An attorney will be able to help you get a more favorable lease where your future costs will be more controlled and where your rights are protected. Commercial real estate attorneys not only have an in depth knowledge about the way lease agreements are drafted, but they also understand how different clauses are likely to play out in court.
A commercial lease must meet both your company’s legal needs and your business needs. Often businesses focus on the business needs of the lease, but neglect to pay attention to potential legal issues.
You need a lease to secure a space that will let you operate your business. Different businesses will have different commercial space needs. A restaurant and a software company will have very different needs.
During the course of your lease term something will go wrong. The lease will spell out what your rights and obligations are when there is a problem. When you have an attorney negotiating your lease they will make sure the lease protects your interests and answers important questions.
The typical business tenant tries to get by with a minimum of legal assistance, bringing in a lawyer after the lease has been pretty well negotiated and the landlord has prepared a lease to be signed. At this point, many commitments have been made already—some perhaps unwisely.
You might decide that using a lawyer the way Andrew did in the example above is good enough. After all, a lease got signed, although Andrew had to compromise on some early concessions he thought he had nailed down. But Andrew's method isn't the only way to get the job done—and it's not necessarily the best.
It’s possible that the end result of the LOI negotiation will be something more in the middle, such as a three-year guarantee. The job of the brokers is to find such balancing points—those places where both landlords and tenants see the terms as workable. (This isn’t to say that a five-year, full guarantee couldn’t be viable: Landlords will typically give you better rent and/or other incentives in exchange for such agreements.)
As a source of financial protection, the landlord may want to stipulate that any operator who takes over that lease must have assets of equal or greater value. And in some cases, they may want the original tenant to still have some financial responsibility for a period of time in case the new operator fails.
Expect the LOI to cover the rental rate, the length of the lease term, renewal options, and extra expenses such as triple net charges (the tenant’s pro rata share of the landlord’s costs for common area maintenance, property taxes and insurance).
Once the LOI has been signed, you’ll want your real estate attorney to negotiate the actual lease.
There are many good, experienced deal-making attorneys, and in some cases retail tenants may choose to bring in their lawyers early in the process at the LOI stage.
Franchisees and other operators may at some point want to sublet or assign the lease to another operator. Landlords often object to this unless certain parameters are in place.
The use and exclusives clause can be among the more time-consuming to negotiate in the LOI, which is as it should be, given its importance.
Commercial leases are viewed under the law differently than residential leases. With residentials, it is assumed that you don't have an attorney available to review various terms, and so the agreements are fairly standardized, and there are numerous consumer protections available under the law.
Commercial leases contain many negotiable clauses. Knowing which ones you can negotiate away, and which ones you need tightened up, usually only comes with experience. For instance, what is the length of term of the agreement, and do you want to be able to sublease? That depends on your business needs.
Your goal of base rent negotiations is to achieve the minimum lease length with the maximum benefits. Work with your landlord to figure out what they’re willing to give in exchange for committed tenancy.
For starters, commercial lease terms tend to be longer than home rental terms, averaging at about 3 years.
Depending on the type of lease you agree to, your rental suition could range from paying a smaller base rent but be responsible for costs like utilities, maintenance, and taxes to paying a premium to have the landlord take care of all financial responsibilities.
To negotiate from a place of strength, you should do it on more than one location at the same time. This will give you the ability to walk away from at least one of the negotiations, putting you in a better position.
It’s important to note , as well, that you will likely have the most negotiating flexibility on the lease structure with an independent landlord, as opposed to a corporate one. (In malls, for instance, it’s typically difficult to negotiate even base rent, much less the structure. At a mall, it’s all about negotiating perks.)
A poor lease agreement can drain you financially even if you’re making all your sales goals. In this article, we’ll talk about how to negotiate a favorable retail lease. Go through the tips below and keep them in mind when you’re dealing with potential landlords.
All this to say, when it comes to a retail lease, there are a lot of little things that can be negotiated and requested to make the lease turn out in your favor. And remember, some of the smaller details can either make up for a higher base rent than you wanted, or you can use them as tools to lower that base rent.
Effective shopping center leases should contain numerous provisions which the landlord and tenant agree about. These include:
Landlords of shopping centers may be in violation of anti-trust laws if they have clauses that restrict the use of the property, and give certain tenants a competitive advantage. Examples include:
While there are many restrictions to shopping center leases that are illegal, landlords are permitted to insert certain restrictions. These include:
When deciding if a restriction is illegal or not, the court will consider the intent of the parties, the effect of the restriction on public policy, and among many other things, the importance of the restriction.
Shopping center leases are highly complex and can have a significant impact on the success of your business. A real estate attorney specializing in commercial real estate can review, draft, and modify your lease.
Basic Provisions. Namely, the who, where, when and how much. A precise reference to the parties to the lease, to the premises to which the lease refers, to the dates of the lease term and possession of the premises , and to the lease rental is elemental. First, the landlord and tenant should be named, and any representative signing on behalf of either should provide evidence of , or at least warrant, his authority to sign. Second, a complete description of the premises should include the location of the property, as well as what part of the property is the leased premises. Third, pin down the dates from when and to when the landlord is entitled to receive rent; these dates may be different from when the tenant actually occupies the premises. Finally, and most important to all concerned, the rental should reflect the total amount of rent to be paid during the lease term and contain clear language as to any rent increases (or decreases), be they in the form of fixed “step” amounts, percentage rent (in which the tenant’s rent obligation is typically tied to his sales), cost-of-living adjustments (to insulate the landlord from the impact of inflation on his rental stream), or some other form. A lease without all of the above is like a car without wheels; it simply serves no purpose.
The parties’ bargaining power will dictate the lease’s ultimate form. Particularly if more knowledgeable, sophisticated and enjoying greater bargaining power, a party will naturally seek strong language to favor his position. If a problem later materializes, the language in the lease often controls the outcome.
Limiting the type of use on the premises is most important to a landlord with many interdependent retail tenants. For example, integral to a shopping center’s success is foot traffic, and a good tenant mix will attract shoppers.
A landlord should look upon his lease as an insurance contract: its provisions can protect an owner from unanticipated loss, tenant disputes, problems obtaining a loan or refinancing and unwanted obligations. In fact, a lease can be the primary vehicle to insure increasing future income from the landlord’s property.
On the other hand, a tenant should resist a landlord’s effort’s to define narrowly the business use allowed on the premises, particularly if non-retail. The tenant’s business may change scope or the tenant may later wish to assign his lease to another type of business. Acceptance and Surrender of the Premises.
Tenant Motivations. Many small business owners opt to rent retail, office or industrial space because it is more affordable than purchasing an entire property. Once having selected a home for his business among several possible locations, the businessman will then typically negotiate with an attorney or real estate broker who’s representing the property owner by himself. Six months, maybe a year later, a provision in the lease suddenly haunts him.
Unfortunately, the small business owner is not in business to locate and then lease commercial real estate. His expertise lies in running his business. Yet, without advice and often without even negotiating, he will sign a lease that will bind him for a year or (typically) more.