Tips for Tenants Negotiating a Commercial Lease

While this article is mainly addressed to those who are planning to open an office or retail establishment at a new location, it also offers useful information to those who are about to exercise some option provided for in their lease, such as the option to renew or to take expansion space. You are in the best bargaining position during the initial negotiation stage. However, depending on the surrounding economic circumstances, you can also use your exercise of an option as an opportunity to "amend" some provisions in your lease.

To be most effective under either scenario, it is imperative that you read and understand your lease.

Even if you have found a suitable location and worked out the "business terms," such as how much you will pay per square foot, and how much of the build-out the landlord will pay for, your negotiating job is not done. The reason is simple. There are still all those pages of terms and conditions in the lease which should be evaluated to be sure that your interests are protected. Remember, you are planning to "live" with that landlord for at least five to ten years, if not longer. You do want to know what the small print means. One way or another, all of those terms can affect your bottom line.

If you simply sign the very official-looking document that the landlord's leasing agent gravely hands you without thoroughly understanding what all of the terms mean, you may later discover to your dismay that embedded in the tiny print are clauses which can trip you up, such as: limitations on your ability to assign the lease, duplicative maintenance charges, site relocation requirements and kick-out provisions.

Do not be afraid to ask for changes in the lease agreement.

Be wary if after you have settled on the business terms, the landlord's representative immediately presents you with the execution copies of the lease and asks you to sign them. With such a maneuver the representative may be trying to create the impression that the negotiating phase has now come to an end and all that remains is for the parties to sign the document to memorialize the deal. In reality, some of the most important horse-trading is about to begin.

When negotiating a lease you should keep in mind that there are no set terms in a lease. That means, just like the amount of rent to be charged, everything is negotiable. Larger tenants can expect to obtain more concessions from the landlord, but landlords will often try to find ways to accommodate the concerns of smaller tenants as well, provided the issues are raised early in the negotiation phase. Landlords only make money when space in their buildings is occupied.

Retain your business perspective at all times when evaluating the deal being offered to you.

This rule may seem self-evident, but too often people fall in love with particular space. Remember, if you become so wedded to the space that you cannot imagine yourself anywhere else, you are needlessly restricting your maneuverability and giving too much power to the other side.

After reviewing the draft lease, you should be able to identify provisions which, from your point of view, are so drastic they will kill the deal if the landlord insists on retaining them. By maintaining a dispassionate perspective, you strengthen your position because your attitude is more positive and confident. If after further negotiations the landlord is still unwilling to delete or amend the troublesome
provision or provide other concessions in exchange, you can more clearly evaluate the situation for what it is and look elsewhere. Keep in mind, if the landlord is dismissive of your concerns at this stage in your relationship, such an attitude will continue throughout the term of the lease.

More than likely the landlord is prepared to modify a questionable provision provided the issue is brought to his or her attention. Here is language from a lease I negotiated dealing with the extent of "the landlord's liability." Each clause as written has a major problem from the tenant’s perspective. Test your ability to spot the troublesome provisions buried in the lease's "boilerplate."

First Clause:

If Landlord shall fail to perform any covenant, term or condition of this Lease upon Landlord's part to be performed and within thirty (30) days after receipt of notice from Tenant of such failure, shall have failed or refused to cure such failure, and as a consequence of such alleged default, Tenant shall seek a judicial determination of the occurrence of such a default, then Tenant's sole remedy, at law or in equity, shall be the termination of this lease.

Second Clause:

It is specifically understood and agreed that any judgment against Landlord or any of the partners of Landlord, individually shall be satisfied only out of proceeds of sale received upon the execution of such judgment and levy thereon against the equity of Landlord in the Leased Premises.

Just because the first provision seems to say that the landlord will be in default if it does not cure defaults within thirty days of notice from the tenant that is only part of the story. The intent is to limit the tenant's remedy so that in a situation where the landlord defaulted, when the tenant seeks to enforce his or her rights, the tenant's only remedy is to end the lease. That means the tenant would lose all of the value which he or she invested in that space. What tenant would seek to enforce his or her rights given such an outcome?

The second clause is problematic because here the landlord is attempting to limit its liability to its equity in the leased premises as opposed to the entire building.

Following the first round of negotiation, the landlord agreed to delete all of clause number one and to substitute the phrase "the Building" for "the Leased Premises" in clause number two.

Let us examine another example. One of the most important rights for a tenant to preserve is the ability to assign his or her rights to the premises to someone else should the need or opportunity arise. Landlords are reluctant to give tenants that kind of authority, preferring to retain as much control over the use of the premises as possible. When left to their own devices, landlords often resolve this conflict by entirely taking the right away from the tenant. Here is a typical lease assignment provision with a hidden land mine that should be excised.

Tenant agrees that it will not transfer, assign or sublet the Premises without Landlord's prior written consent. Landlord agrees that it will not arbitrarily withhold its consent. Tenant further agrees that if it intends to assign or sublet the Premises, it will first notify Landlord in writing and Landlord, at its option, may accept a surrender of the Premises, in which event, Landlord shall release Tenant from any further liability under this Lease.

On the one hand, it seems as if the landlord has agreed to be reasonable when asked by the tenant to give its consent for an assignment of the lease. However as written the clause really allows the landlord to act arbitrarily because the landlord has reserved the absolute right to terminate the lease just because the tenant wants to assign the lease. Under the sample provision, if the landlord activated the
termination option, the tenant would have no choice but to surrender the premises and lose most of his or her investment.

Following further discussion with the landlord making it clear that his insistence on retaining the "kick-out" provision would kill the deal, the landlord proposed the following language, which the tenant found acceptable.

Landlord agrees that if the Tenant should decide to assign the Premises to another proposed tenant who intends to use the Premises for the uses specified in Section 4.1, the Landlord shall not force the Tenant to surrender the Premises provided the assignee must be of equal or greater financial strength as the Tenant, as reasonably determined by the Landlord. However it is agreed and understood that should the Tenant intend to assign the Lease to any proposed tenant that intends to change the type of use, that the Landlord will be free to exercise its right under the lease.

Negotiating requires patience.

In this last example the tenant was satisfied with the modification the landlord offered. However, the clause, while improved, remains troubling because the landlord could still terminate the lease if the tenant wished to assign it to someone who wanted to make another use of the space than that provided for in the "use" clause of the lease.

If the tenant were sufficiently confident and willing to be a little more patient, another round of negotiations could have resulted in further modifications to this clause. In the next round of discussions, the tenant could have asked for the right to withdraw its request for an assignment if the landlord decided to terminate the lease. Alternatively, the tenant could have taken a harder stand and called for the
landlord's decision to be "reasonable" in any case presented to him. From my own experience, I believe that the landlord would have been willing to make further adjustments. However, if the tenant is impatient with the process, he or she may be foregoing rights whose value is not immediately apparent.

In conclusion, if you follow the four rules that I have laid out, you will be in a better bargaining position with your perspective landlord, and you will be able to negotiate a far more balanced agreement than the one that was originally presented to you for signature.

Barbara I. Berschler has practiced general business and intellectual property law since 1985, in the Washington, D.C. metropolitan area. She is with the law firm of Press, Potter & Dozier, LLC, located in Bethesda, Maryland, and may be reached at 301-913-5200.