A Tenant’s Checklist for Commercial Lease Negotiations
When renting office space, tenants often have limited bargaining power over the terms of the lease. Nonetheless, any leverage they may have with a landlord is usually greatest before an agreement on a price has been reached. Many clients are unaware of this opportunity to negotiate, and regrettably, contact our firm to review a lease after having already reached a verbal agreement on key terms, including price. At that point, further negotiation may be considerably more difficult.
Before meeting with a prospective landlord, tenants should prepare by identifying any issues that are important concerns. This basic due diligence can strengthen a tenant’s bargaining position just enough to request an agreement in principle from the landlord with respect to such issues before committing to final lease terms. In doing so, a tenant also gains valuable insight into a landlord’s general willingness to cooperate, which the tenant may wish to consider when settling on a price.
The below checklist of issues may offer a helpful starting point for tenants during the due diligence process:
Negotiating the base price of the monthly rent payment is usually where the parties start. Other costs to consider include:
- security deposit (typically no more than 1-2 months’ base rent);
- utility charges (gas, electric, water, heat, AC, renovations);
- additional costs such as “operating contribution,” “common area maintenance charges” (CAM), or “additional rent” which are typically formula-driven calculations based on the percentage of space a tenant occupies in the building and represent the tenant’s share in the overall cost to operate the entire building and maintain common areas; and
- in retail space leases, a percentage of sales (a common requirement of commercial landlords in the retail sector).
Sometimes, a landlord may try to include the cost of capital improvements, in addition to routine operational costs, as a component of the tenant’s lease obligation. Unlike the above charges, this is not a standard expense in commercial leases.
2. Termination Rights
It is important to understand how termination works for both parties. Some termination provisions allow a landlord to terminate the lease without notice. As a tenant, written notice, as well as an opportunity to remedy during a “cure period,” prior to termination, are usually preferred.
A lease may also require the tenant to provide advance notice of a decision not to renew, which, ideally for the tenant, is not more than 30-60 days before the end of the lease term. Finally, many commercial leases give landlords early termination rights if a tenant is in breach (including acceleration of payments); but, they rarely include the same right for tenants – unless it is requested and negotiated. A tenant may wish to exit a lease early if the landlord breaches the lease, files bankruptcy, or is acquired.
3. Late Payment Fees
Late fees are often imposed when the rent is past due. In some leases, this provision also gives the landlord the right to impose fees (as a penalty) if the tenant violates the lease. However, if this provision allows such fees to be charged “immediately,” without notice, and without an opportunity to cure, the tenant may wish to negotiate better terms, including its own right to withhold rent in the event the landlord breaches the lease.
4. Accurate Description of Premises
A lease typically includes a description of the leased premises. It is good practice to confirm that the space is fully and accurately described in the lease, including the correct amount of square footage.
5. Right of First Refusal (ROFR)
A right of first refusal clause gives the tenant the opportunity to lease more space, if and when it becomes available in the building or complex, before the landlord leases it to another tenant. This issue is often important to startups and fast-growing companies with plans for future expansion. If a ROFR is not included in the proposed lease, a landlord may be willing to add it upon request by the tenant.
While most leases prohibit ‘alterations’ to the premises, common exclusions include cosmetic improvements (like fresh paint, new carpet and window treatments) and telecommunications hookups. Tenants should pay close attention to this provision, especially if they intend to do any extensive remodeling (e.g., to suit specific business needs or capture a preferred aesthetic). If so, it is best to outline what is and isn’t included in the lease.
Not all commercial tenants require signage at the leased premises. However, if a tenant has plans to add a new sign on either the exterior or interior of the building (or to add its name to an existing sign), it will be important to address this right in the lease; and if possible, minimize (or waive) any cost associated with it.
8. Access to Maintenance Areas
Commercial office leases may restrict tenant access to maintenance areas such as the roof, basement, plumbing, and wiring for safety and liability reasons. If a tenant needs such access, be sure to expressly include these access rights in the lease.
Simply put, are the premises furnished or unfurnished? If furnished, ensure the lease says so.
10. Sublet Rights
Many landlords require tenants to seek their approval before entering into a sublet arrangement. Tenants anticipating this need should try to negotiate the removal of this requirement, and otherwise, pay careful attention to to scope of this provision, particularly as it relates to landlord’s ability to withhold (or place conditions upon) such approval.
Is parking included in the base rent? If so, how many spaces? Are there any reserved parking spaces that are off-limits to tenants?
Gone are the days of changing the locks between tenants. Many commercial spaces are now secured by key card systems and other security features. To ensure safety and privacy, tenants should confirm that the landlord is specifically required by the lease to update any locks and create new keycards to prevent access by the prior tenant. Ideally, the lease will entitle the tenant to as many keycards as it needs at no additional cost.
Landlords may reserve the right to access to the leased premises for cleaning, repairs, maintenance, or other reasons. If a tenant is concerned about safeguarding confidential information, especially if computers and documents are going to be freely accessible to anyone who enters, the tenant should negotiate for the inclusion of landlord confidentiality requirements in the lease. Additionally, the tenant may wish to take additional measures to protect proprietary information (plans for expansion, growth, IP, etc.).
14. Lease Term
When a tenant agrees to a longer lease term, the monthly price is likely to be better. However, the tradeoff is often less flexibility, which can present challenges if a tenant’s plans do change. Since most leases include early termination penalties (e.g., requiring the tenant to pay for the entire term length regardless of occupancy or need), tenants should weigh this tradeoff before agreeing to a lease term.
15. The Legal Stuff
A lease is a contract; therefore, it is always a good idea to ask your attorney to review certain legal provisions, such as:
- “Good Title” – in this clause, the landlord represents that it has good title to the premises being leased and will deliver the property to the tenant free of liens and encumbrances, “broom clean,” and ready to occupy.
- “Compliance with Laws & Codes” – notwithstanding the usual boilerplate that (a) the premises are being leased “as is” and (b) tenant has the right to inspect, and if nothing is found wrong upon inspection, any future issues are the tenant’s problem, this clause holds the landlord responsible for “latent” or hidden defects, as well as for code violations, and obligates the landlord to comply with all applicable laws (such as ADA compliance, free from pests and rodents, no hazardous materials or environmental issues, etc.).
- “Personal Guaranty ” – some commercial leases include this provision, requiring the tenant to personally guarantee the lease on behalf of their business, even when the business is the actual tenant. For legal and business reasons that your attorney can further advise on, this requirement should be avoided wherever possible.
Prospective tenants that take the time to understand these common lease provisions are likely to improve their bargaining power during lease negotiations. Although it is still advisable to have a lawyer review the entire lease agreement for other risks and non-standard provisions, the issues highlighted above tend to be overlooked early on, leaving tenants at a disadvantage. If you would like assistance with a lease agreement, please contact Stacey Heller at email@example.com.
Stacey Heller is an experienced transactional attorney and has worked with companies in a variety of industries, including technology, retail, telecom, advertising, hospitality, and real estate and construction. Stacey regularly handles a broad range of work for her clients, from commercial agreements to real estate (commercial leasing and construction), as well as dispute resolution matters. Stacey can be reached at firstname.lastname@example.org or (703) 403-5347.
This publication should not be construed as legal advice or a legal opinion on any specific facts or circumstances not an offer to represent you. It is not intended to create, and receipt does not constitute, an attorney-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal questions you may have. Pursuant to applicable rules of professional conduct, portions of this publication may constitute Attorney Advertising.