Out-of-towners preparing or negotiating or entering into a lease agreement for commercial real property in Pennsylvania, in addition to engaging local counsel, should consider a few provisions with respect to their lease agreements as early as possible, even at the time of the signing of a letter of intent:
1. Confession of Judgment.
In Pennsylvania there is an accelerated process for obtaining a judgment against a tenant following a tenant default called confession of judgment. There are two types of confession of judgment in Pennsylvania: one for money damages and one for possession of the demised premises. Briefly, when a tenant agrees to a confession of judgment provision in a lease agreement, it generally means that when a certain event occurs (typically a monetary default with respect to confession of judgment for money damages and a refusal by the tenant to surrender the demised premises when it is legally obligated to, with respect to confession of judgment for possession), the landlord has the power to obtain a judgment against tenant for either money damages or possession of the demised premises based on this provision in the lease agreement. The landlord is not required to notify the tenant, and the tenant does not have a right to dispute the entry of the judgment, except in limited circumstances. Accordingly, many tenants, especially those not familiar with Pennsylvania law, are understandably reluctant to agree to any confession of judgment provision because it represents an extraordinary remedy for the landlord. Often in Pennsylvania commercial lease agreements a landlord will agree to delete confession of judgment for money damages but will insist on keeping confession of judgment for possession in the lease agreement. In this event, the tenant should negotiate an extra written notice and cure period before the landlord can avail itself of this specific remedy.
1.Landlord Duty to Mitigate.
A tenant will want to include a provision in its lease requiring that the landlord use commercially reasonable efforts to mitigate its damages in the event of a default. Under Pennsylvania law, there is no duty for a landlord in a commercial lease to mitigate its damages unless otherwise provided in the lease. A tenant will want to be sure its lease requires the landlord to make commercially reasonable efforts to relet the demised premises following a tenant default.
1. Interest on Security Deposit.
Tenants should be aware that unless otherwise provided in their lease, commercial landlords will not typically return interest earned on security deposits to tenants following the termination of a lease and there is no such requirement under Pennsylvania law. A tenant with a significant security deposit may want to include a provision in its lease stating that the landlord will maintain the security deposit in a separate interest-bearing account and that all interest earned on the security deposit will be returned to the tenant following the expiration of the lease; however, as there is no such requirement under applicable law and there is no requirement that the deposit be maintained in a separate account, it is unlikely that the landlord will agree to such a provision. A letter of credit may be a more attractive alternative in this case.
1. Pennsylvania Landlord Tenant Act.
The Landlord and Tenant Act of Pennsylvania (68 P.S. §250.101 – 250.602) provides tenants and landlords with certain statutory rights; however, many of these rights may be waived or altered by the terms of the lease. For example, under the Landlord and Tenant Act, tenants are entitled to up to 30 days notice to quit following a breach before the landlord may take steps to repossess the demised premises, but the Landlord and Tenant Act allows for parties to agree to a shorter notice period or for a tenant to waive its right to notice entirely. A landlord should include a provision in its leases stating that the tenant "waives the right to any notices to quit as may be specified in the Landlord and Tenant Act of Pennsylvania of 1951, as amended from time to time."
1 .Form of Memorandum of Lease.
There are many reasons to record a memorandum of lease. For example, if a tenant has an expansion option or a right or option to purchase, the tenant should consider recording a memorandum of lease. This brief document provides record notice of a tenant’s leasehold rights as well as any option or right in the chain of title for the subject property. A tenant will want to obtain the landlord’s permission in the lease agreement to record a memorandum of lease, which is typically subject to the landlord’s reasonable approval. In such event, a tenant should be prepared to agree to file a termination of such memorandum at the expiration or earlier termination of the lease. In Pennsylvania, the form of a memorandum of lease is governed by 21 P.S. § 405.
1. Beware of Local Taxes.
In certain places, local governmental authorities may impose a tax on rents. For example, landlords and tenants of commercial property located in Philadelphia should be aware of the Philadelphia use and occupancy tax (Phila. Code §19-1806). While the tenant is the required taxpayer under the use and occupancy tax ordinance, landlords are required to attempt to collect use and occupancy tax from their tenants. A landlord’s duties under the ordinance include: (1) notifying tenants of the amount of the tax and its due date, (2) making a written demand for the payment of such tax, and (3) completing the tax return forms and remitting the total tax collected from tenants on or before the due date. A landlord is not liable for any use and occupancy tax not paid by their tenants, provided that the landlord complies with its duties under the ordinance and files Form U-03 concurrently with the tax return on or before the due date. Philadelphia landlords will want to familiarize themselves with this ordinance and be sure to comply with their obligations under the ordinance, in order to avoid becoming liable for their tenants’ failure to pay the tax.