Part 11 – last Article blog

11. Lender issues: Landlords will frequently reject tenant’s suggested lease modifications because they would impair the “financeability” of the property, so the tenant must understand lender concerns. In general, the lender’s primary concern is the assurance of uninterrupted cash flow; anything that might jeopardize cash flow will be carefully scrutinized. Sensitive lease provisions generally include tenant remedies such as rent abatement, offset rights (deducting damages against rent) and lease termination rights.

 Successful negotiation means more than just the rent  As noted above, each step of the commercial lease process and each provision of the lease agreement provides ample opportunity to improve the deal, and conversely, expose the landlord or tenant to costly and unnecessary expense. The successful negotiation will focus on more than just rent. By reducing risks and avoiding surprises, the frantic calls for help may be a thing of the past.

Article blog – Part 10

7. Repair, maintenance and alterations: Every lease will address maintenance and repair of the leased premises and common areas, and should also address alterations to the premises. Typically, the tenant will maintain the premises (except the structure) and the landlord will maintain the structure, the remainder of the building (not occupied by a tenant) and any common areas. For alterations to the premises, the lease will allocate responsibility between the parties to provide appropriate controls over the types of acceptable changes. The tenant wants flexibility to accommodate its business, while the landlord wants control over any changes, especially involving the structure, exterior elements and building systems (such as HVAC, plumbing and electrical).

8. Compliance with laws: Compliance with applicable laws and ordinances is usually a boilerplate provision, but can be very costly if not properly negotiated. The lease should address who is responsible for making capital expenditures for structural alterations required by laws enacted during the term of the lease (e.g. installation of sprinkler systems or improvements providing access for the disabled). These matters can be substantial and, if they are required to be made by the tenant, may end up being of relatively little utility.

Compliance with laws relating to the specific business conducted from the premises should be the responsibility of the tenant, and should not be included in common area maintenance expenses. ADA improvements necessary within the interior of the premises resulting from tenant’s work should be the responsibility of the tenant. On the other hand, improvements to the common areas necessary for access by of disabled individuals should be the landlord’s responsibility.

Further, compliance with environmental laws is quite significant because of the extensive nature of improvements and attendant costs, which could include the potential for removal of asbestos or lead, responsibility for insuring compliance with environmental laws and indemnification for non-compliance. Leases typically include lengthy representations, warranties and covenants regarding tenant’s compliance with applicable environmental laws.  However,  the tenant should limit responsibility to noncompliance by the tenant, its agents, contractors and agents, as well as ask for the same limitations and rights as granted to landlord (landlord should be responsible for compliance unless caused by a tenant). The definition of “hazardous materials” should ensure that common business materials (e.g. copier toner, batteries, etc.) and normal cleaning supplies are excluded.

Article blog – Part 8

3. Permitted uses and restrictions on use: The lease will describe what the tenant may do within the leased premises as a “Permitted Use.” Use restrictions will also be included to prevent  objectionable uses, incompatible uses and (particularly in a retail context) exclusive rights. A lease may require the tenant to use the premises only for one specified purpose or may provide for any lawful use. A tenant must analyze how such restrictions might affect its business, as well as its needs for flexibility to allow assignments and subleases, and a landlord desires to maintain a compatible tenant mix and general character of the project (prohibiting unwanted uses).

Lastly, the tenant must comply with use restrictions affecting the premises under recorded documents (for example, a Declaration of Covenants, Conditions and Restrictions recorded against the property), under applicable zoning ordinances, or even other leases. Tenant’s counsel should always ask the landlord to provide all use restrictions applicable to the premises for review and approval during negotiations.

4. Exclusive uses: Exclusive use rights arise primarily in the retail context, which prevent others from selling competing products or services. The trend today is for retailers, particularly large national chains, to demand broad exclusive rights. The landlord tries to negotiate the narrowest rights possible to maintain its ability to lease to a wide variety of tenants. To guard against overly broad restrictions, it is advisable to limit exclusive rights to the single “primary business” of each tenant and to carve out exceptions for “incidental uses,” which may be left undefined or defined by percentage of sales or maximum floor areas. Another safeguard is to require exclusive rights to lapse if not actively used. The negotiations will focus on what constitutes a default by the landlord and subsequent remedies available to the tenant, as tenants want to assure the landlord will honor these rights, and the landlord does not want to be responsible for a “rogue tenant” who violates the terms of its lease.

Part 7 – Common lease components

Below is a discussion of several provisions found in a typical lease agreement, and a brief summary of the issues and negotiating positions for each party. These are critical to focus on in every lease transaction as each could ultimately make or break the deal. Please also see the sample tenant checklist available on my webpage for other issues to consider for each lease review.

1. Construction and tenant improvements: Almost every lease provides for the construction or installation of tenant improvements to the leased premises or the surrounding areas for the tenant’s use, ranging from construction of an entire building to moving a wall. There are aspects of this process, including design, approval, timing, and execution of the construction, that are common to all leases, and are often found in the Work Letter attached to the Lease (which is often fully negotiated with the LOI). Each aspect should be dealt with to avoid unpleasant surprises later. The Work Letter can be very specific and must accurately reflect the complete arrangement of work between the parties. Also, the construction contract and related documents (not just the plans and specifications) are often prepared by an architect or other non-lawyer who relies heavily on forms and fails to notice conflicts between the language of the form and the deal as understood by the parties. The lawyer must review the construction provisions and exhibits carefully, as most construction disputes flow from the failure of the parties to have a common understanding, as reflected in a clearly worded document, and all terms and conditions should be reviewed and fully approved by the project manager or other construction personnel before execution of the lease.

 

How well does your lease protect you?

The selection and acquisition of facility for a company’s business is one of its most important decisions it will make, and it can mean the difference between profitability and failure. Commercial leases are made for the long-term, and the payments made under a lease often represent a significant portion of the business’ expenses.  The total financial burden of rent, costs of tenant improvements and other lease charges can significantly impact the overall success or failure of a business. 

The focus of lease negotiations by a tenant is often limited to rent, concessions and other economic considerations. As a result, many important issues are often overlooked, misunderstood or under-negotiated (even by sophisticated tenants) that could materially affect the long-term success of the deal and the company.  Negotiating the best possible deal is done throughout the entire leasing process, from the initial decision to move forward through lease execution.  To reach the best deal, and to prevent costly disputes or unforeseen expense, it is crucial to negotiate a favorable and highly detailed agreement. 

This really speaks to the heart of a serious problem.  On-the-job training has traditionally been the primary path to knowledge by brokers when it comes to leasing, and as a result, you could spend years of expensive trial and error and still never attain competency.  Did your tenant rep professional help protect you throughout the lease negotiation process, or were your left to fend for yourself once the base rental amount was agreed upon?  Was your broker willing to fight for you when negotiating lease provisions with the landlord?  Did your broker bring years of legal training and lease negotiation experience on behalf ot the tenant to your transaction, and take ownership of the terms and conditions of the lease agreement? 

How well does your lease protect you?  Are you confident that you’ve negotiated a favorable lease?  Let us protect your company from unpleasant problems, it’s not just about rent when it comes to negotiating a good lease deal.  You can better serve your company’s interests by mitigating the risks concerning your corporate occupancy, to negotiate the best possible deal in the marketplace.  We’d be happy to show you why we’re Studley!

Negotiating the lease deal

It is amazing how often companies find themselves looking for guidance because an unpleasant surprise has come up during the term of their lease, with the vast majority of such issues costing them significant dollars (that wasn’t included in their budgets) in attorneys’ fees and costs to remedy the situation.  Often such surprises are due to having signed a poorly understood or poorly constructed lease agreement and could have easily been avoided.  This is especially true of smaller, less sophisticated tenants who, for whatever reason, sign the landlord’s “Standard Form Lease” with few, if any, changes. 

A lease is much like a partnership agreement in that it governs a business relationship that could last for many years.  When everything goes as planned, most leases will serve the parties well but the true test occurs when there are hiccups in the relationship.  If the lease has not been carefully drafted, a hiccup can become a major problem.  Tenants often lose sight of the fact that the “Standard Form Lease” represents the landlord’s wish list, and if not appropriately modified, will likely not serve their interests when issues arise. 

Most tenant rep firms do not fully protect their clients throughout the entire leasing process, as achieving a favorable deal includes the careful negotiation of the definitive lease agreement.  This is where our Studley team differs from the rest.  We’d be happy to show you why we’re Studley!