When leasing retail, warehouse, office or industrial space for a business, there are several key lease provisions that can have a significant impact on the tenant’s ability to make commercially-viable use of the space and its potential risk exposure. Entering into a commercial lease is something that should be done only after gaining a clear understanding of the material provisions and negotiating any modifications that are necessary to protect the tenant’s commercial and financial interests.
Despite the benefits of plain-English drafting, many form lease agreements still contain archaic “legalese” and require prospective tenants to unravel complex provisions that raise more questions than they answer. Prospective tenants must avoid defaulting to landlords’ “standard” language, and they must often look beyond the language contained in their commercial leases to ensure that critical issues have not been overlooked.
10 Key Issues for Prospective Tenants in Commercial Leases
With these considerations in mind, here are 10 common commercial lease provisions that will often require negotiation:
We’ll start with one of the most-obvious considerations: rent. There are a number of different ways to calculate rent in a commercial lease, and deciphering the method of calculation is often the first step toward understanding the tenant’s financial liability. Are utilities included? What about property taxes? Is the tenant’s rent obligation contingent upon its gross receipts (as is common in “percentage leases” for retail space)? These are just a few of the issues involved in deciding whether – and to what extent – negotiation will be required.
2. Common Area Maintenance (CAM) and Pass-Through Expenses
Along with rent, common area maintenance (CAM) charges and other pass-through expenses will make up a substantial portion of most commercial tenants’ monthly or annual financial obligations. These charges can include routine upkeep and repairs, as well as upgrades and other discretionary expenses. Prospective commercial tenants must carefully review their CAM charge and shared-expense obligations, and revisions will often be necessary to cap vague and potentially open-ended obligations.
3. Initial Term
While the initial term of a commercial lease may seem straightforward, there are actually a couple of different issues that prospective tenants will need to review. First and foremost, is the initial term what you asked for? When preparing lease forms, landlords will often seek to limit the length of their commitment to a particular tenant; or, conversely, to lock a desirable tenant into a long-term binding obligation.
Second, when does the initial term begin? If you are renting a white box for an extensive buildout, do your rent and expense obligations begin in full when you sign the lease? Or, will you receive an improvement allowance and a reasonable timeframe to complete your buildout prior to incurring rent obligations?
When entering into a commercial lease, prospective tenants must already be thinking about their options for when the initial term expires. While commercial leases will often include renewal “options,” in many cases these options are subject to numerous conditions that give the landlord substantial control over whether or not the tenant can renew. Prospective tenants should also consider their potential growth in deciding whether to negotiate for a longer initial term or a shorter initial term with more flexibility for renewal.
5. Use of the Premises
The “use” clause is another critical provision that requires careful consideration. While often overlooked, these provisions can create issues for tenants whose operations or objectives are not clearly defined, and overly-specific clauses can unduly restrict tenants’ use of the premises. For tenants with specific requirements, negotiating the use clause can take on additional importance as well.
6. Buildout of the Premises
The necessary buildout provisions in a commercial lease will depend upon whether the landlord or the tenant is responsible for performing the work. For tenant improvements, flexibility is key. For work to be performed by the landlord, the tenant will typically want to seek protections such as:
- A restricted buildout timeframe that does not allow for delaying the tenant’s possession of the premises;
- Labor and material pass-through warranties; and,
- Acceptance rights with remedies for deficient construction (as opposed to a provision for any completed work to be “deemed accepted”).
Exclusivity is often of particular importance for retail locations. While landlords will generally seek to reserve as much flexibility for leasing adjacent and nearby lots as possible, as a tenant, you have a legitimate interest in ensuring that a competing business will not move in next door.
8. Assignment and Subleasing
Similar to renewal, assignment and subleasing are issues that merit consideration during negotiations even though they may not come into play until well into the future, if ever at all. But, suppose, for example, that you sell your company. If that happens, you will likely need to have the right to assign your lease (otherwise, you or your buyer may be forced to terminate at significant expense). Or, suppose you enter into a joint venture, or you downsize and need to sublease a portion of the premises in order to avoid default. If situations like these materialize, you will be glad you addressed your assignment and subleasing rights before you signed.
9. Legal Compliance
A standard commercial lease will require the tenant to “comply with all laws” while making use of the premises. While it is generally reasonable for a tenant to commit to compliance so far as the ability to comply is within its control, there are a number of obligations (such as Americans with Disabilities Act (ADA) compliance) that may more-properly rest with the landlord.
Indemnification provisions in commercial leases tend to be overly one-sided as well. However, there are various obligations and liabilities that typically should be borne by the landlord. For example, while a typical indemnification clause might obligate the tenant to indemnify for “any and all liabilities arising out of the tenant’s use of the premises,” if a third-party claim arises out of an issue with the facility’s electrical, plumbing or HVAC, it may be the landlord that should hold financial responsibility.
Contact a Commercial Real Estate Attorney in Jacksonville, FL
Our commercial real estate attorneys provide lease review and negotiation services for prospective tenants in the greater Jacksonville, FL area. If you would like to discuss they key provisions of your commercial lease with an attorney, please call (904) 737-4600 or get in touch online today.