Commercial real estate lease agreements can be overwhelming to the average person. Therefore, it is imperative that before you enter into a commercial lease agreement as a tenant, whether for more or less than 1,000 square feet of space, you owe it to yourself to consult with a real estate attorney with experience and expertise in this specialized area of the law.
In most commercial lease transactions, the attorney for the landlord drafts the lease agreement for review and comment by the tenant. If you have been working exclusively with a real estate broker up until this point in time, you will now want to add an attorney to your team. Since the landlord`s counsel is the drafter of the first version of the lease, the finer points of the contract will most likely be to the landlord`s advantage. However, most landlords understand the need on their part to be flexible in order to lease their properties and expect that the tenant will request certain changes to the initial draft of the lease agreement. You will need to discuss with your attorney the material business terms that have been negotiated by the parties or provide a copy of the signed term sheet, if one has been prepared by the real estate agents. It is prudent business practice to have your attorney review and provide comments to the term sheet, if possible, prior to the initial preparation of the lease.
The commercial leasing negotiation is a give-and-take process. The objective is to have a lease that is a balance of rights, responsibilities and protections for both the tenant and the landlord. Experience is the key factor in knowing how hard to push and what should be expected from the negotiation. Without going into a list of the most important “gotcha” lease provisions in this blog edition (stay tuned for next edition), it is important to be aware that certain terms (i.e., lease extensions, renewals and options) can make a meaningful difference in a lease because of the important impacts these, and certain other more technical provisions, may have on a landlord.
The tenant`s attorney will know the amount of leverage you have in the negotiation process due in large part to the amount of space in the building you are leasing relative to the total size of the building. The lease document is filled technicalities including, but not limited to, time limits to perform certain requirements under the lease. As a result, many times tenants are technically in default without even realizing it, which can prevent the tenant from exercising extensions, renewals and options previously negotiated in the lease contract. An experienced leasing attorney will be able to identify the nuances in the language of the lease in order to avoid any potential pitfalls for an unsuspecting tenant.
Finally, in order to protect your personal assets, it is always recommended that you sign a lease agreement in your capacity as an officer of a corporation or manager/member of a limited liability company. Most landlords, however, will likely have some difficulty in accepting such an arrangement if you are a newly established business owner without a proven track record of experience or a meaningful financial investment of the business. This is especially the case if the landlord is expected to contribute money to build-out space. In order to induce the landlord to sign the lease, the landlord may request a form of personal guarantee from a principal owner, a letter of credit, prepaid rent and/or tenant-paid improvements.
We will address the specific lease provisions that are most important for the tenant to understand, together with the possible impact on the tenant`s business operations as part of the lease negotiation process, in the next blog on this area of real estate law.