Commercial lease terms are completely negotiable.
David James Robinson,
Attorney at Law
There is no rule requiring your business to agree to the terms offered by the commercial property owner. Commercial leases are generally form documents, meaning, the commercial property owner re-uses the same form for all potential tenants. Some of those terms may be appropriate for one tenant and unreasonable when applied to another tenant. The lease is the record of the agreement so verbal promises are worthless. Here are some issues that can arise:
1) Condition of premises
A lease term that reads “as is, where is” means that the landlord makes no warranties that the structure is suitable for you to conduct your business. As a commercial tenant, you want to make certain, at a minimum, the landlord promises that the premises are in good working order, built to code, ADA compliant, and that they have good title to the property. You will find this under a heading titled “Warranties” or “Landlord Warranties.” If the site needs improvements in order for the tenant to conduct their business, there are multiple vectors of negotiation, including, who pays, timeline for completion, insurance.
2) Lease renewal options
If you are a commercial landlord you will want a “use it or lose it” clause. A commercial tenant will want to negotiate flexible renewal options and a predictable rate of rent increase during the term of the lease and upon exercising a renewal option. If these aren’t part of your lease you are inviting conflict. Imagine, if you’re a business owner, having to change all of your business contact information because you are forced to relocate because of a rent increase.
3) Rent
A. Base rent vs. percentage rent based on gross sales. In commercial retail a common rental term is for a part of rent to be based on gross sales. The key here for both parties is to define “gross sales.” The commercial landlord will want a clause that allows them to audit the tenant’s books and access to record-keeping. If you are negotiating base rent, negotiating points include whether it is a fixed increase or based on fair market increases.
B. Default. Does the lease address what happens if one of the parties fails to uphold their end of the bargain? On the tenant’s side, that would be failure to pay rent. On the landlord’s side that could be losing title to the real property, damage to the structure, failure to respect the “quiet enjoyment” of the tenant.
4) Common Area Maintenance (aka “rent in disguise”)
Common area maintenance (CAM) clauses include garbage removal, snow/ice removal, cleaning. They can also include the administrative costs associated with these services. They may also include (or fail to mention building security). Tenants can pay for these based on the amount of square feet they occupy or some other agreement. The broader the definition of “common area maintenance” (or no definition at all) means that the landlord makes the decisions about what is done and the tenant(s) pay the bill. Defining what is included and what is excluded from CAM is critical.
5) Real estate taxes
Does your commercial lease address this issue and if so, what does it say? Tenants can be charged with paying real estate taxes.
6) Assignment and subleases
Landlords will want to control who occupies the property. Tenants will want flexibility to find a new occupant for the premises in the event of a downturn in business. An assignment is a transfer of the tenant’s entire interest in the lease to the assignee and the assignee will deal directly with the landlord. The original tenant remains liable under all of the lease terms unless a document called a “release” is executed. In a sublease, the original tenant retains its interest in the lease and transfer to the subtenant only the right to occupy the premises. Both of these options must be negotiated in the original lease or the tenant will not have any options.
7) Repairs and maintenance
A common form term requires the tenant be responsible for repair and maintenance of “building systems” which will include HVAC repair and replacement, plumbing and electrical. Common form terms also place responsibility for repairs to the roof, building structure and foundation either on the tenant or with the landlord. As a tenant, pay close attention to the duration of the lease and whether this is something that the business wants or can afford. Under this section of the lease there should be a clauses addressing emergency repairs, which party’s insurance is liable, janitorial services, and compliance with all applicable laws.
The takeaway here is that the lease is the sole evidence of the landlord and tenant agreement. Taking the time to read it thoroughly and understand the terms is critical because this will be the ‘roadmap’ to solve disagreements during the term of the lease.
~David Robinson