Everyone who has rented a hotel room, an apartment or a
car has typically been presented with a preprinted agreement requiring
their signature. And most of us when presented with these long forms
have, after a quick perusal or deep breath, simply signed them.
Although there is some truth to the maxim that everything is
negotiable, we assume that these types of documents must be signed in
their original form or the business will not sell or lease its product
to us.
By contrast, one of the most expensive lease
transactions with the most complex documents is virtually always
negotiated and amended from its original form: your business' premises
lease. Whether for retail, industrial or office space, it can and
should he negotiated before you sign on the dotted line. Should you
fall victim to a landlord's declaration that it never changes its
pre-printed lease form, you run the risk of someday either finding out
that you were misled or wishing that you had walked away from the deal.
I have reviewed everything from 100-pages food court
mega-leases to three-page off-the-shelf generic forms, and every
transaction confirms that negotiation of certain items is essential to
address the needs and concerns of you, the tenant.
This article will not substitute for the counsel of
one's real estate broker and attorney, but is intended to provide a
brief overview of some issues which are common subjects of negotiation.
- Occupancy Date
Almost all leases will contain a lease term, and many
will specify an "occupancy date." Rent will have to be paid beginning
on that date, and this could pose a problem in certain situations. If
the premises are not ready on that date the tenant should not be
required to pay rent. If the tenant is responsible for the build-out of
the space, the landlord might balk at such a provision. If a tenant has
any doubt that it or its contractor will be ready on the occupancy
date, the lease should be changed. Also, free rent and other
concessions should be changed so as to begin on the actual "move-in"
date.
- Holdover Provisions
Most leases contain some sort of "holdover" provision,
which automatically increases the rent in the space after the lease
expires. The aim of such a paragraph is to encourage the tenant to
either renew or move out on time, and a holdover rate of 25 percent
over the old rate is more than enough to accomplish that purpose.
Double and triple rent is not uncommon, and should not be consented to.
- Default Clauses
The terms in your lease specifying what will cause a
default are crucial and must be clearly understood. In addition, a
tenant should be entitled to notice from the landlord of any defect
along with a reasonable time to cure or remedy the default or
violation. Certain types of defaults, whether or not monetary in
nature, may require longer cure periods. Examples of lease defaults
would be the late payment of rent, not opening for business during
regular mall hours, or failure to maintain liability insurance.
- Liability and Indemnity
Liability and indemnity provisions are often found in
leases, and should be reviewed by the tenant's attorney. Often these
clauses require the tenant to be legally and financially responsible
for almost anything that happens on or near the premises, and to
reimburse the landlord for any expenses it may incur due to any such
event. I have found these clauses to be generally one-sided and unfair,
and suggest that blanket liability clauses be negotiated out of the
lease in favor of a clause that places liability on a party for only
its own negligent acts or omissions.
- Expense Pass-Throughs
Shopping center and office lease are famous for their
pages of complex paragraphs which pass through to the tenant the
development's variety of operating expenses. Some of these complex
clauses only pass through the annual increases. These are legitimate
expenses for a tenant, provided the expenses are purely for running and
maintaining the building. Trash removal, utilities and routine
maintenance are good examples.
A tenant must be vigilant in its negotiation of a
lease, however, to weed out any "expense" items which either enhance
the value of the landlord's property, or which are more properly the
landlord's expenses of doing business. Such items include capital
improvements, new landscaping, advertising, overhead, legal fees
(except to reduce property taxes), client entertainment, leasing
commissions, fines and penalties, and costs associated with expanding
the development. You can expect some resistance in this area, but an
intelligent landlord will respect the integrity of your argument.
Furthermore, be careful to ensure that the formula for determining the
tenant's portion of the total expenses is based not on the amount of
the property actually leased out, but on the amount of the property
actually leased out, but on the total amount of leasable space in the
property. This ensures that you are not charged for a portion of the
unleased space.
- Subleasing
Subleasing or assignment will always be prohibited
without the landlord's approval. The lease should specifically state
that such approval will not be withheld by the landlord in an
unreasonable fashion. If the landlord has certain standards for the
subtenant to meet, these should be both reasonable and in writing.
- Tenant Improvements
Depending on your needs, "tenant improvements" or the
build-out of the space could be one of the most important actions of
the lease. If the Landlord is paying and the budget is limited, a
tenant might want to negotiate the right to select its own contractor
in order to keep control over costs. Whether there are monetary
allowances for specific items or just a general budget limit, the lease
should state that unused dollars should be paid to the tenant. An
alternative would be to apply the unused allowance to the tenant's rent.
- Percentage Rental
"Percentage Rental" is where a percentage of sales is
charged in addition to a base rental amount. This provisions is common
to shopping center leases. Because this is always negotiated, different
stores will, of course, be paying different rates. Before signing a
lease, a tenant is, therefore, well advised to speak with other tenants
about their arrangements. Once a specified level of sales is reached by
tenant, it will begin paying a percentage of its sales in addition to
the base rent. Accurate sales records must be kept in the event the
Landlord wants to verify sales figures, and penalties are sometimes
included if the tenant has under-reported sales. Never sign a lease
without a clear understanding of your percentage rent obligations.
- Guarantees
The subject of guarantees is one which can be the most
important provision in many leases. Personal guarantees are typically
required when the tenant is not a very large company. It is
understandable why a landlord would want a guarantee, since it is not
uncommon for a tenant to move out or go out of business before the
lease term ends. On the other hand, an individual could be financially
ruined if called upon to honor a long-term lease guarantee. Reasonable
concessions by both landlord and tenant can result in guarantees that
all can live with. Therefore, you should consider requesting that the
guarantee be limited in time (i.e., it will expire after a certain
number of months), limited to a specified dollar amount, or that it
contain a dollar obligation which decreases over time. One of these
options should serve to protect the landlord's true interests while not
scaring off the guarantors.
Several other provisions of your lease may require
negotiation. Perhaps your lease will fail to specify who has the
obligation to repair the premises or specific items. Maybe it will
restrict the tenant unfairly to a specific use of the property or a
specific type of business. Fixtures might automatically become the
landlord's property after the lease term, even if they are the tenant's
property and of substantial value to your business. Renewal might be
automatic, or it might penalize the tenant for failure to renew before
an unfairly long lead time. And perhaps the lease requires you to give
up the right to a jury trial in the event a dispute results in
litigation.
But, the options are numerous. If you are fortunate
enough to have a broker and attorney who give you advice, along with a
landlord who is reasonable and eager to lease its property, you will
find that a lease is, indeed, something that can be negotiated to your
satisfaction.
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