Negotiating Commercial Leases: Considerations for Landlords and Tenants (Part 1)

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In this 2 part series, we will discuss negotiating commercial real estate leases. Specifically, we will address key issues for landlords and tenants to consider during this process.

Part 1, will outline the overall considerations that landlords and tenants should be making when they are reviewing and negotiating commercial leases. We will also highlight 3 clauses you should take extra care in reviewing and negotiating.

The general goals that landlords and tenants seek to achieve during their commercial lease negotiations are the following:

Landlord Tenant
Consistent and Reliable Rent Payments Predictable expenditures
Ability to finance the property Operating flexibility
Ability to sell the property Ease of termination
Safeguarding their property Property to be a good fit for the business purpose

In addition, to the goals of each party, there are 5 general factors that impact the negotiation process of commercial leases: the state of the market, the location of premises, local and market norms, the size (both for the premises and overall building), and the creditworthiness of a potential tenant.

The first 3 clauses that we will discuss are rent payments, security deposits, and permitted use.

1. Rent

For Landlords, they want to make sure that rent payments cover their own payments relative to the building/property they are renting. Relatedly landlords want to ensure they cover all operating costs.

For tenants, they want to ensure that there are no ambiguous financial obligations and to identify and carve any and all expenditures they will be required to take over.

When negotiating, both parties will want to consider if the rent will include some or all of the following:

  • base rent (usually quoted based on square footage)
  • percentage rent (usually for retail leases relating to a tenant’s sales)
  • additional rent for any operating expenses, real estate taxes, common area management, and utility charges.

2. Security Deposit

For landlords, they want to make sure they are protected when it comes to the tenant’s performance under the lease agreement.

For tenants, they want to limit the exposure for any guarantors and their security amount.

When negotiating, the parties will want to address the form of security (cash vs a letter of credit), a burndown (where there is a decrease in a security deposit after a certain length of time if no defaults have happened), and whether or not a guarantee will be required.

3. Permitted Use

Landlords will want to narrow down the type of permitted use and activities that can be performed on the premises; conversely, tenants will want a broad use so that they have flexibility when it comes to assignments/sublets or a change in business.

When negotiating the permitted use, one of the main concerns for both parties is whether there will be exclusive use. Tenants will want to try and restrict a landlord’s ability to lease the premises to any of the tenant’s own competitors, especially in retail leases. Conversely, landlords may want to forbid tenants from engaging in certain types of business for which they have granted an exclusive right to another tenant.

Contact us for more information on commercial leases by e-mailing us at info@mnklawyers.com.

This material is provided for informational purposes only. It is not intended to constitute legal advice, nor does it create a client-lawyer relationship between MNK Law and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material.

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