Key Issues To Negotiate In Commercial Leases

By: Robert Bramlette, Income Member

Even though the Great Recession has ended, economists are forecasting the U.S economy will have tepid growth for 2016 and 2017. When an event in China or the Middle East can directly or indirectly impact local businesses, entrepreneurs must manage every expense meticulously.

One of the most significant company assets is the real estate it owns or controls. For companies that lease space, rent is usually a very substantial expense. Whether you are leasing retail space in a mall, strip center,  free standing location, office space, commercial or industrial space, credit-worthy tenants can negotiate favorable terms.

Businesses must be extremely careful with short and long term planning, since economists are debating if the Bull Market will continue. Fortunes can be lost and made in these types of economic climates. For shrewd managers, this may be an opportunity to acquire a prime location or additional space, relocate to a more favorable location or extend their lease under very favorable terms. The current economy may present a “once in a lifetime” opportunity for a company to improve or increase its real estate. Economic risks may be minimized by having flexibility to assign or sublet the space in the future without stringent landlord requirements. Also, options for additional space may provide opportunity for future growth at reduced prices or a “windfall profit” if the landlord wants to “buy back” the space as it becomes in high demand.

Every provision in a lease should be analyzed and managers should consult with attorneys and real estate counselors regarding real estate opportunities. A few points to consider in lease negotiations:

 

Favorable lease terms

• Obtain option to extend the term at specified rent, etc.
• Include option to obtain additional space at specified rent, etc.
• Consider option in existing facility or another facility controlled by the landlord
• Obtain favorable signage

 

Lower rent payments

• Lower per square foot payment
• Restructure percentage rent payments

 

Assign “kick out” provision or right to terminate/reduce rent if:

• Anchor tenant vacates
• Specific percentage of the mall/center “goes dark”
• Your business does not reach a minimum level of sales
• Office building amenities are discontinued

 

Eliminate early termination penalties

 

Assign or sublease rights

• Negotiate a broad use clause
• Limit items requiring landlord’s consent
• Exclude provisions triggering landlord’s consent in the event of change in control of the tenant

 

Obtain Tenant Improvement Allowance

• If there is concern about the landlord’s ability, fund the allowance, then have them provide improvements or pay the money into an escrow and use funds soon
• Obtain the right to use allowance as rent

 

Common area maintenance charges

• Specify amount landlord will pay
• Cap annual increases
• Exclude various operating expenses
• Obtain audit rights

 

Ensure HVAC units are in good operating condition

• Cap amount of maintenance, repairs and replacement expenses paid by tenant
• Require landlord to provide periodic maintenance
• Require landlord to replace when necessary

 

Obtain the right to cure landlord defaults (failure to maintain and repair parking lot, HVAC, etc.) and setoff against rent

Obtain right to reduce rent if amenities are eliminated

 

Legal

• Obtain favorable jurisdiction for disputes
• Eliminate provision that tenant pays landlord legal fees