Getting the Keys: A Quick Guide to Tenants Negotiating a Commercial Lease

July 25, 2012

Signing your first lease as a new commercial tenant can be a daunting transaction, and you might be tempted to get it over with as quickly as you can. Your business won’t make any money while you’re squabbling over the finer points of landlord/tenant law. It’s important to remember, however, that the lease you sign may be hanging over your head years after you hang out the sign, and the mistakes you make in the beginning could cripple you down the road.

First and foremost, before you sign anything, take it to an attorney. There are clauses and terms of art in leases that might look perfectly innocuous unless you know exactly what they mean. Furthermore, it is amazing how many things can go wrong in a tenancy. A friendly, rational relationship can sour over dozens of different little issues, and it’s dangerous to assume you and your landlord will always be able to work out an equitable solution. The best answer is to make sure your rights and interests are protected in the governing document itself, and an attorney with commercial real estate experience will know just how to do that for you.

If you want to give it a go without an attorney—or at least want to do the initial work yourself and have an attorney review the final product before you sign—then consider these basic points:

  • Who are you? The name you sign is important. If you’re a Limited Liability Company or a Corporation, you and your personal property enjoy some protections, but only if you include your business form in the lease. Otherwise, you—and not your company—may be liable for the rent and any additional costs.
  • How do you want to pay? Do you want a flat monthly payment for the duration, or a gradual step-up rent that increases over time? Be careful about any lease in which you pay a percentage of your income to the landlord; the landlord now has an interest in your sales and may push you to pursue short-term profits instead of long-term growth. As the landlord typically has some control over where and how you place your signs, this may become a point of contention between you.
  • What do you get? A share of the parking lot does not necessarily come with the property. You might be obligated to pay for the electricity, but what about other utilities? Common areas? Restrooms? What about air conditioning and heating, and at what temperature do you want to keep the property? Spell this out; don’t take these issues for granted.
  • What can you add to the property? You may want to change the floor or re-do the lighting, and you may add value to the property by doing so. Make sure the lease allows you to do that, or at least allows you to do that with the landlord’s written consent. And make sure you spell out what happens to those new lights if you decide to leave; if you want to take them with you, you need to say so in the lease.
  • What about your cleaning solutions and other chemicals? Many landlords are worried about their insurance premiums going up once you start storing caustic chemicals on the property; you may need them to conduct business, however. Watch for language that precludes you from storing any hazardous chemicals on the property, and make sure you write in some language that allows you to store chemicals reasonably related to your business. Talk this over with the landlord and make sure you’re on the same page. If insurance premiums are a major factor, you may need to offer to pay for the increase.
  • What about their chemicals? By leasing the land, you may inadvertently expose yourself to serious liability if anyone discovers hazardous substance spills on the property—even if you had nothing to do with it. Make sure the landlord includes a warranty that there are no discharges, spills, emissions, etc., and consider an indemnification clause whereby the landlord will cover you.
  • What if you want to renew? If you want an option to renew the lease when the contract ends, that information must be specifically expressed. Outline the terms of that option. Otherwise, you may have to start this whole process over—while competing with other people who want that space—when the lease term expires.
  • What about repairs? Nothing can sour a good landlord/tenant relationship like something unexpected breaking down. Unless the contract specifically says otherwise, the landlord is obligated to repair all major problems in the structure (plumbing, wiring, etc.) and all areas under the landlord’s control. Watch for language to the contrary, and make sure your obligations to repair items in your control are spelled out.
  • What do you want? If you’re just renting, make sure you say so; this is known as the Habendum Clause. If you want to rent with a purchasing option, make sure you lock in the terms of that option. Do you want first right of refusal? Or right of first offer? A blanket option to purchase doesn’t necessarily mean you’re the only person who can buy that property.
  • Finally, what if everything goes bad? As a commercial tenant, the law presumes you know what you’re signing. The implied warranties that protect residential tenants don’t apply to you. Make sure you have language in place that discusses your options to break the lease if the property no longer meets your intended purpose. All warranties of fitness for a particular purpose must be expressed in your contract.

Once you’ve considered all of these items, take the lease to an attorney for final review. There are still a dozen little issues that can catch a commercial tenant unaware, and an experienced attorney can help you identify and plan for them. But if you take it slow and plan ahead for all the possible contingencies, and make sure the lease accurately spells out your wishes, you’re a big step closer to hanging out your sign and the comforting knowledge that—whatever else happens—your lease won’t be one of your problems.

This article was originally drafted by Axley summer law clerk Jeremy Lyon.

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For more information about "Getting the Keys: A Quick Guide to Tenants Negotiating a Commercial Lease," contact Larry K. Libman at llibman@axley.com or 608.283.6727.