Gaining competence in lease negotiations is something very few business executives will ever achieve, since they will probably never negotiate more than a small number leases throughout their business career. Choosing to negotiate alone is risky, given that an uninformed decision has the potential to be extremely costly. This is why executives often choose to hire advisors such as real estate attorneys and brokers, to aid them in the decision-making process when it’s time to lease an office.
Seeking out the advice of a professional is invaluable. However, as a tenant, you should also gain a solid understanding of the process so that you can be an active participant in the negotiating process. After all, not all attorneys are created equal and the last thing you want is to be at the mercy of an incompetent one. So do your research, get informed and learn as much as possible about the key lease negotiating concepts in use today.
When a landlord tells you that their lease is standard and that everybody signs it, does that mean you should too? Be careful, because standard does not necessarily mean fair to you. Before you sign, you need to understand in detail what you are agreeing to. Most people dread reading leases because they are lengthy documents written in complicated legalese, however not understanding what you are signing will cause greater difficulties in the long run.
For example, did you know that most leases indicate that the landlord has the right to relocate a tenant into a space deemed ‘similar’? What happens when the big multinational across the hall wants to expand and take over your space? The landlord probably had included a clause allowing them to move you under the circumstances. How much notice are they legally bound to give you? Can you refuse or cancel your lease? What happens if you accept but the moving expenses far exceed those that they offer to cover?
Or how about the sections entitled Additional Rent or Common Area Maintenance? Your company could be unknowingly financing your neighbor’s big blowout Christmas party.
So remember, just because the landlord tells you his lease is standard, it doesn’t mean it is fair to you, the tenant. It’s amazing how many tenants will make few, if any, changes to a lease before signing it. Do you sign contracts with other vendors without reading them thoroughly?
Of course this begs the question: Why hire an advisor at all then? Shouldn’t they be taking care of these details? Yes, but unfortunately most tenants seek out the help of an attorney too far into the negotiation process. Often if the tenant tries to make what the landlord considers to be last-minute decisions, the landlord will become more resistant. At this point the attorney may only have the power to review the language of the lease, to determine whether it accurately reflects the already-negotiated business terms. Obviously the best option is the engage a reputable attorney right from the beginning of the negotiation process, so that together you can cover all the important business and legal points.
You may also consider hiring a real estate broker. While a competent and experienced broker should generally be able to guide you through most lease clauses, doing your research can only help to situate yourself in a place of power. Following are some sample items you should take time to investigate when looking at a commercial lease.
Incorporation – If your business isn’t incorporated at the time of signing a lease, there could be potential issues down the road when you wish to incorporate.
Consumer Price Index – Increases in the base rent are often tied in the Consumer Price Index. Be aware of the CPI operating expense escalation clauses.
Rent Increases – There are potentially unwarranted percentage-based rent increases that favor the landlord.
Operating Expenses vs. Property Tax – Some standard form leases have separated operating expenses from property taxes, which is not in the tenant’s favor.
Non-profit Status – You should be able to obtain financial benefits if you are a 501C corporation.
New Building – As a tenant of a newly built property, you may wish to request a ‘net’ or Zero dollar stop lease.
Operating Expenses – Research the top items that smart tenants ask to be excluded under the operating expenses.
Indemnification – When the landlord asks to be indemnified against everything, you should figure out what your negotiating position will be.
Condemnation Provision – Smart tenants will usually add a provision to a standard lease regarding condemnation provisions.
Landlord Services – When the landlord doesn’t deliver necessary services, you need to know what your recourse for protection will be.
Tenant Relocation – Your concerns as a tenant should be addressed in the lease in detail regarding any type of relocation.
Date of Possession – If the date of possession is delayed, you should have terms in the lease that protect you regarding your own commitments, such as when you have to vacate your current premises.
Square Footage – There is a difference between rentable footage and usable footage in terms of the end costs to you, the tenant. It is important to understand the rules and know who is in charge of the standards of measurement. For example, if your rentable square footage increases because the building is re-measured, will you be asked to pay more rent?
Partnerships – Tenants in partnership will want to include limitations on liability in the lease.