The lease you can do: the importance of commercial rental contracts

We’ve all heard horror stories of housing rentals gone badly. But for owners of agricultural and commercial properties, the stakes are even higher

By Anita Tomins

With tenanted farms and businesses, a handshake isn’t enough.

We’ve all heard horror stories of housing rentals gone bad. But for owners of agricultural and commercial properties, which typically represent larger investments and longer commitments, the stakes are even higher. Since responsibility for the farmstead or building stays with landlords, it’s crucial that they understand all the implications of such arrangements and have measures in place to protect their interests.

Here’s where a written contract can save the day. JB Hahn, Manager of Risk Services at Economical Insurance, says the most important thing these clients can do is to develop a formal lease agreement. “This contract needs to clearly state who is responsible for maintenance of buildings, equipment, and machinery, among other things,” he says. Misunderstandings can lead to misery — two words nobody wants in their landlord vocabulary.”

Such paperwork would not only spell out the obvious — names of the parties, period of the lease, rental amount, and when payments will be made — but also delve into details like the right to periodically enter and inspect buildings. This important yet sometimes overlooked detail allows owners to ensure the premises are being well maintained and that smoke alarms and extinguishers are operational.

It’s good too to make it clear that lines of communication are expected to be kept open. For example, the contract should specify that the owner is to be notified about anything affecting their property, such as damage to buildings, leaks from fuel-supply tanks, and change of use for land or buildings.

Landlords should also obtain annual certificates of insurance from the lessee indicating amounts of their coverage and policy terms. This is especially valuable when it comes to things like crop insurance, the lack of which could mean the difference between making rent and bailing on it. Tenants should have their own coverage for personal property and contents.

How and what the lands and buildings can be used for is another element to address, as well as who is responsible for repairs to property and building services like electrical, heating, and plumbing. The right to sublet is an especially critical item. “Finding that the hair salon you rented to is now a massage parlour, or your family farm has turned into a grow-op, may not be a surprise you want to encounter,” Hahn notes. “These are the kinds of situations that can and do happen if people aren’t thorough enough in the ‘honeymoon’ stage.”

Finally, your clients should have legal counsel review the document before everyone signs on the dotted line. “Spending a little money on a lawyer in the beginning can prevent spending a lot more on them later if things go sour,” says Hahn. “In Risk Services we’re all about encouraging customers to hope for the best but prepare for the worst.’”


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