By Jennifer Tsyn
Whether your business is just starting up, expanding or relocating, a key concern for most businesses is finding the right space. That process can be fraught with difficulties, especially when it comes to negotiating the lease.
Most landlords will present prospective tenants with a draft lease that is very favorable to the landlord. This means that when negotiating with the landlord, it is easy for tenants to overlook issues that may cause problems in the future.
Here are some of the key issues a new tenant should consider when reviewing a draft lease for commercial space include:
What are the “premises” and how can you use the space?
The space that is being leased should be defined clearly. If the lease references square feet, make sure it is clear whether rentable square feet or usable square feet are being discussed. Additionally, you will want to be clear about when, and how, you and your employees or customers can use common areas of the building, such as hallways and common restrooms, as well as parking areas. The lease should also specify who is responsible for cleaning, maintaining and making repairs to these areas.
Finally, tenants should consider whether they will be able to access their premises after hours and on weekends. Is there building security available at those times? Will the elevator, if any, be running? Will the landlord be heating and cooling the space adequately on the weekends or after hours, or will the tenant have to pay for heat and air at these times?
Term of the lease.
The term of the lease should be clearly defined. A landlord may be more willing to negotiate certain financial or other items if the lease has a longer term, but the tenant should consider the needs of its business and its long terms plans in determining what length term is right for it.
Any right by the tenant to renew the lease should be spelled out; if there are automatic renewals of the term, tenants should be aware that the lease may be drafted to lock them into a renewal if the tenant fails to give notice of non-renewal at a certain time in the future.
Ability to leave the leased premises.
Most draft leases provided by a commercial landlord will not include a right of the tenant to terminate the lease. Tenants, however, should consider if they will need to terminate the lease if the landlord isn’t maintaining the premises or is breaching the lease, if the premises are damaged by fire or other causes, or if there is a significant change in the tenant’s business. Tenants should consider addressing the damages that the tenant might have to pay if it needs to leave the lease term early (such as liquidated damages and/or rent through the end of the original term).
Tenants should also carefully review lease provisions regarding tenant’s right to assign the lease or sublease the premises; tenants may want to try to avoid allowing the landlord to deny an assignment if the tenant is part of a merger or is acquired.
Maintenance, repair and replacement.
Tenants should make sure the lease is very clear as to which party is responsible for issues with the structural components of the building, including exterior walls, the common areas, the roof, systems serving the entire building (i.e. electrical, plumbing, HVAC), environmental issues, and other issues within the tenant’s space.
Tenants should be aware that maintenance, repair and replacement are not the same, and each should be addressed.
Indemnification, insurance and liability.
A tenant should consult its insurance agent to confirm if the insurance required to be carried by the tenant in the draft lease is appropriate and the cost is manageable for the tenant. Tenants should also make sure to include provisions requiring the landlord to carry insurance on the building.
Tenants should carefully consider whether the landlord or tenant will be liable if someone is hurt within the common areas of the building or inside the premises, or when there is property damage in either the common areas or inside the premises, or if the landlord’s failure to meet its obligations causes a loss to the tenant.
Additional licenses or approvals.
Tenants should also consider what licenses or approvals they will need to start their business after moving into the space. If the tenant is required to comply with the Americans with Disabilities Act, that should be addressed in the lease.
If the tenant will be applying for any type of license that will look at the building’s owners or owners(such as a liquor license), the lease should state that the landlord will cooperate with tenant’s efforts and tenant may want the ability to terminate the lease if the license cannot be obtained. Before signing a lease, tenants should also be certain that the premises are zoned appropriately for the intended use.
This list is by no means exhaustive, and commercial leases may have many other provisions that merit negotiation.
Tsyn is a business law attorney with Bond Schoeneck & King, engaging in diverse corporate and business law matters, including such specialized areas as commercial real estate transactions, including leases, purchases and asales.