Companies should look for and consider the following issues when negotiating a commercial lease.
• Assignment and Subleasing. Assignment and sublease restrictions are commonly included in leases so the landlord can ensure that an assignee or sublessee, has the sufficient financial wherewithal and is otherwise a suitable tenant. The landlord, however, often has the right to reject an assignment or sublease in its sole and absolute discretion and may have the incentive to do so if market rental rates have substantially increased. Ensure the lease provides that the landlord should have the right to reject a proposed sublease or assignment only at its reasonable discretion.
• Operating Expense Calculation. In many leases, the landlord may charge tenants a pro-rata portion of the monthly operating expenses for the property, commonly known as CAM charges. Tenants should ensure that the calculation provisions are fair. Most importantly, the tenant’s share of expenses should be based on the percentage that the tenant’s rentable area bears to the total rentable area of the property, rather than the total rented area of the property, which can unfairly increase the tenant’s pro rata share if the property is not fully leased. In addition, certain landlord expenses should not be passed through to tenants and should be excluded from the calculation of operating expenses. Among them include leasing commissions, legal fees and other expenses incurred in connection with leasing spaces, fines or fees paid by the landlord for failure to comply with laws, reserves for repairs and maintenance, costs associated with hazardous waste removal, political contributions, excessively expensive common area art, and litigation expenses for lawsuits with tenants. Finally, include a right to audit the landlord’s books and records to verify the accuracy of the calculation and tenant’s allocation of operating expenses.
• Remedies for Landlord Defaults. The lease should include appropriate remedies if the landlord fails to perform its obligations, such as making certain repairs. Tenants should have the right to abate rent when the landlord causes utility service interruptions, the right to terminate the lease if the condition continues for an extended period, and the right to make repairs the landlord fails to timely make and to deduct the costs from the rent.
• Personal Guarantees. If required to execute a personal guaranty, try to negotiate a maximum limit on the amount recoverable, with such maximum decreasing on a quarterly or annual basis.
• Tenant Maintenance Obligations. Avoid unreasonable repair obligations, such as the obligation to make all electrical, plumbing, or HVAC repairs. This can be costly if, for example, an entire plumbing or electrical system must be replaced due to age or defects. If a tenant accepts such obligations, it should conduct a thorough inspection of the premises prior to accepting possession and should exclude catastrophic failures, such as a required replacement of the entire plumbing system due to age, defect, or prior misuse.
• Legal Compliance. The lease should obligate the landlord, not the tenant, for legal compliance, such as making upgrades required to comply with the Americans With Disabilities Act.
• Default and Cure Provisions. The tenant should have ample time to cure any defaults under the lease, including, payment defaults.
• Relocation Rights. If the landlord has the right to relocate you, ensure you have the right to accept or reject the proposed new location, and to obtain reimbursement for relocation expenses and business interruption, such as salaries and expenses incurred during any time you are unable to operate. In addition, the landlord should be required to, at its expense, provide the new space complete with comparable tenant improvements and fixtures.
• Approval Rights. In addition to subleasing and assignments, leases are often riddled with other matters that require the landlord’s consent or approval in its “sole and absolute discretion”. Wherever possible, try to limit the landlord’s approval rights to its “reasonable discretion”.
The information contained in this article is strictly for educational purposes and is not intended to be legal or tax advice or to be relied upon by anyone without doing their own research, and consulting with legal and tax advisors.