tenant may want to do environmental testing or have an engineer or contractor check the condition of the premises.

Simply giving a prospective tenant the right to enter your building to inspect the space or the underlying property before you have signed a lease may expose you to liability. If the prospective tenant inadvertently damages your building or disturbs your current tenants, you may have little recourse.

To protect yourself, have the prospective tenant sign an agreement which addresses the respective parties’ obligations and limits the risks from its inspection.


ACCESS AND INDEMNITY AGREEMENT

You and the prospective tenant can sign an agreement called an “Access and Indemnity Agreement.” This agreement would address what inspections the prospective tenant can make in the space or on the property before the lease is signed. Also, it will provide appropriate protections for you as Landlord/Owner.

The Access and Indemnity Agreement should be prepared as a license agreement. The parties to the agreement should be called “licensor” and “licensee,” not landlord and tenant. By creating a license agreement, you retain the right to terminate the agreement and quickly bar the prospective tenant from entering the space if the lease negotiations fail. Otherwise, the prospective tenant might argue that it has a leasehold interest in the space — and you’ll have to treat it as a tenant and possibly go through a lengthy and costly eviction process. Make sure the following language appears in the agreement:

The foregoing rights in favor of Licensee are in the nature of a license and shall not create any leasehold or other estate or possessory rights in Licensee, and if Licensee defaults hereunder or this Agreement is terminated, Licensee shall immediately vacate the Premises, and any occupancy or activity by Licensee upon the Premises thereafter shall be considered a trespass.

The agreement should address certain limits and protections when allowing the prospective tenant access to the space or property. The following is a checklist you should consider including.


1. LIMITED PERIOD OF ACCESS

Lease negotiations may be lengthy. But that should not mean that the prospective tenant should get an infinite amount of time to perform an inspection. If you don’t keep control over when and how long the inspection can take place, there is a greater chance that problems will arise.

Set an inspection period that runs from the date you sign the agreement until a set date. Alternatively, the agreement can provide that the tenant has until the earlier of a set date or the date on which you terminate the inspection — which you can terminate at any time. Although the prospective tenant may disagree with this termination right, it is reasonable, given that there is no binding lease at this point.

Suggested language:

During the period (set period of time being referred to herein as the “Inspection Period”) from the date of this Agreement until the earlier of: (i) the date upon which Licensor gives written notice to Licensee that Licensor has terminated the inspection period, which Licensor may do at any time and for any reason or no reason in its sole discretion or (ii) [insert date].
If this is not acceptable to the tenant, you may suggest tying the termination to the date upon which the lease negotiations cease.


2. SPECIFIED TYPE OF INSPECTION

Keep control over the prospective tenant’s activity in the space or on the property by specifying exactly what inspection it may do. For example, if the prospective tenant wants to perform an environmental assessment of the space, spell out what tests this will involve. To allow some flexibility, you can also give the prospective tenant the right to perform other non-invasion tests that aren’t listed in the agreement, but only if you pre-approve them in writing.


Suggested language:
... Licensee shall have the right, at its sole cost and expense, to enter the Premises for the sole purpose of [detailed description of inspection, e.g., making topographical surveys and environmental reports (limited to a Phase I environmental audit performed in accordance with ASTM Standard E1527)] and such other non-invasive tests as are pre-approved in writing by Licensor (any and all of such activities by Licensee be referred to herein as “Due Diligence Activities”).

3. REQUIRE INSURANCE BEFORE INSPECTION

Require the prospective tenant to get insurance to cover any damage or injury that results from its pre-lease inspection. Make sure this insurance is in effect before the inspection begins. Also have the agreement: (i) set the minimum amount of insurance coverage the prospective tenant must get; (ii) require the prospective tenant to provide proof of insurance that is acceptable to landlord; and (iii) the landlord should be named an additional insured and must be notified before there is any change in or cancellation of the insurance.


4. INDEMNIFICATION

Make the prospective tenant indemnify you and your agents from any claims, fines, liens or damages that may arise directly or indirectly from its activities. Add an indemnity clause to the agreement.


5. COMPLIANCE WITH ALL LAW/BUILDING RULES

Make the prospective tenant comply with all federal, state, or local laws, rules, regulations and codes. Also require it to comply with all the building rules and regulations. For example, if the prospective tenant needs to use the freight elevator to bring equipment up to the space, it will have to schedule its time just like all other tenants.

Suggested language:
Licensee shall carry out or cause to be carried out the Due Diligence Activities in full compliance with all Building Rules and Regulations and all applicable government or quasi-governmental laws, rules, regulations, codes and standards.

6. REQUIRE PERMITS AND LICENSES

Make the prospective tenant get any required licenses and permits before starting the inspection.

Suggested language:
Prior to commencing any due diligence activities, Licensees shall obtain all necessary governmental and quasi-governmental licenses and permits, if any are required, in order to make lawful Licensee’s entry onto the premises and performance of the Due Diligence Activities.

7. REQUIRE ADVANCE NOTICE OF INSPECTION

Make the prospective tenant give you advance written notice of the date, time, and scope of any particular inspection. That gives you an opportunity to prepare the space, notify any tenants, and be present to monitor the activities.


Suggested language:
Licensee shall provide Licensor with at least [insert # e.g., twenty-four (24)] hours’ written notice before entering the Premises for the purpose of conducting any Due Diligence Activities.

8. DISRUPTION OF TENANTS

If there are current tenants, bar the prospective tenant from interfering with their businesses during its inspection.

Suggested language:
Licensee shall perform, or cause to be performed, the Due Diligence Activities in an orderly manner so as to avoid unreasonably interfering with or interrupting the normal business operations and quiet enjoyment of the other occupants of the Building.

9. MAINTAIN THE RIGHT TO ACCOMPANY THE TENANT

The Landlord should retain the right to accompany the prospective tenant during the inspection. This will let the Landlord monitor the inspection work so that it can reduce the odds of incurring liability.

Suggested language:
Licensor may require, at its sole option, Licensee to be accompanied by Licensor or its agents or employees while in the premises or elsewhere in the building during the inspection period.

10. PROHIBIT PROSPECTIVE TENANT FROM USING OTHER PARTS OF BUILDING

Since the prospective tenant isn’t a tenant yet, don’t let it use any of the building amenities that are available to your current tenants — such as tenant-only gym. If the prospective tenant needs access to some part of the common area — the loading dock — it should get Landlord’s prior written consent.

Suggested language:
The rights granted to Licensee by this Agreement shall be restricted solely to the [define area] and shall not extend to any other portion of the Building without Licensor’s prior written consent.

11. DISCLAIM ANY RESPONSIBILITY FOR PROSPECTIVE TENANTS SAFETY

The Landlord should not be responsible for the safety of the prospective tenant or its employees during the inspection. The prospective tenant should be entering the space at its sole risk and expressly disclaim any responsibility for the safety or property of the prospective tenant or its agents. The prospective tenant should also agree to release the Landlord and hold it and its agents harmless if any injury or damage occurs.

Suggested language:
Licensee’s Due Diligence Activities shall be at its sole risk, and neither Licensor nor its employees or agents shall be responsible for the safety of Licensee or its employees or agents, or for the condition or loss of any items of personal property brought onto the Premises by Licensee or its employees or agents. Licensee does hereby expressly release and agree to hold Licensor and its agents and employees harmless from and against any claim or damage to the person or property of Licensee or any of its employees or agents.

12. REQUIRE THAT THE PROSPECTIVE TENANT IS RESPONSIBLE FOR ANY DAMAGES

Have the prospective tenant agree to be responsible for any damage done while it’s in the space or on the property. This should include any damages or losses suffered by the Landlord, its other tenants, the prospective tenant, or any contractors or employees it brings in. It should also cover any damage that the prospective tenant causes elsewhere in the building or on the property — not just in the space being leased.

Suggested language:
Licensee assumes full responsibility for the Due Diligence Activities and for all damages or losses occurring in the premises or any other part of the building that are suffered by Licensee, Licensor, or either party’s agents, contractors, employees or invitees, which damages or losses arise from Licensee’s entry onto the Premises or performance of the Due Diligence Activities.

13. BAR COMPENSATION FOR MONEY SPENT BY PROSPECTIVE TENANT

Bar the prospective tenant from suing Landlord for the money it spends on the inspection. If a lease is not consummated, the prospective tenant may later argue that the results of the inspection benefitted the Landlord in some way, and therefore the Landlord must compensate the prospective tenant.

Suggested language:
Licensee shall have no right or claim against Licensor that Due Diligence Activities have benefitted the Premises and/or Licensor and Licensee is not and shall not be entitled to any payment or compensation of any nature or kind with respect to same.

14. PREVENT LIENS

Bar the prospective tenant from permitting any liens to be filed against the space or the building. Otherwise, the Landlord may be left with a lien on the building that it will have to remove.

Suggested language:
Licensee shall not permit any lien to be filed against any portion of the building in connection with the Due Diligence Activities.

15. REQUIRE THE PROSPECTIVE TENANT TO RETURN THE SPACE IN ORIGINAL CONDITION

Require that the prospective tenant return the space to the Landlord in its original condition. That means the prospective tenant is responsible for repairing any damage.

Suggested language:
Upon completion of the Due Diligence Activities or the earlier termination of the Inspection Period, Licensee shall promptly restore the Premises to its condition (subject to ordinary wear and tear) as it existed upon the date of this Agreement.

16. REQUIRE CONFIDENTIALITY

Require the prospective tenant to keep any information it discovers confidential. The Landlord doesn’t want prospective tenant telling other tenants or prospective tenants about any problems it discovers, without first having had a chance to address the problems.

Suggested language:
Licensee acknowledges the confidential nature of any information developed or obtained by Licensee with regard to the Premises. Licensee shall keep all information and data confidential and shall refrain from disclosing such information and data to any third party not retained or utilized by Licensee in connection with this Agreement or the proposed lease and shall obtain agreement of any such third party to maintain such confidentiality.

17. DENY OBLIGATION FOR FUTURE NEGOTIATIONS

Provide in the Agreement that the Landlord is not obligated to sign a lease with the prospective tenant. Otherwise, if the Landlord later tries to terminate lease negotiations, the prospective tenant might argue - and a court might agree - that the Landlord is estopped to do so. This is particularly likely since the prospective tenant has probably spent a significant amount of money on its inspections.

Suggested language:
The parties acknowledge and agree that Licensor has no obligation whatsoever to further discuss, negotiate or agree to a lease of the Premises with Licensee until, and unless, a formal lease is executed by each of the parties. In this regard, Licensee further acknowledges and agrees that this Agreement does not and shall not, in and of itself, obligate or imply that Licensor has any obligation whatsoever to negotiate or discuss (or continue to negotiate or discuss) or to enter into any such lease discussions or agreements with Licensee with respect to the Premises.

18. MAKE NO REPRESENTATIONS OR WARRANTIES

If the Landlord had made representations or promises to the prospective tenant about the condition of the space - for example that the space is free of asbestos - the prospective tenant may sue the Landlord, claiming that its investigation proved that the representation about the condition of the space was a misrepresentation.

Suggested language:
Licensee represents, warrants, and agrees that neither Licensor nor its employees, agents, or attorneys have made any oral or written representations, warranties or statements of any nature or kind whatsoever to Licensee, whether express or implied, and in particular that no representations or warranties have been made with regard to the physical condition or operation of the Premises; latent or patent defects; the zoning and other laws, regulations and rules applicable to the Premises or the compliance of the Premises therewith; the occupancy of the Premises or any part thereof; the quality or condition of the Premises; or any other matter or thing affecting or relating to the Premises.

19. OTHER CLAUSES

Make sure the Agreement also includes typical provisions such as: (i) the Agreement isn’t binding unless Landlord and the prospective tenant execute it; (ii) the person signing on behalf of the prospective tenant is authorized to sign the Agreement; (iii) the prospective tenant’s obligations, where appropriate (such as the indemnification obligation), will survive the termination or expiration of the Agreement; (iv) the Agreement can’t be modified unless the modification is in writing and signed by the Landlord and the prospective tenant; (v) the Agreement will be binding on both Landlord’s successors and the prospective tenant’s successors; (vi) include a notice provision in the Agreement; (vii) provide for the recovery of attorneys’ fees and costs to the prevailing party; (viii) the Agreement should provide for venue and applicable law for the interpretation and enforcement of the Agreement; and (ix) the Agreement could provide for alternative dispute resolution such as mediation and arbitration.





Provided as an educational service by John Raymond Dunham, III, Esq..

This publication is intended to serve you. If you would like certain topics covered, or have any questions or comments, you are invited to contact Mr. Dunham at: 941.951.1800, Ext. 250, Facsimile: 941.366.1603, E-Mail: jrd@jrdlaw.com, Web site: www.jrdlaw.com or write him at LUTZ, BOBO, TELFAIR, DUNHAM & GABEL, Two North Tamiami Trail, Sarasota, FL 34236.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered and report on issues and developments in the law. It is not intended as legal advice, and should not be relied upon without consulting an attorney.