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Key considerations when negotiating commercial real estate leases

Posted by Christin D. Hoyt | Jul 28, 2023 | 0 Comments

Any commercial real estate lease that is valid and binding is a long and densely written legal document. They ideally protect the rights and interests of each party involved in the deal, outlining a list of basic details as well as a lengthy list of clauses that address a wide range of issues specific to the property and the needs of the potential tenant/lessee and the owner. Some details are negotiable, while others are non-negotiable.

The right contract should address all foreseeable issues and offer protocols for resolving disputes, whether it is something as commonplace as maintenance obligations or unexpected as a natural disaster or pandemic. These clauses help mitigate unnecessary risks.

Does it need to be this complicated?

Yes. These agreements involve large amounts of money – the contracts typically last several years and can apply to properties with thousands of square feet of space – so these deals are a vital part of each party's way of doing business, whose success and bottom line is partially based on the agreement's terms. For lessees, the lease's terms will affect the profit margins, growth potential, and overall success at the location in the lease. For owners, the lease helps ensure they earn income, the property is appropriately maintained, and they have control over how the lessee uses it.

Here are eight considerations that help parties achieve their goals:

  1. Premises details

There should be an overview of the space's condition before the new lease. The amount of buildout the tenant must do before occupying the space. The two sides need to agree upon the changes. Details to work out include:

  • Who pays: If the tenant makes improvements to the owner's property, the tenant may wish for the landlord to fully or partially credit or compensate them for the upgrades.
  • What happens when the tenant vacates: Do the improvements and buildouts remain, or must the tenant pay for demolition work to return the space to a raw form?
  • What improvements can be removed when the tenant leaves: There may be certain design elements that the tenant may want to take with them, such as lighting fixtures.
  1. Common area obligations

Commercial lease agreements will have charges tied to lobbies, hallways, parking, landscaping, and other common outdoor spaces.  The lease will outline who has access and other usage limitations and how much they are charged for the maintenance of common spaces. The tenants may also want a breakdown of the costs and how they are calculated, and may want to reserve the right to audit the common area fees.

  1. Terms of the lease 

These involve actual dates and details for:

  • When the lease starts.
  • When the lease ends.
  • When the tenant must pay rent (generally after buildout or a landlord's offer to close a longer-term deal).
  • When the landlord can raise rents, and by how much.
  • When and how to handle renewals or extensions.
  • When and how the tenant vacates the space.
  • Is the tenant able to leave without penalties if an anchor tenant vacates?
  • Will there be a guarantor of the tenant's lease obligations?
  1. Determining the cost of rent

The landlord may have a straight rate paid monthly or at an agreed-upon interval, or they may also have a percentage arrangement based on the store's revenue or profits. If they use a percentage, there should be consideration given to bad checks, gift cards, merchandise transfers or other specifics related to goods and services.

  1. Information and restrictions regarding other occupants in the building

The tenant may be concerned about other occupants who rent, such as allowing a subsequent tenant with similar goods or services. The potential tenant may also want to determine how long the leases are for others (such as neighbors or anchor tenants). Conversely, they may also want to sublease their space to other tenants, either after they leave or to share. The owner will likely require the power to approve sublets.

  1. The scope of insurance coverage

Both sides should have expectations regarding insurance coverage and cost. The landlord will have a policy and require tenants to carry a certain amount of coverage, which the tenant should discuss with their insurance agent. On a related note, the contract also can outline what happens if a fire or natural disaster damages the property.

  1. What if the tenant defaults?

Unfortunately, some tenants will miss payments, thus violating their lease agreement's terms. The lessee may also default by paying their rent but not following other conditions in the agreement, including improper activities not stated in the lease, not upkeeping their space as outlined in the agreement or some other action or inaction. Depending upon the circumstances and how the contract terms, the consequences can be minor or involve significant financial penalties.

  1. Dispute resolution

Disputes between businesses arise from time to time. Just as business agreements stipulate an approach for resolving disputes between the parties, lease agreements will usually have protocols and processes for handling landlord-tenant disputes.

Ideally, the two sides start with informal negotiation. From there, it may go to mandatory mediation, with each side paying the expenses. The agreement may also stipulate binding arbitration handled by an attorney experienced in commercial real estate law, again with both sides paying their fees. If a party believes that the arbitration was unfair, they may have the option of litigation, with the cost potentially paid by the party that filed.

Trust but verify by reading the agreement

These essential details and others related to the unique needs of the lessee and owner should be agreed upon ahead of time. Once the parties finalize the conditions, the lease agreement should reflect the terms in writing.

Before signing a lease, it is crucial to ensure the contract accurately reflects the negotiations. Failure to do so can lead to problems when an issue arises and the owner or tenant finds out they do not have the contract they thought they did. The realization could lead to unexpected additional expenses or even threaten the business's viability.

About the Author

Christin D. Hoyt

Our Attorneys


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