Guest Author: Salvatore Russo, JD, MBA
Commercial leases, like any other contract, are negotiated based of each party’s respective leverage. But even if you are a smaller or newly established tenant, there is still plenty of homework that needs to be done prior to executing the lease.
Outside the terms of the Lease
Who is the landlord?
Is the Landlord multi-billion net worth REIT or is it a small mom and pop establishment? Does the landlord have reputation for unscrupulous activity (i.e. exaggerating actual square footage, neglecting required repairs)? Do your research to see if the landlord has been or is currently involved in any pending litigation matters. What is the matter over? Is there a reoccurring theme to the litigation? Remember you will be dealing with the landlord over the course of several years or more so make sure it is a party you can trust.
Who are your neighbors?
Who are the neighbors and what are their respective business activities? How long have they been there? There are two major ways your neighbors can affect your tenancy. On the one hand you may want certain tenants to remain in shopping center as anchor tenants to help facilitate the success of your own business. If so, make sure a provision is included in the lease to identify this and allow you to get out of the lease should that anchor tenant vacate. On the flip side, some tenant activities and permitted uses could be detrimental to your business. If these tenants are in place for the immediate future, consider looking for a different location to set up shop. Also, if your negotiation position allows it, be sure to get that exclusivity clause to make sure no direct competitors become your unwanted neighbors.
The land beneath your feet
As healthcare and science continues to develop, more and more environmental hazards are being recognized in the soil and surrounding earth of commercial real estate space. What was the prior use of the parcel? Has there already been a prior environmental threat recognized? Should such an environmental issue become apparent during your lease term, it could easily the value of your leasehold. Even if there has been no concern in the past, make sure the landlord is willing to warrant that no knowledge of such a condition exists and hold you harmless should such a situation arise.
The condition of the building
If you are moving into an existing building, what kind of condition is it in? Inspect the building before devoting any more time to lease negotiation. Is the landlord aware of any adverse conditions? Has landlord’s insurance policy revealed any causes of concern? Just like the environmental review, it is of upmost important to avoid any issues from the onset and to prepare yourself for any that appear down the road.
Market conditions
Just because you’ve previously leased a facility down the road does not mean you can assume the rental rate will or should be the same in your new abode. Make sure you are up to date on market trends using the best possible comparables to find the rental rate per square foot dictated by the market.
Within the 4 corners of the lease
You’ve done your due diligence with respect to the location and rents, but now the real hurdle lies ahead. Understanding your lease thoroughly is absolutely essential. Negotiating certain points may be difficult depending on your position, but some points that are important to you may not even be in the Landlord’s radar. However, the following non-exhaustive list of clauses will almost always be of pivotal concern to any lease:
Alterations – (What kind of consent is required from landlord to alter the premises?)
Assignment and Subletting – (Can you assign or sublet? What conditions must be met in order to do so?)
Casualty and Condemnation – (Who is responsible for repairs and what termination rights exist?)
Default Clauses – (What triggers default? What cure periods are available? What remedies does each party have?
Holdover – (If you overstay your welcome, what’s it going to cost you?)
Insurance – (Whose name is the insurance in? Who’s paying the premiums? What kind of insurance and thresholds are required?)
Parking – (What type of parking are you granted and how many spaces? Are there points in place to address a neighboring tenant that infringes on parking that is necessary for your business?)
Permitted Use – (What business activity is permitted? Can you change the use?)
Real Estate Taxes, Operating Expenses, and CAM – (Who is responsible for paying each? What are the terms of reimbursement? Can you audit the landlord’s statements of costs?)
Relocation – (Can the landlord move you to another location?)
Renewal Options – (How many? How long? How much notice is required?)
Repair, Maintenance, and Surrender – (Who is responsible for what during the lease and at termination/expiration?)
ROFRs, ROFOs – (Will you need additional space? Are you making significant improvements or want to be in the space for a long time? If so you you’ll want to right to lease or purchase space)
Termination Options – (Can either party terminate? When? How much notice is required?)
When in doubt, seek the advice of professionals such as a real estate attorney or broker. It will be much cheaper to pay an advisory fee upfront than to find out you got less than you bargained for in your tenancy after its too late to get out of your lease!