Originally Posted 12/5/06
As you probably know from previous posts, we have recently moved and consequently negotiated and signed a new lease. It was one of those times where I get to sit on the other side of things and view things from a view that my clients usually get. It dawned on me that I should write a blog article about negotiating commercial real estate leases and some broad major things to pay attention to.
At the outset, I definately recommend having a lease reviewed by an attorney. Quite simply attorney’s who have reviewed leases before are in a lot better position to identify items that are not quite standard and can spot potential pitfalls that may cause issues down the line.
With that being said, let’s dive into the first 5 major issues you should be thinking about.
1) What Type of Lease is it?
First of all you need to determine what sort of lease and rental relationship you are dealing with. This will be a major factor in determining your rights and responsibilities as a tenant. The major types of leases are the following: Full Service Gross, Modified Gross, Net or Triple Net. While there really aren’t any strict guidelines as to determining what type of lease it is, there are some general. Basically a Full Service Gross price will include everything –ie landlord pays taxes, insurance, utilities and provides. Modified Gross will usually include most of the above, but may not include janitorial or the tenant will pay some portion of the utilities. Triple Net is the other end of the spectrum, in which the tenant pays their share of the landlord’s taxes, insurance, utilities, and maintenance on the building. Everything else being equal (location, quality of building, square footage etc.), for the same amount of base rent a Full Service Gross lease will be a better deal than a Triple net Lease.
2) Personal Guarantees.
This is often one of the biggest sticking points between tenant’s and landlords. From the tenant perspective I would suggest that you try to avoid a personal guarantee if at all possible. By personally guaranteeing an obligation of the company, you are basically doing an end around the liability shield that a Corporation, LLC, or LLLP create for the owners of the entity. If the landlord stands firm on their request, there are some strategies that can be employed to reduce the time the guarantee is in effect.
3) Insurance.
Insurance requirements are a big one that business owners often overlook. Attention needs to be paid to what types of insurance are required and the amounts of coverage. You don’t want to get in trouble by binding yourself the insurance that you don’t have or can’t afford. Not having the appropriate insurance coverage and supplying the landlord with the appropriate documentation could violate your lease and make you in breach. Landlords usually will negotiate on this point.
4) Landlords Right to Relocate Tenant.
These provisions show up from time to time in leases. Basically it allows the Landlord to relocate your business to a “comparable” location in the same building/complex. Several questions arise such as what is a comparable space? If the new space is larger does your rent increase (this could be a big deal if you could barely afford the place in the first instance)? If the space is smaller does your rent decrease? And what happens if the new space does not meet your needs? Careful consideration of these provisions may be crucial for your business (e.g. retail space) – especially if you have clients or the public regularly visiting your place of business.
5) Expense Stops
Expense stops are also common with Full Service Gross and Modified Gross leases. Basically, the concept is that tenants will be responsible for a pro rata share of any increases in the expenses to maintain the building and any common areas, and will be assessed the amounts as extra rent. Special attention should be paid to these sections, as they have the potential of increasing the amount you pay per month in the future.
Well that’s it for now, I will discuss the other 5 tips in a future post.
