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Can an incomplete and unsafe building be rented to a tenant on a commercial lease if the building never received a certificate of occupancy?

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    You might want to specify your jurisdiction, since this seems to depend on local laws (even at a municipal level). That will help those who are more knowledgeable about premises regulations give you a useful answer. – Iñaki Viggers Sep 28 '18 at 11:55
  • @IñakiViggers what do you mean when you say jurisdiction? Are you referring to actual location as in city and state? If so, then it's located in Albuquerque New Mexico, Bernalillo County – J.Monte Sep 28 '18 at 16:34
  • Yes, that is what I meant. If I were knowledgeable of that branch of the law I would be happy to post an answer. – Iñaki Viggers Sep 28 '18 at 18:51
  • @IñakiViggers with the knowledge you do have can you share that – J.Monte Sep 30 '18 at 0:28
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Short Answer

Can an incomplete and unsafe building be rented to a tenant on a commercial lease if the building never received a certificate of occupancy?

Yes. Unless your lease says otherwise. Your sole source of legal protections is your lease. Without knowing the detailed provisions of your lease, it is impossible to know.

Long Answer

The General Rule

In commercial leases, to a much greater degree than in residential leases, the principle of buyer beware (a.k.a. caveat emptor) applies. Commercial leases are typically negotiated between sophisticated parties, and if the tenant doesn't want to start paying rent until the certificate of occupancy is issued despite a lease that says otherwise, then that is tough luck and the tenant is bound to the terms of the lease.

Commercial leases are generally rented in "as is" condition, sometimes with and sometimes without a tenant finish and improvements allowance from the landlord.

Unless otherwise agreed, in a commercial lease, the burden is on the tenant to do "due diligence" including a physical inspection of the property by a professional inspector and independent review of the zoning status of the property to confirm that the tenant's business is allowed to operate at that location, much as a buyer of real estate would. If the tenant identifies an objection during the due diligence period set forth in the lease or contract to enter into a lease with the tenant, then the tenant can choose to get out of the lease obligation. But, there is only a due diligence condition if the tenant bargains for it.

The lease allocates responsibility to maintain the building in good repair and may allocated this responsibility to the landlord or the the tenant. In one of the most common types of commercial leases, called a triple net lease, virtually all maintenance obligations are the tenant's responsibility:

The triple net absolves the landlord of the most risk of any net lease. Even the costs of structural maintenance and repairs must be paid by the tenant in addition to rent, property taxes and insurance premiums.

Some firms, such as WeWork build their entire business model around entering into the "as is", triple net commercial leases with landlords that are the norm, and then subletting the properties to smaller businesses on a furnished, all maintenance and building services provided, gross lease basis.

Many states have statutory or common law implied warranties of habitability in the case of residential leases that require that a certificate of occupancy be in place and that other conditions be met by the landlord:

An implied warranty of habitability is a warranty implied by law in all residential leases [ed. in states that have such a warranty] that the premises are fit and habitable for human habitation and that the premises will remain fit and habitable throughout the duration of the lease.

New Mexico, in particular, has many statutory protections for residential tenants (statutes found here). But, almost none of these protections extend to commercial leases in New Mexico, because commercial leases are not leases of dwelling units, as defined in the relevant statutes.

Note that not every state even has an implied warranty of habitability for residential tenancies. Colorado did not have one until the early 2000s, and it had only very weak protections for tenants regarding habitability until the current decade. Before then, in Colorado, a defective or unsafe condition of the premises was not a defense to paying rent under either a commercial or a residential lease in the state.

In theory, a county or municipal government could impose a habitability requirement on commercial leases. But, this is very uncommon because, as the examples below illustrate, there are circumstances where it is sensible, even in a fair deal, to place the burden of making property subject to a commercial lease habitable.

Examples Of Situations Where This Would Not Be Required In A Fair Deal

Most commercial tenants insist upon terms that say that the obligation to pay rent starts when a certificate of occupancy is issued and the tenant is allowed to take possession of the premises. But, there would certainly be some times when a commercial tenant would pay rent on property that does not yet have a certificate of occupancy.

For example, in what is called a "pad rental", a business rents a basically vacant lot with only a concrete foundation and utility hookups and zoning approvals in place, and then the tenant builds a shop or office building on the pad. See, e.g., this commercial lease offer on Loopnet, a major internet site for listing property available to be leased by businesses:

ABOUT 4900-5100 N WICKHAM RD , MELBOURNE, FL 32940

Rental Rate $3.79 /SF/Yr

Listing ID: 15146692 Date Created: 2/11/2019 Last Updated: 3/19/2019

1 LOT AVAILABLE -

Rental Rate $3.79 /SF/Yr

Lease Term 20 Years

Service Type To Be Determined Date Available Now

Space Type Relet Lot Size 0.69 AC

DESCRIPTION

Pad ready site with all utilities, parking field, ingress/egress, retention, and site lighting IN.

Join Goodwill, Einstein's Bagel, Verizon, Twins Car Wash, Wickham Road Music, and Nail Salon in this 100% leased new retail center.

HIGHLIGHTS

Pad ready site.

In a commercial pad lease, typically, a tenant would start paying rent immediately and the length of time needed to get the tenant's shop built and approved for occupancy by local government officials is their problem.

But, even then, the terms would depend on what was negotiated between the landlord and the tenant which would depend to a great extent on how hot the local commercial real estate market was and on the other terms. A landlord will usually offer more favorable terms (such as a provision stating that rent is not owed until a certificate of occupancy is issued) in a weak rental market, but may also decide to have very tough lease terms with a somewhat lower monthly or annual rental rate. Also, as in the example above, conditioning rent payment on occupancy or availability for occupancy, is less common in a very long term lease such as the twenty year lease being offered for the pad rental above.

Something very similar is done in an existing building that requires tenant finish. At one extreme, the landlord will do tenant finish to the tenant's specifications at the landlord's expense and the tenant will only start to pay rent when the tenant takes occupancy. At the other extreme, the tenant will start paying rent immediately and do the tenant finish at the tenant's sole expense. In between, the tenant may do the tenant's own tenant finish pursuant to landlord approved plans, with the landlord contributing a tenant finish allowance that will often be less than the full anticipated cost of tenant finish work, and the rent will be reduced or waived for a set period of time which may be less than the actual or anticipated time that it takes to complete the tenant finish. This gives the tenant an incentive to not waste tenant finish dollars and to push the contractors doing the work to finish as soon as possible.

In yet another example, it wouldn't be terribly uncommon for a landlord to rent a commercial space that is already occupied by squatters, or holdover tenants, to a new tenant on a triple net basis. In a lease like that, the tenant is responsible for evicting the current occupants, rather than the landlord.

The promise that the leased property won't be occupied by someone else when the lease commences is called the "covenant of quiet enjoyment" (which is "a covenant that promises that the grantee or tenant of an estate in real property will be able to possess the premises in peace, without disturbance by hostile claimants."). This provision is often, but not always, included in a commercial lease, although often, courts will imply in law a covenant of quiet enjoyment into even a commercial lease, in the absence of express language in the lease stating that the covenant of quiet enjoyment is not intended to be included in the lease.

Conclusion

It all boils down to the terms of the lease and a reasonable construction of the relevant lease terms.

The fact that there is such a thin amount of legal protection from unfair lease terms is one of the reasons that most commercial tenants hire an attorney to help them negotiate the terms of a commercial lease, in addition to, or instead of, a commercial real estate broker.

Footnote: Why Is Commercial Lease Law So Harsh?

The duties of a commercial tenant are much closer to, and in some cases, almost identical to, those of an owner of real property and are not infrequently for long terms such as twenty, or even ninety-nine years.

Why would a landlord and tenant enter into a commercial lease in these situations, rather than having the prospective tenant simply by the property subject to a mortgage?

A lot of this is tax driven. Many businesses would purchase their buildings rather than lease them if taxes were not a consideration and the commercial lease is basically a tax favored alternative to a mortgage payment. When the commercial landlord is a mortgage lender in all but name, and a commercial tenant is a building owner in all but name, it makes sense to place the legal maintenance responsibilities of a building owner on the commercial tenant.

A business can deduct every dollar paid in rent from its revenues when determining its taxable income, even the portion economically attributable to land value and depreciation in the structure of the building, as it is paid.

But, if the business finances the purchase of the property with a mortgage, the business can deduct the interest paid, but not the principal payments. Depreciation of improvements on real estate (for most of recent U.S. tax history, over a straight line 39.5 year depreciation period) can counterbalance some of the principal payments, although often more slowly than the principal payments are actually made. Also, if depreciation deductions wipe out too much of the business's income, those depreciation deductions are disallowed or deferred.

Furthermore, the portion of the purchase price of property attributed to land value can't be depreciated at all. In many cases, this quirk of the tax law is addressed with a business structure in which: (1) a non-profit that doesn't care about the tax treatment of its income leases the land to (2) another business that builds a multi-tenant building on the property which it owns even though it doesn't own the land the building is built upon, subject to a mortgage with a long amortization period similar to the depreciation period for the building, which in turn is (3) leased to businesses that actually used the multi-tenant building by the building owner.

Second Footnote On Rent Control and Cooperative Apartments

Even further afield, in places like New York City that have rent control, residential tenants become more economically equivalent to apartment owners, and residential landlords become more economically equivalent to a combined mortgage lenders and home owner's association. There was a strong demand for rent control in New York City at the time that rent control was adopted, because economic necessity meant that mostly people needed to live in one unit of a multi-unit apartment building, but the legal concept of ownership of one unit within a larger apartment building that is now commonly called a "condominium" in the United States, did not exist. So, there were a lot of renters in New York City who very much wanted to be de facto apartment owners who didn't have the legal tools available at the time to achieve this goal.

The other work around which was used in the Northeast before the condominium was invented was a "cooperative apartment", in which all of the residents of a particular apartment building owned the entire building and were jointly and severally liable on the mortgage on the building, but then were allocated a unit within the building in exchange for economic obligations to the cooperative association that managed the building on a not for profit basis for its owners.

  • Your response is way to long sorry. The facts are I did not sign a triple net lease, the lease consisted of 5 pages with the last being an addendum the landlord wrote up which was mainly concerning the 2nd building and the tenant having to wait 2 month to acquire so landlord could finish work and get his belongings out. None of it happened. I'm going to upload a copy of my 5 page lease so you can see what it looked like. Just give me a few minutes. – J.Monte Apr 28 at 22:30
  • @J.Monte The reason for discussing the triple net lease example is merely to help explain the general rule (there are no statutory or common law protections other than what is found in the lease) in a context where that general rule, which is quite counterintuitive when taken out of any context or history basis, makes sense. – ohwilleke Apr 28 at 22:35
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    @J.Monte This site isn't a place for providing individualized legal advice. We may not be able to answer your question based on the terms of your lease as that may constitute specific legal advice. – ohwilleke Apr 28 at 22:36
  • s.amsu.ng/L4TmrfEc8bgN just asking for your opinion not legal advice – J.Monte Apr 28 at 23:13
  • s.amsu.ng/L4TmrfEc8bgN opinion not advice wanted – J.Monte Apr 28 at 23:15
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Can an incomplete and unsafe building be rented to a tenant on a commercial lease if the building never received a certificate of occupancy?

Although unable to formulate an accurate and precise answer, I can give you a starting point that might lead you to the information you need.

I did not find any New Mexico case law regarding certificate of occupancy that could be relevant to your inquiry. Searching with other terms might yield better results. However, one of the results from query http://www.leagle.com/leaglesearch?exact=certificate+of+occupancy&crt=New+Mexico is this case, which in turn refers to the Minnesota authority Rosso v. Hallmark Homes of Minneapolis, 843 N.W.2d 798, 802 (2014). By interpreting Minnesota statutes, the court in Rosso concluded that the issuance of a certificate of occupancy

is not a necessary condition that has to occur before substantial completion of a home is achieved under Minn.Stat. § 541.051

It is unclear to me the chapter(s) and section(s) of NM legislation on which you would need to rely for your claims. What I need to emphasize, though, is that the lack of a certificate might not necessarily be decisive in NM either. In that case, you would need to resort to other aspects for highlighting the risks inherent to renting/leasing an unsafe building for commercial use.

You might want to take a look at the query http://www.leagle.com/leaglesearch?all=certificate+occupancy&exact=premises+liability (giving 262 results as of today, though none from NM) to see whether any of those judicial reviews shed(s) any light on your inquiry. This does not mean that you have to thoroughly read each one of the 262 cases. Just open a result and search for some keyword(s) such as "occupancy" or "premises"; if all occurrences of the keyword are cursory references or pertain to jurisdictional issues and/or the statute of limitations/repose, skip over to the next result (over time one develops "expertise" in ruling out cases that seem irrelevant to the inquiry in question, thereby rendering one's legal research skills more efficient).

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    Whether the lease includes a warranty concerning the conditions of the premises is probably important. In many jurisdictions, a residential lease includes an implied warranty of habitability that cannot be disclaimed. I suppose commercial leases generally have nothing similar, but it's certainly worth looking into the question. – phoog Sep 30 '18 at 15:55

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