Negotiating Commercial Leases

Our Firm often becomes involved with negotiating commercial leases on behalf of landlords and tenants (never at the same time of course!).  There are several important areas which invariably become central to the negotiation.  Here are some of the many questions which need to be asked when negotiating a commercial lease:

Term:  How long should the lease term be?  Will there be options to renew after the initial term?  How will the rent change if the lease is extended?  Should the lease renew automatically at the end of the term, or should it end automatically unless notice of renewal is given?  If renewal is automatic, for how long should the lease term be extended?

Rent:   What should the starting rent be?  Should it increase periodically or remain fixed over the term?  Should the rent be adjusted if options to extend the lease are exercised?  Should an annual escalator be employed (such as the consumer price index)? 

Premises:   Are the premises expandable?  Is there adjacent space which might be available in the future?  Should the tenant have an option to rent the adjacent space?

Security Deposit:  Should a security deposit be required?  How much is fair?  Should it be held in a separate escrow account or can the landlord commingle the deposit with other funds?  Should the security deposit be interest bearing?

Remedies on Default:  Typical remedies on tenant default include acceleration of rent, meaning that the tenant can be charged for all of the unpaid rent through the remainder of the lease.  Should the landlord have a duty to re-let the premises if the tenant vacates early?  Should the landlord be required to mitigate damages, i.e., seek a replacement tenant if the existing tenant defaults so as to minimize the landlord’s damages?  Should the landlord be allowed to confess judgment for possession of the premises following tenant default?  Should the landlord be allowed to confess judgment for money following tenant default?

Personal Liability and Guarantors.   If the tenant is a corporation or limited liability company, should the individuals involved with the business be required to be personally responsible for the lease?  Should they be required to act as guarantors or sureties?  Should their liability be limited or unlimited?

As you can sense from the many questions set forth above, the negotiation of a commercial lease is fraught with complex issues which must be worked out between landlord and tenant.  In a hot real estate market, where space is at a premium, landlords often dictate most of the terms.  In our current real estate market, which remains somewhat soft for commercial properties, tenants have an opportunity to negotiate a somewhat better deal.  Whether you are a landlord or a potential tenant, give us a call if you feel we can be of assistance in this area.

– Kevin Palmer


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