In negotiating commercial leases, there are several key provisions that should be given careful attention by both landlords and tenants. Counsel experienced in drafting, negotiating, and litigating commercial lease contracts should be consulted to review and negotiate these critical provisions to avoid potential consequences that may arise from a poorly drafted provision or worse, the absence of a critical provision. While every commercial lease is different and the terms should be tailored to your specific lease and agreement, here are some key provisions that should be carefully considered and negotiated:
- Rent and Pass Through Costs. There are various ways that rent can be calculated in a commercial lease, which should be carefully defined. Does the lease include a “grace period” or rent abatement or waiver period in which rent is not collected (such as during a renovation or tenant improvement phase)? Does the lease allow increases or escalations, and if so, how will they be computed? Commercial leases may include pass-through expenses for common area maintenance (“CAM”), taxes, utilities, and insurance based upon a tenant’s percentage of the total area of the total building leased by the tenant. These pass-through costs should be clearly stated, especially in a building shared among many tenants.
- Security. How much security is required, what kind of account it will be held in, and the conditions of its return should be clearly stated.
- Term and Renewal. Is the term too short, or too long, for the purpose of the lease? The term length should meet the tenant’s business goals. When the term starts and ends should be clearly stated. Any known or anticipated conditions that may warrant an abatement of rent, or abatement of the lease should be specifically stated. Similarly, how renewals occur and procedures regarding options to renew are to be exercised should be clearly stated.
- Buildout and Improvements. The lease should clearly state whether the landlord or tenant is responsible for performing the build-out work, and if both have responsibilities, they should be clearly spelled out as to who is responsible for doing what. The time frame for the build-out work, and how to handle any foreseeable types of delays in opening the business should be contemplated. The parties may want to include a “force majeure” clause that relieves either or each of the parties from performing a contractual obligation due to certain circumstances beyond their control. A provision that requires the tenant to perform the build-out work may also specify whether the landlord has agreed to reimburse tenant for any costs of the work, typically known as the “tenant improvement allowance.” How this “T/I allowance” is remitted must also be carefully negotiated and spelled out the in the lease, including whether there are any restrictions or conditions for receiving such payment. This provision should also make clear who owns fixtures and finishes that are part of the tenant’s build-out improvements when the lease ends. Whether any work requires approval and consent before performing should be spelled out, as well as the effect of a party’s failure to give reasonable approvals.
- Tenant Use. I like to call this the “Clapton Clause” (based on the song, “It’s in the Way That You Use It”). How a tenant can use the space, and the purpose of the lease, should be specifically stated. This can protect a landlord where a tenant is using the space for an unauthorized use. A clear use clause can also protect a tenant if the landlord’s actions prevent, or substantially interfere with, the tenant’s possession, use, and enjoyment of the premises for the purposes for which they were leased. Obviously, a clause restricting or specifying the use of the premises, versus a clause giving the tenant discretion as to its use of the premises involve different considerations, which should be carefully negotiated on a case-by-case basis. Of course, it is critical to know whether the commercial space may even be used for the type of business intended at the premises, which is why it is also important to determine whether there are any restrictions – by the landlord or by law – which would prevent or interfere with the purpose of the use of the premises.
The business lawyers at Haber Law are experienced in negotiating, drafting, and litigating commercial leases, and can help draft, negotiate, and review your commercial lease as well as litigate any dispute that may arise from an existing lease. Please contact Haber Law for more information or to schedule a consultation. Stay tuned for Part 2 of this series where we will discuss other key provisions in commercial leases.