In a typical commercial lease deal, most tenants focus on basic provisions like rent, square footage, improvements and other obvious black-and-white economic factors.
However, there are many other lease provisions that should be carefully scrutinized because they can have a direct economic impact on tenants and landlords.
As a result, it’s very important for tenants to keep the following provisions in mind:
-Commencement date. It may be a surprise to many tenants, but the obligation to pay rent does not necessarily coincide with the day a company moves in. Lease forms favorable to landlords can contain clauses that start the rent on a fixed date, regardless of whether the tenant has moved in or not.
A savvy tenant should tie the start of rent to completion of improvements plus, at a minimum, a weekend to install furniture, fixtures and equipment.
-Delivery condition. Landlords will often deliver space to a tenant “as-is” unless there is lease language specifying otherwise. Therefore, a lease should spell out that the landlord will deliver the premises with improvements, along with a certificate of occupancy and documentation that the space being leased and the entire building are in compliance with existing codes and regulations.
-Tenant improvements. Although many tenants prefer to do their own construction, they should make this the responsibility of the landlord. If tenants do take architectural and construction matters into their own hands, they assume all responsibility for a delayed construction timeline (and remember, the rent starts regardless of whether or not the tenant has moved in).
-Options. With real estate markets now favoring landlords, tenants have limited leverage to acquire additional space during the lease term or when agreements are renewed.
Without an explicit agreement about expansion, a landlord is not required to give a tenant available space at fair and reasonable terms. Therefore, tenants should estimate their future expansion needs and ask that they be incorporated into the lease.
Things to consider include: which space a tenant may want; when the tenant may want it; and what the economic parameters of the expansion may include. Also, leases should contain one or more options for renewal at fair market value, with a notice of six to 18 months.
Assignment and subletting. In today’s marketplace, tenants must insist upon the right to sublease or assign the lease to any entity that is comparable in quality to existing tenants in the building.
There’s a lesson to be learned here from the way law firms operate. These days, most legal firms request and landlords agree to provide an “occupancy by others” provision.
This allows a law firm to let clients or other lawyers who are not part of the firm to occupy a significant percentage of space in the tenant’s law office, without this type of occupancy being categorized as a sublease. This provides tenants even more flexibility in dealing with excess space.
-Control and audit of operating expenses. Tenants should insist that landlords pass through no capital improvements, repairs or replacements as operating expenses.
In the process, tenants should bargain to have capital items included in operating expenses only if they achieve cost savings to the landlord or if they are required by laws enacted after the lease is executed.
-Fair market rental rate. Obtaining renewal rights and expansion rights are critical in most lease deals, but the effectiveness of those rights will depend on the tenant’s ability to secure an appropriate definition of “fair market rental rate.”
Tenants should make sure they do not lose expansion rights by agreeing to a minimum rent (such as a provision that the fair market rental rate will not be lower than the rent then in effect).
-Building structures and systems. Landlords have long included a standard provision in leases that requires tenants to comply with all laws applicable to the premises and provide modifications and changes required by applicable laws.
This may seem innocuous, and for a long time it was. But recently a few landlords have contended that when laws were passed requiring buildings to have sprinklers, the tenant should pay for the cost of those systems within the tenant’s premises.
Likewise, in full-floor premises, the men’s and women’s restrooms are considered part of the premises. When disability laws were passed requiring certain changes to washrooms, some landlords contended that since they were part of the premises, the tenants should pay for the full cost.
The unfairness of this position is clear when a tenant is in the last year of a lease and the landlord contends they should pay for the entire unamortized cost of sprinkler installations, even though such a system has a useful life of 50 years.
Ted Simpson is a vice president of Cushman Realty Corp. who specializes in corporate representation. He can be reached at [email protected].
Entrepreneur’s Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1759 with feedback and topic suggestions.
