During my almost 20 years of practice, I have seen too many occasions where a client has a commercial lease dispute that could have easily been avoided if certain provisions would have been negotiated at the outset. It is true virtually every commercial lease negotiation involves a landlord-driven form of lease. However, leases are negotiable and it is important for tenants to carefully review commercial leases and all related exhibits with a qualified legal and other professional team to ensure tenant’s interests, and those of any guarantors, are adequately protected. Here is a list of just 10 illustrative terms for a tenant to consider:
10. Non Disturbance by a Purchaser or a Lender – Most landlords will require a tenant to subordinate the lease to rights of a purchaser of the center or an entity that makes a loan secured by the center. While these provisions are customary protections for a landlord to ensure its ability to leverage or sell its asset, it is important the tenant negotiate to ensure any such purchaser or lender will honor the terms and conditions of the lease so tenant will not lose any rights upon a future sale or financing.
9. Franchisees – If the tenant is a franchisee, it is imperative that the franchisor (and its counsel) be part of the team reviewing the lease and providing additional terms to protect the franchisor’s goodwill, intellectual properties and business reputation. A tenant should provide its attorney with the applicable franchise agreements to ensure the tenant is complying with the franchisor’s requirements.
8. Signage – Signage can be expensive. Most landlords will pre-approve signage so there is no question as to the location, look and compliance of proposed signage. This gives a tenant certainty prior to signing the lease and spending money. Also, add provisions ensuring landlord can never block the view of such signage and a reasonable process for future required signage by the landlord, franchisor or both.
7. Profitability – Consider the total rent, CAM (common area maintenance) charges, taxes, utilities and other fees charged to the tenant and how this will affect the bottom line. Several years ago we were negotiating a lease in north Phoenix at what was being touted as the hot new center in town (with extremely high rents to match the reputation). Our client wanted to open a restaurant as an initial tenant and be part of the extensive pre-opening marketing and promotion. When we crunched numbers with our client, it quickly became apparent it would have had to sell more than double their anticipated daily sales just to cover the basic rent and before other expenses. Fortunately, we discovered this early on and a potentially terrible situation was avoided.
6. Allowed or Permitted Uses/Exclusive Uses – As a tenant, you want over-inclusive language giving flexibility to what kind of operation you can run at the leased premises. This will help with future business transitions and meeting market demands and set up tenant to maximize income by offering what the public is demanding. As important a consideration for many tenants is not having competitive uses in the same center that will reduce customers, income, etc. If competition is a concern, a tenant must argue for a restriction on leasing to competitors. Be cautious of landlords excluding prior tenants or their successors from exclusivity restrictions as those prior tenants might change their use or assign their lease to a competitive user.
5. Early Termination/Co-Tenancy – Most landlords are reluctant to grant early termination rights to a tenant. Landlords want the certainty of tenant mix and income (and their lenders often prohibit termination rights). However, some landlords will negotiate an early termination if the center does not meet certain co-tenancy requirements. For example, a landlord may be receptive to reducing rent if the landlord is unable to keep an anchor tenant or if the center is less occupied than anticipated.
4. Loss of Services – Closing a small business for any extended period of time may be catastrophic to a tenant. Consider negotiating very short time frames for a landlord to repair or restore the loss prior to the tenant having the ability to step in and self-help with a deduction from rent for its costs. Also, if the loss involves a potential negative impact on the health, safety or welfare of tenant, its employees or customers, the time frame to repair or restore should not exceed a few days. For example, if a landlord’s contractor cuts power to the air conditioning in the middle of a 115 degree day in Phoenix, a tenant must have the right to step in and quickly repair the power if the landlord will not do so within 48 hours.
3. Relocation – Relocation can be expensive (even within the same center). There are hidden costs with changing addresses (think about everything that has your address on it and how that would have to change – letterhead, websites, business cards, advertisement and marketing materials). Down time during a move means lost revenue. Having a certain spot in a center near an anchor tenant or with better visibility may be crucial (e.g. a restaurant near a movie theater). Tenants should always try to eliminate forced relocation clauses and most landlords are receptive to deleting such provisions. Alternatively, tenants should negotiate for significant compensation to cover their downtime, moving expenses, advertising costs and all other expenses associated with relocation.
2. Assignments and Subleases – Too often a client asks us to help with the sale of its business through an asset or stock sale (or merger) and in such scenario the landlord has the right under the lease to disapprove of any lease assignment. It is imperative that, at a minimum, tenants negotiate the right to freely transfer the lease to a person or entity acquiring all, or substantially all, of the assets of the tenant and who will continue to operate the business at the center or to the franchisor or replacement transferee as applicable. For other assignments or subleases, it is important to negotiate reasonable limitations on landlord’s consent rights. Landlords also often require tenants to share excess rents and other consideration stemming from an assignment or sublease. This is negotiable and tenants should not agree to split anything other than increased rents after deduction for expenses. Last, consider a release of any personal guarantors for replacement guarantors with similar or greater net worth.
1. Guaranties – Depending upon market conditions, and despite what you might have heard, guaranties are negotiable and should be carefully scrutinized. Assuming a guaranty is required, try to limit in terms of years or have a “burn-off” – where the guaranty is perhaps limited to the amount of the tenant improvement costs paid by landlord and leasing commissions, which sum reduces each month during a certain time period and then automatically expires at the end of such time period.
This is not an all-inclusive list of issues. Every lease negotiation is unique. Tenants should use a team of professionals for its lease review (e.g. insurance agents to review insurance provisions and to ensure the correct coverage; a licensed commercial real estate agent familiar with the marketplace to negotiate the rental amounts, incentives, extension periods; and, an architect and contractor for any improvements to be constructed).
Of course, having a qualified attorney to review the lease, exhibits and other related contracts together with the zoning and other municipal requirements is imperative to ensure the tenant is protected as much as possible. If you have any commercial leasing needs please contact Matthew Levine at firstname.lastname@example.org.