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Commercial Lease Considerations

November 6, 2015

Many, if not most, businesses will at some point find themselves leasing real property for their business. Most modern commercial leases exceed twenty pages in length and are laden with complex provisions. However, you can shed some of the concern with these provisions if you are on the lookout for these important provisions.

  1. Additional Rent: Most commercial leases compute the rental amount as a combination of a fixed base rent plus an additional component that is intended to compensate the landlord for various overhead expenses or operating costs such as common area maintenance expenses. With additional rent, it is important to closely scrutinize exactly what it is that the landlord can classify as a cost that it can pass on to its tenants. For example, it is customarily acceptable for the landlord to pass on the costs of real property taxes and insurance for the property, but the cost of capital improvements should only be passed on to tenants in an amount equal to the depreciable costs of such improvements over the improvement’s useful life.

  2. Renewal Option: While you may end up not wanting to occupy the space for an additional term, it is prudent to at least plan for the possibility that you may want to do so. Consequently, it is a good idea for your lease to include the option for you to re-lease your space at some amount of rent. If you are hesitant to pre-negotiate a specific rental amount so far in advance, you can always opt for the renewal term’s rate to be based upon the fair market value at the time your lease comes up for renewal.

  3. Apportionment of Liability: Most commercial leases are drafted in unabashed favor of the landlord, and provisions dealing with the apportionment of liability between the parties are no exception. When it comes to this area of your lease, it is generally perceived as fair for you to bear responsibility for what happens on your leased premises and for you to agree to indemnify and hold harmless the landlord from such occurrences. Conversely, the landlord should bear responsibility for what happens on the common areas of the property and to agree to indemnify and hold you harmless from such occurrences.

  4. Insurance Requirements: Purchasing casualty and liability insurance for your space is something you will and should do irrespective of the lease’s requirements that you do so. However, be wary of requirements to insure beyond your means or requirements to insure “in an amount determined by the landlord from time to time”. Some landlords will want their tenants to acquire business interruption insurance, but such policies are often cost prohibitive to obtain.

  5. Landlord’s Lien: Most leases will contain an express lien in favor of the landlord upon the tenant’s property to secure the payment of amounts due under the lease. Consider asking the landlord to waive such lien and the landlord’s statutory lien because of the impact it may have upon current or prospective debt financing arrangements that you may have or later seek.

  6. Repairs/Maintenance: Most leases will place the bulk of the repair and maintenance obligations for the premises upon the tenant, including those applicable to the premises’ HVAC system. Make sure to account for the cost of such obligations in determining whether the space is economical for you.

  7. Surrender of the Premises: Make sure it is clear and that you understand the condition in which the space must be tendered back to the landlord. For example, if substantial improvements or revisions are made to the premises to make it usable, are you required to deconstruct such improvements or revisions?

  8. Personal Guarantees: If you are leasing space as an entity, it is advisable to avoid personally guaranteeing the lease. However, if you business’ operating history or financial position are insufficient to convince the landlord otherwise, consider including language in your renewal provision that no personal guarantee shall be required for the renewal period.

These are by no means the only areas of concern, nor are they a substitute for the advice of an attorney on your specific lease, but they should provide you with a list of some key areas to keep your eye on in reviewing and negotiating your lease. Keep in mind that a lease is a long-term commitment with significant financial implications to your business, so it pays to get it right.