Whether you are starting, expanding, or relocating your business in Summerville, one of the first steps you need to take from a legal perspective is to negotiate the terms of your lease. Commercial leases tend to be lengthy and complex (often unnecessarily so), and they are almost universally heavily one-sided in favor of the property owner. With this in mind, as a prospective commercial tenant, you need to be prepared to negotiate. But, where should you focus your efforts, and what can you reasonably expect in terms of negotiated concessions?
As with other types of contracts, when negotiating a commercial lease, it is necessary to focus on your business’s particular needs. This includes obvious issues such as how much space you need and how much you can afford to pay, but it includes some not-so-obvious considerations as well. When negotiating a commercial lease, market factors are also relevant. If you are searching for space in a tenant’s market, you could have a significant amount of leverage with which to negotiate. On the other hand, if your options are limited and the property owner is courting multiple offers, you may need to strike a balance between negotiating and making sure you get the lease.
10 Commonly-Negotiated Provisions in Commercial Real Estate Leases
So, what should you negotiate? Again, recognizing that each individual business’s circumstances are different, here are 10 commercial lease provisions that commonly get negotiated:
1. Term (Duration of the Lease)
As a tenant, from the moment you sign a commercial lease, you will typically become bound to pay rent (and all other charges and expenses) for the full duration of the lease. As a result, the term of the lease is of critical importance. While you want to make sure you have enough time to build your business at its new location, you do not want to lock yourself in for too long and risk having to pay “lost future rent” while you are no longer occupying the premises.
2. Description of the Premises
Are you renting the entire commercial space that is available? What about storage areas and outbuildings? How many parking spaces are you guaranteed? While the description of the premises is one of the most-fundamental aspects of a commercial lease, it also gets overlooked with surprising frequency. As a commercial tenant, you need to make sure that the lease fully and clearly describes the rental premises consistent with your understanding.
3. Rent, CAM Charges, and Operating Expenses
Rent can be calculated in a multitude of different ways in a commercial lease, and commercial landlords take different approaches to holding tenants responsible for common area maintenance (CAM) charges and operating expenses. When negotiating a commercial lease, you want to make sure that your payment obligations are clear, and that the property owner has limited (if any) rights to adjust rents, charges, and expenses during the lease term.
4. Built-Out and Tenant Improvements
Will you be leasing a “white box,” or will the landlord be required to built out the space to your specifications before you move in? Either way, it will be important for you to ensure that the lease includes appropriate protections regarding matters such as commencement and move-in dates, tenant improvements, inspections, and approvals.
5. Anchor Tenant and Non-Competition Clauses
“Anchor tenant” provisions provide tenants with a right of early termination in the event that a major business leaves an adjacent or nearby property. Non-competition clauses ensure that the property owner will not lease adjacent or nearby space to a competing business. Both types of contract terms can be critical to retail tenants, but tenants will typically need to negotiate for their inclusion in commercial leases.
6. Early Termination
Commercial leases will typically provide property owners with several early termination rights while keeping tenants bound for the full lease term. There are a number of ways that prospective tenants can negotiate these provisions, from seeking the addition of “notice” and “cure” periods to inserting tenant termination rights for landlord defaults.
7. Compliance with Laws
Commercial leases typically require tenants to comply with all applicable local, state, and federal laws. While there is nothing inherently wrong with an obligation to comply with the law, landlords often use these provisions to overreach. These provisions are often written vaguely as well, and tenants must be careful to ensure that they are not taking on responsibility for compliance obligations that are beyond their control (i.e. ADA compliance for build out work performed by the property owner).
8. Indemnification and Insurance
Indemnification clauses are used to shift liability from one contracting party to another. Commercial leases typically impose broad indemnification obligations on the tenant, and it is up to the tenant to negotiate modifications that appropriately limit its liability. Similar to legal compliance, commercial tenants generally should not take on indemnification obligations for any potential liabilities that are beyond their control.
9. Renewal Rights
In commercial leases, tenants’ renewal rights are typically subject to multiple conditions, and these conditions can provide property owners with varying degrees of discretion. As a tenant, you want to be sure that there are objective criteria for determining whether you have the right to renew.
10. Subletting and Assignment Rights
Regardless of whether you have any current intention to sublet the rental premises or assign your lease, it is generally a good idea to negotiate reasonable subletting and assignment rights just in case you need them. Here, it makes sense for property owners to retain a certain amount of control (i.e. any sub lessees or assignees should be subject to the owner’s ordinary approval standards); however, there is not much justification for landlords to flatly prohibit subletting and assignment.
Discuss Your Commercial Lease with Summerville Real Estate Attorney Patrick Watts
Patrick Watts is a Summerville real estate attorney who has been practicing law in South Carolina for more than 40 years. If you are preparing to enter into a commercial lease and would like to speak with Patrick about protecting your business, please call 843-851-7050 or contact us online to schedule a confidential consultation.