What to Ask For in a Commercial Lease
"You don’t ask, you don’t get”. Ignoring this familiar phrase can come with a hefty price tag for a tenant when negotiating a commercial lease. However, asking for what you want is the second step. The first step is knowing what to ask for.
In the typical review and negotiation of a commercial lease, tenant’s attorney may raise a concern or two usually not mentioned in the lease, but typically the lawyer responds only to what the lease already says. A savvy tenant’s attorney knows that a landlord’s “standard” lease does not address many issues beneficial to a tenant.
In a situation where almost anything can happen, the goal for the tenant is to be aware of potential issues that could arise when two parties with different agendas concerning the same piece of property negotiate a lease. Although the tenant may have a good working relationship with the current landlord, the building may be sold in the future and the relationship with the new landlord may not be that wonderful. Therefore, it is critical that the lease protect the tenant.
A tenant should keep these issues in mind:
Agreement on the Basic Terms
As early in the negotiation process as possible, obtain a term sheet from the landlord that describes the basic terms of the transaction. Make sure that the landlord and tenant have the same idea as to the basic terms of the deal. This is the opportune time (while it is relatively easy and inexpensive) to raise and resolve significant issues, such as the availability of tax incentives, rebates, the selection and coordination of tenant’s professional team (architects, construction team, financial advisors and lenders), whether present occupancy of the premises by an existing tenant will delay the new tenant’s move-in date and whether the new tenant’s intended use requires special permits (e.g. liquor license or public assembly permit).
Building Out the Space
Once the lease is prepared, pay attention to clauses covering Tenant Alterations to the premises. Make sure the tenant is not required to obtain the landlord’s consent for decorative or minor alterations or the erection or demolition of partition walls. If landlord has approval rights for substantial construction (and they generally do) attach to the lease a list of landlord approved contractors and require the landlord to be reasonable if consent is required for alterations. If there are outstanding violations that may interfere with the tenant’s proposed alterations, make it a condition of the lease that the landlord cure the violations within a specific time frame. A huge costs savings measure that is often overlooked by the tenant is to include a provision that tenant is not required to restore the premises to its original condition if it is generally usable by other tenants.
The landlord will typically reserve the right to enter the premises. To control potential interference with tenant’s business, the lease should provide that tenant receive sufficient prior notice, designate those circumstances when landlord can enter (e.g. to make emergency repairs or to show the premises to prospective tenants or buyers of the building) and specify when and to whom access will be given. It is important to provide language that requires the landlord to minimize interference with tenant’s business and to comply with tenant’s instructions and security requirements. The tenant should consider prohibiting landlord’s access to certain areas, such as computer network control rooms or areas containing a vault.
Other Tenant Protections
In New York, there is no legal requirement for a landlord to mitigate damages if a tenant defaults. This means if the tenant stops paying rent, and unless the lease states that the landlord must actively pursue finding a substitute tenant, the landlord can sit back, look to the defaulting tenant for the rent and will not be penalized for not seeking a new tenant. The tenant should insist that the lease require the landlord to re-let the premises. Another tenant protection is to exclude the landlord from termination of the lease or evicting the tenant due to “non-monetary” defaults. Instead, require the landlord to convert any “non-monetary” default into a monetary default by curing it and then sending the tenant the bill. In the event of destruction of the premises by fire or other casualty, negotiate for the tenant’s right to terminate the lease if the casualty or restoration causes a material change in zoning, access to the premises, parking or visibility of the premises. At the very least, make sure rent is abated during restoration.
By knowing what to ask for, a savvy tenant can save itself a substantial amount of money.
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