Have you looked at a commercial lease and thought, where do I start? You’re not alone. The lease a landlord presents to you may look like a standard form, but no commercial lease is the same and, most often, the landlord has included landlord-favorable terms. Since the initial term of a commercial lease is often five or more years, it’s important for a tenant to read, understand and negotiate acceptable terms from the get-go.
Here are a few tips to help any tenant, from a first-timer to a seasoned renter, negotiate a more favorable commercial lease:
1. Buildout and Rent Commencement. Be sure you are comfortable with (a) the condition in which the landlord will deliver the space to you (ie, can you get warranties that the HVAC is working, there are no ceiling leaks, etc.?), (b) what is required to build out the space for your use, (c) the amount, if any, the landlord will contribute towards the buildout, and (d) how long you have to complete the buildout before your obligation to pay rent starts.
2. Latent Defects. Landlords often require tenants to take a space "as is" and disclaim warranties as to the space’s condition, and its current and future use. Consider negotiating a requirement that the landlord repair any hidden defects you cannot see during routine inspection.
3. CAM Costs and Audit Rights. In addition to fixed base rent, you will likely pay a proportionate share (or all, for a single-tenant property) of common area maintenance or "CAM" costs, taxes and insurance. Ask the landlord for an accounting of last year’s costs so you know what to expect. CAM costs should be "actual costs, without markup, incurred by the landlord" and should exclude expenses like capital expenditures, structural repair costs (for which the landlord is often responsible), and costs benefiting a specific tenant. Consider negotiating a cap on yearly increases and on any management or administrative fees included in CAM costs. Include the right to audit the landlord’s records to confirm you have not overpaid and the costs are properly payable as CAM costs, taxes or insurance.
4. Indemnity and Insurance. Indemnity is an agreement to pay for certain losses and damages suffered by the other party. Be careful of overly broad indemnity provisions; don’t indemnify the landlord for something the landlord is responsible for under the lease. Include a provision that if a fire or other casualty prevents your use of the space, your obligation to pay rent abates until repairs are completed. Obtain insurance required by the lease, and consider obtaining business interruption insurance even if it is not required.
5. Tenant Default Notice and Cure Period. Require the landlord to give you notice and a reasonable cure period before the landlord can declare you in default (including for late payment). This protects you, for example, if there is a glitch in payment of the rent of which you are not aware (faulty mailing, etc.).
If you have questions regarding commercial leases, please contact one of our real estate attorneys at (402) 392-1250.