Commercial leases tend to be very long, and they are complicated for tenants who don’t regularly sign new leases. They are full of legalese. And, because it is usually the landlord who drafts the lease, the initial contract proposal is biased in favor of the landlord and the landlord’s wallet. Understanding the process of lease negotiations and the economic terms of a commercial lease are important because lease contracts tend to tie up tenants for several years and can represent one of a business’ biggest expenses outside of salaries.
Therefore, it is critical that businesses seek to avoid the following mistakes:
Not Understanding the Lease Contract. Reading and understanding lease terms are not for novices. Lawyers review leases with an eye toward what happens under the lease if things go wrong.
Not Understanding the Leasing Process. Just about everything in a lease contract is negotiable. The lease draft that the landlord sends to the tenant for review is the landlord’s initial negotiating position and favors the landlord. The landlord is not surprised when a would-be tenant asks for changes, and changes typically should be requested.
Paying Too Much Rent. Commercial leases typically have a base rent and then pile on additional costs for property taxes, property insurance, maintenance of tenant’s premises and maintenance of common areas. Landlords may initially pay the expenses of operating the building, but then pass most of these expenses onto the tenants. Tenants should ask for information on what the operating costs were for the two or three preceding years. Tenants need to understand exactly what they are expected to pay and not just focus on the base rent.
Not Planning for Future Growth or Downsizing. It is almost certain that the tenant’s business in the future will differ from what it is today. Tenants should negotiate lease terms that are as flexible as possible in case the tenant later needs space to expand, wants to move to another part of the premises or needs to downsize.
Not Negotiating Assignment and Subletting Provisions. If the tenant plans to eventually sell his or her business or merge with another company, the ability to assign the tenant’s existing lease to the new owner is important – particularly if the rent being charged under the lease is at a below-market rate at the time of sale. Landlord may want to be able to determine in its “sole and absolute discretion” whether the tenant will be allowed to transfer the lease to the new owner, but the tenant will want lease language that such consent “cannot be unreasonably withheld”. To allay the landlord’s concerns, perhaps a standard can be drafted into the lease that would require, for example, that the new owner tenant must have a net worth equal to or greater than the value of the departing tenant’s net worth as of the date the original lease was signed.
Assuming that the Premises are in Better Shape than They Are. Tenants should ask the landlord to warrant that the premises meet current building, fire, safety and zoning codes, and comply with requirements of the Americans with Disabilities Act, as amended. Better yet, have the landlord guaranty the condition of the heating, ventilation, air conditioning, plumbing and electric systems for the length of the lease or at least for a given period of time.
Not Reviewing the Adequacy of the Property’s Capacity for Electrical, Heating, Ventilating, Air Conditioning and Telecommunication Needs. Particularly if the tenant has special needs, it is important that the tenant ensure the sufficiency of landlord’s systems.
Not Understanding Tenant Improvement Provisions. Who is paying for tenant improvements? The lease should provide that any structural situations that arise should be the responsibility of the landlord.
Not Understanding the Rules Regarding Signage. External signs are obviously important to businesses. Landlords typically have many rules about what can and can’t be done, and what permission the tenant needs from the landlord first. Signage should be discussed in the lease. The tenant may also want to be certain that tenant’s sign is located on any pylon sign available outside the building, and that the tenant’s business is listed in the company directory inside the building.
Not Avoiding – or at Least Limiting — Relocation Provisions. Relocation provisions allow a landlord to move a tenant to another part of the premises at the landlord’s option. Suddenly, the tenant may find his or her business in a low visibility, hard-to-reach spot in the back of the building. The best situation for the tenant is to exclude this provision from the lease. The fallback position is to build in a requirement that the tenant receive adequate notice of a move, that the landlord pay the expense of the move (including necessary changes in company letterhead, business cards and the like), and that no move can take place during the tenant’s busiest time of the year.
Not Carefully Reviewing the Provisions Under Which the Landlord Can Terminate the Lease. During times of rising rental rates, landlords have an incentive to cancel existing contracts so that they can bring in new tenants at higher rates. Therefore, if the lease contract allows the landlord to terminate the lease upon tenant’s breach of the lease, be certain that the breach must be of something significant. Otherwise, the landlord will be tempted to look for any little excuse to exercise landlord’s termination right.
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