Negotiating Commercial Leases

One of the more common tasks we perform for clients involves the negotiation and preparation of commercial leases, including leases for office space, retail stores, warehouse space, manufacturing locations, and similar properties. The process involves communication with real estate brokers and direct contact with property owners and prospective tenants and their attorneys. Sometimes we represent property owners and other times we represent prospective tenants. The legal and economic issues which arise in negotiations are many and varied, and often include some or all of the following:

• Rent Amount: This amount, usually expressed either as a monthly amount or based upon the square footage of the premises, is always subject to negotiation. In a strong economy landlords tend to show less flexibility in rents, especially where vacancy rates are low. By contrast, high vacancy rates often signal a tenant’s market where rents can be bargained down.
• Utilities, Taxes, and Insurance: Many commercial leases are “triple net”, meaning that the tenant bears all costs attributable to the property as if he or she actually owned it. Included are the cost of utilities, liability and casualty insurance, and real estate taxes. Also included are maintenance and repair expenses.
• Maintenance and Repair: Most commercial leases require the tenant to be responsible for maintaining and repairing the premises. Care should be taken by short-term tenants to insure that the tenant is not responsible for replacing (as opposed to repairing) big-ticket items such as air conditioning and heating units, roof systems, structural components, and similar items. Landlords sometimes deal with maintenance obligations through imposition of common area maintenance (“CAM”) charges, requiring the tenant to pay for the maintenance and repair of its prorated share of common areas on a monthly basis. Negotiations typically involve placing a cap on monthly CAM charges and annual increases, as well as giving the tenant the right to audit these costs.
• Security Deposit: Landlords typically want the tenant to post one or more months’ security deposit, depending on the length of the lease. The amount of security and whether it is to be held separately in an interest-bearing, escrow account are common negotiating points.
• Landlord Remedies: Most commercial lease forms contain substantial remedies in favor of the landlord, including the ability to confess judgment for unpaid rent and to enter judgment by agreement for possession of the premises in the event of default. Negotiations typically revolve around attempts by the tenant to limit these and other harsh remedies for monetary defaults. This negotiation often turns on the relative economic strength of the tenant and the existing demand for similar space in the area.
• Lease Guarantees: Corporate tenants, especially new corporations, are often asked to have the shareholders act as guarantors of the lease.
• Termination and Options to Renew: Some leases terminate automatically at the end of the term, while others renew automatically unless notice of termination is given a specified number of days before the end of the term. Whether or not a lease renews automatically will depend upon the objectives of the landlord and the tenant, respectively. Many leases contain options to renew at the end of the existing term provided the tenant is not in default at the time of exercise. Often the rent and other charges escalate at the time of renewal, usually based upon increases in the Consumer Price Index or some other recognized barometer. Options to renew are especially important to businesses which are established at a well known location, for whom moving could be detrimental.