Tenants often view commercial leases as meriting less scrutiny
than other commercial real estate transactions. However, commercial leases are usually negotiated on the landlord’s form,
necessitating careful review
since such forms tend to be
heavily favorable to landlords.
Further, leases are typically
long-term agreements that can
have a substantial impact on a
tenant’s profitability. While tenants tend to focus on the obvious (e.g., fixed rent), there are
other provisions that can also
prove to be significant. What
follows are some important
issues that should be carefully
considered when handling
1. Premises. Tenants should do their due diligence and consider
their needs when evaluating space for rent. Is it suitable for tenant’s intended use? Is the electrical capacity sufficient? Is the size
adequate? One way to provide for flexibility with respect to size
would be to negotiate, if possible, an expansion option.
2. Use. After nonpayment of rent, a common reason for a tenant
default. Tenants should check that the space is zoned for its
intended use, since typically landlords will not warrant that a
space is suitable for a particular use.
3. Delivery. The premises should be delivered in compliance
with all laws and with all building systems in good working order
and repair. The lease should clearly delineate the work being
done by each party to prepare the space for occupancy and any
deadlines for completing such work. Will there be a tenant
improvement allowance and how does the payout work?
4. Fixed Rent (a/k/a Base Rent). The most common reason for
a tenant default. Is it consistent with the market? When does it
begin and how is it structured? Are there escalations and are they
fixed or tied to an index? Will there be a free rent period? An
experienced broker can assist in ensuring that the fixed rent
being charged is appropriate.
5. Operating Expenses and Real Estate Taxes. Building operating expenses (also known as common area maintenance
expenses) are unpredictable and, if passed on to tenants, often
costly for tenants. If there is no cap on operating expenses, as is
generally the case in New York City, tenants should include a list
of standard carve-outs.
6. Maintenance and Repairs. The lease should clearly
delineate each party’s responsibilities. Except in certain circumstances (e.g., where a tenant leases an entire building), landlords should typically be responsible for maintaining the building common areas, roof, structural elements, building envelope,
and building systems that service more than one tenant. The
lease should also clearly address who is responsible if an environmental condition is discovered at the premises; generally,
the landlord should be responsible for remediating conditions
existing prior to the commencement date or introduced thereafter by the landlord.
7. Default. Tenants should request cure periods and no acceleration of rent, unless over fair market value. Landlords should also
be required to mitigate damages.
8. Assignment and Subleasing. Landlord’s consent should be
reasonable. Tenants should also attempt to include carve outs to
the consent requirement (i.e., for restructuring, M&A, IPOs, etc.)
– the last thing a tenant wants in a corporate transaction is for the
landlord to be the “tail that wags the dog”!
9. Security. Tenants should consider how much security they are
willing to give. If the deposit is substantial, they can try for a reduction after a set period of time for being a good citizen. Tenants
should also, if they have sufficient leverage, avoid giving a parent
guaranty. Otherwise, they should attempt to limit the guaranty.
10. Term. How many years is the term? Does tenant have a right
to extend and how is fixed rent in the renewal term determined?
Tenants should give considerable thought to these questions and
not assume, in the absence of an express renewal option, that
their landlord will be willing to negotiate with them for a lease
extension at the end of the term. ◆
A longer version of this article appeared on GlobeSt.com.
10 Issues to Consider
While tenants tend to focus on
the obvious (e.g., fixed rent), there
are other provisions that can also
prove to be significant.
BY VASILIKI YIANNOULIS
Vasiliki Yiannoulis is an associate at law firm Withers Bergman.
She may be contacted at email@example.com.