Negotiate now or pay later!
November 08, 2018
One of the most important roles I play as a commercial tenant representative in lease negotiations is to guide my clients in avoiding assumptions and pitfalls that could result in costly litigation at some point in the future.
Here are five important areas to pay attention to now, so that you and your landlord can create a business term sheet that leads to a strong business relationship.
1) The first place that tenant/landlord disputes develop is around the move-in date. In a perfect world, tenants would vacate promptly, needed repairs and improvements would happen on schedule and the next tenant would be able to occupy immediately. Unfortunately, that is not always the case. There are many things that can interrupt this smooth flow of events. When negotiating your lease, be sure that you get a written agreement as to what happens if the landlord is not able to deliver the premises as promised, including recovery of your costs related to the delay.
2) Most tenants spend time and energy searching for a commercial space that works for them financially. Sadly, many fail to negotiate for what happens when it’s time to renew. Standard provision typically state that the landlord is entitled to fair market value or some language to that effect. This language is far to vague. I always advise my clients to ask that the lease specifically define how fair market value will be determined at renewal.
3) Too many leases are vague regarding common area maintenance (CAM) or operating expense controls and increases. Never just accept a predetermined percentage increase without first considering whether the actual increase might be less. If you agree to a fixed percentage increase, be sure to specify what the rate will be or if it will be determined by the Consumer Price Index or some other mechanism.
4) Because they fear mechanics liens resulting from nonpayment for tenant improvements, landlords like to require the purchase of completion bonds to guarantee payment. This can add considerable expense for the tenant, so I recommend negotiation for some other arrangement whenever possible. Tenants that have enough net worth can provide assurance to their new landlord that they will honor their obligation to the builder.
A related issue is when the landlord will release funds allocated for tenant improvements. Ask for a reasonable schedule for payments, such as 1/3 at the start of construction with additional payments made when specific milestones are reached.
5) Your landlord gets to have a say in the transfer of the lease to a third party, usually stated as “reasonable consent.” If you have subsidiaries or related businesses, ask that they can occupy the premises without consent to avoid potential costs and delays.
Spending a little time examining your new lease and hammering out the details now is investment in a successful commercial leasing arrangement.
Never go it alone. Our professional tenant leasing experts here at Bayshore are ready to help you. Give us a call!
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