Negotiating and living with a commercial lease

The complexities and consequences of a commercial lease are often hidden, whether in the most comprehensive lease form or a simple agreement pulled from the internet. Businesses across all sectors will likely be faced with the challenges of negotiating a lease.

Do not approach the task lightly. A poorly negotiated lease can have severe detrimental effects on your business both from a landlord and tenant perspective. This article outlines some of the issues to consider.

Delivery and commencement

The lease must clearly identify the premises delivery date and the lease commencement date. The dates may differ if the tenant is obtaining early access to allow for a build-out or other work.

If the date is tied to an event outside the parties' control, for example a contractor completing work on the space, the tenant (and perhaps the landlord) should negotiate an out, often in the form of an option to terminate the lease if the space is not timely delivered.

Operational covenants

The premises' permitted use and the parties' maintenance obligations control the viability of the lease from both a landlord and tenant perspective. Although rent is often at the forefront, poorly negotiated use and maintenance obligations can create sever financial burdens.

Use — From a tenant perspective the permitted use should be broad. The unpredictability of a particular business market can create the need to expand the current scope of the tenant's business. Generally, landlords will want a more restrictive tenant permitted use.

Maintenance — The maintenance obligations are the hidden financial burden within the lease. Both landlord and tenant must have a clear understanding of the obligations and how they affect the party. For example, I often see leases place the burden of replacement of the heating, ventilation and air conditioning (HVAC) system on the tenant. Imagine as a tenant being in the final year of a lease (or at any other time) and finding out that you are obligated to purchase a new $10,000 HVAC system.

Default and remedies

Default — As in any contract, clearly defining what constitutes a default is critical to the party's understanding of the deal. Lease provisions should outline both landlord and tenant defaults. Notice and cure periods should be provided allowing each party an opportunity to address a default.

Often leases contain a specific list of what constitutes a tenant default, that list must be reviewed and negotiated.

Remedies — Leases will outline certain remedies upon a default. Landlord remedies are typically detailed including options for lease termination, the allowance of immediate possession and certain monetary rights. Careful review is critical and including a landlord mitigation obligation is advisable.

In furtherance of the remedies, the lease will likely allow the landlord to collect attorney fees for enforcement efforts. To create a level playing field, the attorney fee provision must be mutual, allowing the prevailing party reimbursement for its attorney fees from the non-prevailing party.

This article provides several substantive provisions to consider however, there are numerous other terms and issues that will need to be addressed depending on the particular facts of your business, the leased space and the lease form. My hope is that the article provides a starting point calling out several discussion points for your negotiation.