Key issues for tenants when reviewing a commercial lease
Many commercial tenants think of a landlord lease as a standard "form" and focus only on the business terms contained in the lease, such as the rent, square footage, term, renewals and improvement allowance.
What tenants don't realize is that many of the so-called "standard" lease provisions they don't review can affect their ability to operate and cost additional money if not appropriately negotiated on the front end.
What are the most important things for tenants to keep in mind?
Tenant improvements. In a "turn-key" build-out, the landlord covers the cost of the build-out as part of the agreed-upon rent. When tenants build out their own space, the landlord typically provides a set dollar amount for the tenant to use. Tenants should ensure their obligation to pay rent does not begin until the improvements are complete. They should specify by what date the improvements should be completed — and what remedies will be available to the tenant if the landlord fails to deliver the premises on time.
Operating expenses. In addition to base rent,most commercial tenants will be required to pay some percentage of the landlord's operating expenses for the property, such as maintenance, insurance or utilities. Tenants should verify the accuracy of the percentage for which they are responsible. This percentage should be based on the total number of rentable square feet in the building, rather than rented square feet. The tenant's share of operating expenses should not be affected by vacancies in the building, and capital improvements should always be excluded.
Remedies for landlord's failure to perform. Tenants should be certain they have appropriate remedies when the landlord fails to perform its obligations under the lease, such as repairing the air conditioning. Tenants should have the right to abate rent when services are interrupted for a short period and the right to terminate the lease if the condition continues for an extended period.
Insurance. Most landlord lease forms provide only that the tenant waives claims against the landlord for damages caused to the landlord's property. The landlord and tenant should agree to waive claims against each other for damage caused to the property of the other. A mutual release is reasonable because the tenant pays a portion of the landlord's insurance as an operating expense.
Tenants should be sure to include “mutual waivers of subrogation,” which precludes insurance companies from trying to recover after paying out a claim. They should also be sure any “indemnities” are reciprocal, which will require both the tenant and landlord to pay the other for losses incurred by a third party as a result of their actions.
Default. Tenants needs to be certain they will receive ample notice of defaults and ample opportunity to cure them, such as failure to pay rent or maintain insurance.
Assignment and subletting. The tenant should seek carve-outs from the typical landlord consent requirement for transfers to related third parties and transfers in the event of a stock sale or merger. Because a tenant may someday find itself in a situation where it has too much space, ensuring that subleasing a portion of the space will be permissible is important.
Compliance. Be certain the lease does not allocate all compliance obligations to the tenant, particularly compliance with Americans with Disabilities laws, which can be costly. It is reasonable to allocate responsibility for ADA compliance and local building codes within the leased premises to tenants, with responsibility for compliance within the common areas allocated to the landlord.
Relocation. Tenants who cannot eliminate this provision, which allows a landlord to move them, should try to limit the number of permissible relocations. Additionally, the landlord should be responsible for all costs associated with the relocation. Any future space should be similar in quality and size to the existing space.
Restoration. Tenants should confirm that the time permitted for the landlord to repair and restore the premises following a fire or other casualty is reasonable, and that if the premises are not restored by a certain date, they will have a right to terminate the lease.
There are numerous other provisions that could impact tenants’ ability to operate effectively in their space or cost money if not drafted appropriately. Tenants should consider having a professional review the draft lease on their behalf.
Kelly M. Clum-Matthysse is an attorney with Warner Norcross & Judd LLP who concentrates her practice in real estate law. She can be reached at firstname.lastname@example.org.