By: Scott Duncan, a partner in our Commercial Real Estate Department
A business owner makes many critical decisions and one in particular involves the location at which his business is operated. At some point it is likely that he will have to deal with a lease agreement, whether to secure space or to gain revenue from owned space.
Often savvy brokers can steer you through many of the mundane terms of the lengthy document, but you would be smart to involve the services of a real estate attorney who specializes in the drafting and negotiation of leases in order to protect your interests. Specifically, there are issues beyond the standard term, rental rate and identification of the premises that require serious consideration and negotiation in order to avoid potential pitfalls during the term of the agreement.
First, close attention should be paid to how the space “fits” the specific needs of your business operations, including all initial construction of improvements. All parties involved – landlord, tenant, brokers and contractors – need to be clear on what improvements are being made, and the respective obligations for the completion of the construction of the space. For example, know who is responsible for payment for the improvements. No good can come from receiving unexpected, unbudgeted bills for finishing the space. Most of these potential problems are avoided by a thorough review of the construction exhibits and finalization of the plans and budget prior to lease execution.
Second, each party should have clear obligations for the maintenance of the leased premises and building in which the leased premises are located. Commonly the interior space will be maintained by the tenant, while all “structural” and exterior repairs are the responsibility of the landlord. However, you will find many variations on this theme depending on the nature or character of the premises and building. Both parties should fully understand the respective maintenance obligations prior to execution of the lease in order to avoid problems which could result in severe interruptions to your business operations.
Third, although the parties rarely want to focus on issues of default, it makes sense to work through the potential for a default and remedies on the front end. While the landlord’s interest must be protected in the event of a default by the tenant, there may be some provisions which could be negotiated in favor of the tenant to protect the tenant’s right to continue occupancy of the space while working towards a cure of the problem. As we all know, all businesses have ups and downs, and the lease should have some flexibility through cure or grace periods to allow for potential downturns.
Lastly, any special stipulations specific to your needs should be addressed prior to signing the lease. It is less difficult to obtain an extraordinary concession in the process of negotiating the lease, rather than try to gain the approval of the landlord after the agreement has been finalized and the tenant has taken possession of the space. You should analyze every aspect of your business plan for the premises and focus on some common issues, such as:
(i) rights to renew or extend the lease beyond the initial term or early termination;
(ii) use of the premises;
(iii) special equipment or tenant fixtures that would technically violate the terms of the lease;
(iv) signage rights on the building or a monument sign;
(v) special utility needs above building standard;
(vi) the right to make alterations without Landlord’s approval; and
(vii) parking needs and common area usage.
Before entering into a commitment to lease space, make sure that you have exhausted every opportunity to tailor your proposed lease agreement to work well with your specific business needs.