Commercial Leases: The Tenant's Perspective

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Leases are often among your most important contracts. They should be negotiated and drafted to accurately reflect the business terms of your rental arrangement, provide a reasonable allocation of costs, risks and liabilities and address the particular requirements of your business. Changes can be made to a landlord’s "standard lease" to reduce the risks associated with occupying another person’s property.

Consider Your Needs
Before signing a lease you should consider all of your business needs at that space. How much parking is available? Are your signs allowed? Can access to your space be changed or disrupted? Will you need to make alterations? Do you need access during off-hours? Do you require certain floor load, environment or electric capacities? Even financing your trade fixtures and equipment is prohibited by many preprinted lease forms.

Look Beyond the Monthly Rent
Some common charges that can add significantly to the total cost of a lease are:

  • "Triple net" (or "NNN") expenses. These are costs the tenant assumes that otherwise would be paid by the property owner. While the term does not have a universally accepted meaning, the "nets" in "triple net" are commonly thought of as real estate taxes and utilities levied against the tenant’s space, insurance premiums for that space, and the costs of maintaining the space. Each component can be defined to decrease your portion of those costs.
  • Common area maintenance (or "CAM") charges. These charges relate to common areas which several tenants share, such as lobbies, parking areas, etc., and often provide some additional return to the landlord in the form of management fees and the like. Verifying your percentage of CAM charges and excluding inappropriate charges can help control these charges.
  • Tenant improvement (or "TI") allowances. What these allowances cover, if and when they’re paid to you or reimbursed to the landlord, and how they relate to the rent, all need to be understood and accurately provided for in the lease.
Some Lease Terms May Have Surprising Consequences
Did you know that under many standard leases:
  • You can be liable for contamination of the property that occurs before the lease is signed?
  • You can lose your lease if the landlord’s lender forecloses?
  • You may have to fix a leaking roof or make other unexpected repairs?
  • You can be liable for the costs of restoring damage caused by a fire or uninsured casualties?
  • You cannot cancel the lease even if your space is not available when the term begins?

Insurance—Who Really Bears the Risk?
Don’t underestimate the importance of consulting with your insurance broker. Both the types of coverage and how the landlord and tenant are named on the policy can have important impacts on risk allocation. A "waiver of subrogation" clause can prevent an insurance company from recovering the insured loss from you or the landlord. You should ensure that this clause is consistent with the other lease terms and is limited to the actual risks covered by the policy.

Dealing with Changes—Gain or Pain?
Far too often, a lease hinders changes in your business instead of enhancing the possibility of success. When you negotiate your lease is the time to raise questions such as:

  • Can you expand or relocate your space (and on what terms)?
  • Can you extend your lease term (and on what terms)?
  • Can you restrict your competitors from leasing in the same building or center?
  • Can you open other nearby outlets?
  • Can you cancel your lease before it expires?
  • Can you sublease some or all of your space or assign your lease to someone else?

Key Contributors

Kris J. Ormseth
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