Important considerations of lease negotiations
A lot has been written about lease negotiations for good reason. You should never take a commercial lease for granted. It’s one of the most significant contracts a business owner signs, and a single paragraph of ambiguous language in a commercial real estate lease can result in years of frustration or possible lawsuits.
There are a few noteworthy trouble spots in commercial real estate leases that you want to avoid. Here are a few:
- Length of the lease: Commercial leases often run between 3 to 10 years. The length is negotiable of course, and tenants often prefer to lock into a longer lease as a hedge against inflation. The often overlooked part is the move-in date. The lease needs to spell out what happens if the space isn’t ready on the agreed upon date. Many last minute issues can occur, so detailing contingencies is vital.
- Rent increase amount: In the good old days, real estate taxes and energy costs rose so slowly that owners could recoup increases by raising rents with each new tenant or lease renewal. Today, escalation clauses are used. These escalators are often tied to the Consumer Price Index or written to pass on prorated increases in direct costs.
- Lease renewal: Having an agreed upon lease renewal formula can remove ambiguity from the process. Typically, a tenant gives a written notice or the lease lapses automatically—though multi-location businesses often prefer having an automatic renewal in place so as not to accidentally miss the renewal date.
- Landlord foreclosure: Having a standard non-disturbance clause can protect the tenant if the property is foreclosed upon. The non-disturbance clause ensures that the rental agreement between the tenant and the landlord will continue under any circumstances.
- Insurance coverage: Landlords typically cover the common areas and typically insist tenants carry coverage to protect the landlord. Making sure the policies dovetail is a job for an attorney with expertise in insurance or a professional insurance agent. He or she should review the building owner’s policies and help to close any dangerous gaps and spot unnecessary expenses.
Having the guidance of an experienced real estate attorney can help navigate the complexities of lease negotiations and avoid unnecessary complications and risk.