Commercial leases are often lengthy and complicated documents. They are also often full of (sometimes hidden) pitfalls for tenants. At Cassady & Company we recommend tenants have the right lawyer on their side to help navigate their next commercial lease.
Based on our experience, the following are nine major pitfalls that every tenant should think about and attempt to avoid when negotiating or entering into a commercial lease:
- Damage Clauses. Damage clauses often state that only the landlord has the right to terminate the lease in the event the rented premises are damaged. This means that the tenant usually cannot terminate the lease in the event of property damage to the rented premises. Tenants may also need or want the option of walking away from the lease if they are unable to use the rented premises for an extended period of time such that the rented premises no longer suits their purpose.
- Assignment Clauses. An important and valuable asset for some tenants is their commercial lease. While most leases allow the lease to be assigned by a tenant to someone else, the assignment is often subject to the landlord’s consent. Some leases allow the landlord not only to refuse their consent for the assignment by the tenant, but also to terminate the lease outright. If a landlord has the option of terminating the lease when a tenant requests the landlord’s consent to an assignment, this can reduce the value of the commercial lease generally and in most cases this type of clause will affect the value of the tenant’s business. More often than not, it is best for tenants to ask for a term that the landlord cannot unreasonably withhold consent to an assignment of the lease.
- Clauses Relating to Building Repairs. Some leases include terms which obligate tenants to pay for all repairs to a building during a commercial tenancy, including necessary structural repairs. A careful reading of the lease clauses relating to building repairs is one way for a tenant to ensure that its obligations to repair and maintain a rental premises is limited to what is fair and reasonable in the circumstances. It is advisable for tenants to make sure they understand what their obligations are for repair and maintenance under a commercial lease and that the lease is as clear as possible in this regard.
- Operating Expenses and Fees. In some leases, who will pay which operating expenses is straightforward. For example, tenants are often responsible for taxes, insurance and maintenance costs (also known as the common “triple net” lease). In some leases, however, the landlord will attempt to impose many different additional costs and fees on the tenant. Some examples of additional costs and fees include structural repairs to the building, management salaries, depreciation of machinery and equipment owned by the landlord, a percentage of operating expenses of a vacant lot, the landlord’s legal and accounting fees and management fees, etc. Knowing what you are responsible for as a tenant is important and, depending on the landlord, the building, and/or the market, some of these additional fees may be negotiable.
- Arbitration Clauses. There are some parts of a lease that will require that the landlord and the tenant to reach another agreement respecting the leased premises in the future. For example, a landlord and tenant in an existing lease may reach an impasse while negotiating the amount of rent payable for a renewal or the extension term of a lease. If the landlord and tenant cannot agree, the lease’s arbitration clause will govern how the landlord and tenant will determine what is fair. Most commonly, arbitration clauses in commercial leases provide that if the landlord and tenant cannot agree, rent and/or the extension term of the lease will be determined by three different arbitrators. Arbitrators are costly, and having to pay three rather than just one can sometimes mean unnecessary expense to the landlord and tenant. The cost may also deter a tenant from going to arbitration under the arbitration clause. Tenants should consider negotiating a term that only one arbitrator will determine the rental amount and/or extension term of the lease to save on costs, and reduce the cost to the landlord and tenant in the event the arbitration clause is necessary to invoke in the future.
- Relocation Clauses. Relocation clauses are clauses that allow the landlord to relocate a tenant to different premises within a rental building or complex. In negotiations with the landlord, a tenant may be able to negotiate for this type of clause to be deleted entirely or amended so that the landlord may only relocate a tenant to premises that are comparable to the originally rented premises, as well as making the landlord responsible to pay for all expenses related to any relocation.
- Removing Leasehold Improvements. Leasehold improvements are often added by tenants during a tenancy and can include such things as signage or the installation of specialized equipment. On occasion, a landlord will seek terms in a lease which make the tenant responsible for removing leasehold improvements at the termination of the lease. Often removing these improvements is very expensive and time consuming for the tenant. It is almost always in a tenant’s best interests to negotiate with the landlord to change this type of clause to require that at the end of the lease, the tenants be required to remove fixtures only and leave the suite in a clean condition.
- Non-Disturbance Clauses. Many leases have an attornment clauses. Attornment clauses grant future mortgage lenders of the landlord priority over any existing leases. This means that if the landlord defaults on its future mortgage and the bank forecloses against the rented property, the bank may not be obligated to recognize the tenancy. It may be possible to modify this type of clause and to require the landlord to obtain a non-disturbance agreement from any future lender. This would obligate the lender to recognize the tenant’s tenancy in the event of foreclosure by that lender.
- Tenant Remedies. A final clause which operates to protect a tenant is to provide the tenant with additional remedies. For example, if the landlord fails or refuses to repair the rented premises where there is a problem within a reasonable amount of time, the tenant could negotiate that they be entitled to complete the reparations and deduct the cost of the reparations from the rent.
The above-listed pitfalls are only some of the issues that tenants face when they are negotiating commercial leases with landlords. Cassady & Company has lawyers available to help you navigate your way through a commercial lease and to negotiate revisions on your behalf. Having the right lawyer on your side is always a benefit.
Feel free to contact us to set up an appointment to discuss your options for your commercial lease.