Whether you are starting a new business or expanding or relocating your existing operations, it is important to carefully scrutinize the terms of your lease and negotiate appropriate protections for your company. Commercial leases tend to be heavily one-sided in favor of the landlord. And if you fail to negotiate, you may find not only that your rights are limited, but that you are prohibited from using the premises for certain necessary purposes as well.
As a prospective tenant, you are well within your rights to request modifications to the landlord’s form lease and most commercial landlords expect prospective tenants to negotiate. While necessary lease concessions and provisions will vary depending on a particular tenant’s risk tolerance and intended use of the property, some of the provisions that most often warrant negotiation include:
1. Use of the Premises
When leasing commercial premises for business purposes, it is essential to ensure that you will be able to use the premises, not only as you intend to use them now, but as you may need to use them in the future. While this can be a relative non-issue for retail business owners seeking to rent space in a shopping center or a stand-alone retail property, for other prospective tenants, it can be a threshold issue in commercial lease negotiations. The “use” clause should define permitted uses of the premises as broadly as possible while specifying any permitted uses that are essential to the tenant’s business operations.
For retail businesses in particular, the exclusivity clause can be of critical importance. If you are planning to open a restaurant or specialty store, you most likely do not want a competitor to open up shop next door. Depending on the size and nature of the property, exclusivity clauses can cover adjacent parcels, multiple nearby parcels, or the entire property.
3. Initial Term and Renewal
With regard to the initial term of the lease, some tenants will prefer to lock in a prime location for as long as possible while others will want the ability to abandon the premises after a year if the location (or the business) proves unprofitable. Commercial landlords will often prefer long-term commitments with guaranteed rent payments, though there are some exceptions here as well. Regardless of your preferences, it is important to ensure that the initial term is clearly defined and that any renewal rights are subject to conditions that are in your (rather than the landlord’s) control.
4. Rent, CAM Charges, and Other Expenses
The financial provisions of a commercial lease are important for obvious reasons, and there are a variety of options available. Most commercial leases can be classified as either a gross lease, net lease, or modified gross lease, although even within these classifications there are various potential alternatives. As a prospective tenant, it is important to negotiate a rent structure that is as advantageous as possible given your company’s unique financial and operational needs. And if the rent does not cover common area maintenance (CAM) charges and other expenses, these costs will need to be carefully addressed and thoroughly documented as well.
5. Assignment and Subleasing
While assignment and subleasing may not be priorities for you right now, if you need to get out of your lease before the end of the initial term or any renewal term, having the right to assign your lease or sublet the premises can protect you against remaining liable for rent and expenses for the remainder of the then-current term. Although commercial landlords will generally want to maintain strict control over the tenants occupying their premises, it may be possible to negotiate the right to assign the lease to the buyer in the event that you sell the business or to sublet the premises – provided that the sublessee meets certain predetermined standards.
6. Build-Out and Modification of the Premises
If the landlord will be building out the premises to your specifications, the lease should include provisions designed to ensure that the buildout will be completed on time and to your satisfaction. The landlord should also provide direct or pass-through warranties for the work performed, and the lease should prevent unilateral extension of the commencement date as well as “deemed acceptance” of the newly-constructed or remodeled premises.
Commercial leases will commonly include broad indemnification clauses that require the tenant to indemnify the landlord for any and all losses arising out of or relating to the tenant’s use of the premises. While a limited indemnification obligation will generally be justified, the type of blanket clause that appears in most form leases is not. At a minimum, the tenant’s indemnification obligation should exclude losses arising from the acts of other tenants (and the landlord itself) as well as any property conditions that are outside of the tenant’s control.
8. Compliance with Laws
Similarly, while commercial tenants can expect to be held responsible for complying with all laws that apply to their businesses, they should not be subject to a blanket and unilateral “comply with all laws” obligation. For example, Americans with Disabilities Act (ADA) compliance and environmental contamination issues will often fall squarely on the landlord’s shoulders, and tenants who inadvertently take responsibility for these issues can face substantial liability exposure.
9. Anchor Tenants
If your business will rely on the presence of an anchor tenant to drive consumer traffic, then your lease should include appropriate anchor tenant (or “co-tenancy”) provisions to protect you in the event that the anchor tenant leaves. Potential options include a right of termination or the right to pay reduced rent if the anchor tenant is not replaced within a specified period of time.
Finally, for retail businesses, professional offices, warehouses, and other commercial properties, parking rights can be a fundamental issue during lease negotiations. Lack of parking can be a serious problem, and tenants who fail to negotiate a guaranteed number of parking spaces can find themselves dealing with dissatisfied customers and employees.
Speak with a Tacoma, WA, Real Estate Lawyer at Blado Kiger Bolan, P.S.
If you are preparing to lease a commercial property in Tacoma, WA area, we encourage you to contact us to discuss the terms of your lease. To speak with one of our experienced real estate lawyers in confidence, please call 253-272-2997 or inquire online today.