Proper and efficient logistics and warehousing have always been, and still are today, at the heart of any trade in goods and one of the indicators of a successful business. Any complications in these areas can have major implications for the liability and financial stability of businesses. In this article, we shall examine the basic and specific legal aspects of this sector, with a focus on lease agreements. Whether you are planning to lease or use warehouses, logistics centres, “fulfilment” centres or any other facilities of a similar nature, the following should definitely be considered.
Legal basis
At the outset, it is important to note that in this article we will only deal with the lease of premises for business purposes, i.e. we will deliberately leave out situations where the non-residential premises in question are leased for private purposes, although we do not exclude that many of the following will also apply to such cases. As already outlined in the introduction, the lease (or rental) of warehouses, premises in logistics centres or buildings with a similar purpose falls into the category of leases of premises used for business purposes and as such has its legal basis in Act No. 89/2012 Coll., the Civil Code (the “CC”). Section 2302 et seq. of the CC devotes a special subsection to it and, unless otherwise stated, the general provisions on leases under Section 2201 et seq. of the CC apply in the alternative.
The statutory regulation of the lease of business premises is not extensive. Landlords and tenants are allowed a relatively wide contractual freedom and the terms of the lease can be negotiated in almost any way. However, it is clear that the circumstances of entering into such a lease will vary from case to case. Each tenant and landlord enters into a transactional relationship with different needs, requirements, and different bargaining power in different circumstances, and therefore a one-size-fits-all solution cannot be applied to all such relationships. Leases for large-scale logistics and warehouse space will likely emphasize different circumstances than leases for the warehouse facilities of a start‑up e‑commerce store. This and much more needs to be considered when negotiating your contract.
Specifics of warehouse and logistics space lease agreements
Nature of the goods
The common feature of all logistics facilities is, first and foremost, the goods to be handled. It is clearly unnecessary to elaborate on the need to initially check whether the landlord even allows the handling of the goods in question in the premises, and not only with regard to safety regulations. Complications can easily be avoided by defining the goods in question in the lease itself, but from the tenant’s point of view, care must be taken to ensure that they are not defined too narrowly and limit the tenant’s future business.
An often overlooked aspect may be the frequency, size and, above all, the expected weight of the goods to be stored. Especially the last mentioned can significantly limit the tenant in the maximum and especially efficient use of space, since many warehouses and logistics centres often have a maximum floor load capacity per 1 m².
In logistics centres, where the turnover of goods is much higher than in stable warehouses, you as a tenant should also be interested in the maximum possible “transportability” of goods within the building, i.e. the capacity of freight elevators and loading ramps, as well as the quality, speed and capacity of other transport technologies and options offered by the centre. Especially in logistics, “time is money”.
It is in the interest of both parties that all such conditions are explicitly agreed in the lease agreement. The landlord avoids the risk of questioning the suitability, fitness and availability of the premises for the agreed purpose and thus the potential risk of termination of the lease agreement, while the tenant is provided with guaranteed limits for which the landlord is responsible.
Subject of lease
The issue of investment in the preparation of the space is to some extent identical, for example, with the lease of units within a shopping centre, where the tenant normally carries out their own works and adaptations, the so-called “fit out”, either at their own expense or often from the landlord’s contribution. In our case, it is not so much the visual aspect as the functional aspect, i.e. the installation of all necessary transport, storage, control and security technologies. It is therefore necessary to negotiate in the lease agreement the conditions for carrying out these works, from the allocation of the corresponding duties to the timing of such modifications and how they will affect the rent. It should be noted, however, that large logistics centres and, in particular, fulfilment centres have, as a rule, already installed all the necessary technology and spatial arrangements to fulfil their obligations, and any additional interventions or modifications are only permitted in exceptional circumstances.
It is also necessary to bear in mind how such modifications (i.e. technical improvements) will be dealt with at the end of the lease agreement, i.e. whether and who will retain such technical improvements or who will remove them, and who will ultimately settle them financially. When addressing this question, it is necessary to take into account, in particular, the expected tax aspects, i.e. to consider, for example, the depreciation of the technical improvement during the lease.
In the context of larger, and especially shared, logistics centres and warehouses, due consideration must also be given to the common areas and the rights and obligations divided between the individual tenants. It is always necessary to familiarise yourself with the internal operating rules and regulations. Larger centres and warehouses are a kind of living organism that changes according to the needs of others, especially new tenants. From the landlord’s point of view, it is then standard to include in the contract the right to dispose of the centre or warehouse, i.e. to change the layout or location of entrances, doors, corridors, lifts, staircases and other public parts of the building to ensure sufficient flexibility for the landlord and efficient use of the space in the future. From the tenant’s point of view, it is then necessary to ensure that such changes do not affect its premises and their usability, including the movement of goods within the premises in terms of capacity or speed.
At the same time, the tenant should consider whether the building and the subject of the lease meet the expected operational parameters necessary for running the tenant’s business. In other words, we consider it appropriate to include in the lease agreement, for example, provisions on the operating hours of the premises or the time when the leased premises will be freely accessible to the tenant, or to define time restrictions, if such exist. Such restrictions may arise, for example, from the need to coordinate the logistical operations of all tenants on the premises, the need to maintain or repair the premises, or any other circumstances.
Obligations of the Parties
The rights and obligations of the contracting parties under the contract depend primarily on the nature of the object and the services provided or guaranteed. In the case of shared centres, it is necessary for the landlord to guarantee the undisturbed operation and use of the subject of the lease, also for other users. If the centre contains any technologies used and promised in connection with the leased object, it is the landlord who should, as a rule, be responsible for their functionality and sufficiency, maintain them regularly and, if necessary, upgrade them. Within the lease agreement, it is also advisable to negotiate details for the provision of other services, such as maintenance of access roads, waste removal, cleaning of common areas, security, marketing use of the areas, etc.
An uncommon, but for the tenant quite essential arrangement is the landlord’s commitment to innovate and improve the building to a reasonable extent, so as to ensure the competitiveness and financial viability of such premises in the foreseeable future, taking into account the technological developments of recent years. This is particularly true for longer-term contracts. For tenants and users of fulfilment centres in particular, the meteoric rise of “artificial intelligence” is one aspect that should certainly be considered. But the same applies to any building in relation to its energy performance and future sustainability.
Liability for the condition of the goods and the risk of damage when storing and handling them must also be a major consideration. For standard warehouses, the situation is relatively simple, as the tenant is generally responsible for the stored goods, if the parties agree to take out appropriate insurance. In the case of fulfilment centres, the situation is different when all the goods are entrusted to an intermediary who takes over the goods and subsequently distributes them on behalf of the customer. Here, on the other hand, it is proposed that the intermediary be fully liable for the condition of the goods from the moment of receipt, i.e. in the event of any handling of the goods within the centre and during delivery. Somewhere in between stand the classic logistics centres and transhipment centres, depending on whether the handling of the goods during unloading, loading and transport within the centre is carried out by the tenant itself or whether the goods are also handled by the landlord.
To ensure that the above obligations are met, we recommend that you always negotiate not only appropriate termination grounds but also any contractual penalties. The risks involved must be considered when determining the amount of such penalties. For example, if the logistics centre is not functional and the corresponding goods cannot be distributed further, the seller may face penalties from its customers, the risk of spoilage in the case of consumer goods, etc.
Length of lease
The length of the lease is a very basic condition of any contract and, in conjunction with the agreed termination grounds (see below), can be the fine line between the certainty of a successful business and financial loss. Leaving aside key logistics facilities located at transport hubs close to the capital, where a shortage of potential tenants can hardly be expected, an inappropriately set up contract can become a major financial burden even for a well-run business.
A number of aspects enter into the negotiation of the length of the lease, ranging from the lucrativeness of the building, the rental price, the current market situation, the internal needs of each party, the agreed termination reasons, to the amount of initial investment and the time required to prepare the premises. The standard lease term for the objects in question is 3 – 5 years, often negotiated with the possibility of automatic prolongation or an option for extension, either without further consideration or provided that individual conditions are met. Contracts concluded for a period longer than 10 years or for an indefinite period then provide a fiction of security, but this is balanced by different legal grounds for termination. It is therefore advisable to opt for such longer contracts, particularly in the case of long‑standing and well‑established relationships.
Termination of lease
In business circles, it is a common practice to exclude, to the maximum extent permissible, all legal grounds for termination of the contract and, if necessary, to negotiate one’s own, so‑called contractual grounds. This is mainly due to the fact that the statutory grounds are very general and, above all, often undesirably transfer the business risks of one party to the other. However, if the lease agreement does not contain such exclusionary provisions, it is possible to apply the statutory provisions, even if they have not been specifically agreed.
The law differentiates the grounds for termination according to the type of lease, i.e. in this case only for a lease used for business purposes, but also according to the term of the contract, where different grounds apply in the case of a fixed-term lease and when an indefinite term is agreed. It is not the purpose of this article to discuss these grounds in detail, but it is worth noting that the applicable statutory grounds for termination relate, for example, to situations where there is a grave breach of contract, where there are obstacles to the lease relating to the premises or a loss of business licence. However, these are generally not entirely within the control of the party seeking to terminate the contract.
However, even if statutory grounds are excluded, the parties do not generally proceed to include extensive lists of new contractual grounds for termination, in particular to ensure the maximum possible degree of certainty on both sides. This is particularly true in relation to contracts of shorter term. However, it is certainly desirable to include termination grounds for breach of contractual obligations or violation of the law, in the event of bankruptcy and entry into insolvency proceedings or the commencement of execution on the property of one of the parties, etc. However, any other specific termination grounds may also be recommended. For example, tenants nowadays very often try to assert termination grounds dependent on their negative economic indicators, such as in our case a decrease in the turnover of goods, unusability of storage space, etc. The correct negotiation of contractual termination grounds or other options for terminating the contract is thus often even more important for each company than the agreed duration of the lease.
Conclusion
As described above, the conclusion of a lease agreement for logistics facilities and warehouses is a unique and relatively complex matter, the successful and effective resolution of which always requires an appropriate amount of commercial, technical and legal discretion.
Mgr. Ondřej Růžička, attorney – ruzicka@plegal.cz
Mgr. Kateřina Vyšínová, junior lawyer – vysinova@plegal.cz
27. 05. 2024