Pitfalls to avoid in commercial lease

Description the leased permises: A well-written lease must clearly define the leased premises to include all aspects of the business’s needs, now and in the future. It is important that the tenant understand what square footage the leased premises includes in order to truly appreciate its rights and liabilities

Clarity: The language providing any financial obligations of the tenant must be exceedingly clear.  Nothing should be left to assumption or later negotiation.

Put the deposit on an escrow account. Do not give the deposit in cash directly to the landlord, but give it to the lawyer.

Common Area Maintenance (“CAM”) Expenses (also known as “Operating Expenses”): Landlords may try to use this provision as a “profit center.” An Operating Expense or CAM provision requires the tenant to pay its pro rata share of the operating expenses incurred by the landlord in the operation and maintenance of the building. The tenant should reserve the right to audit the landlord’s expenses and to review the landlord’s calculations.

Landlords may try to use this provision to require the tenant to repair and maintain areas located outside the leased premises

Repair and Maintenance Provision: Landlords may try to use this provision to require the tenant to repair and maintain areas located outside the leased premises. Define exactly the extent of the tenant’s repair and maintenance obligations, taking care to exclude items such as regular wear and tear or items that are covered by the landlord’s property insurance.

Real Property Taxes: An unsuspecting tenant may find itself paying real estate taxes and special assessments for a period beyond the expiration of the lease.

The real property taxes provision defines the respective obligations of the landlord and tenant for real property taxes. Landlords have expanded the definition of real property taxes to include any type of tax assessed against the property, the landlord or for doing business and are increasingly defining taxes to include future taxes of any sort, including rent taxes or income taxes.

Define precisely which taxes and/or assessments are to be included in the definition of real property taxes and be sure to exclude federal or state income, franchise or estate taxes.

Assignment and Subletting: Asking the landlord for permission to assign or sublet the premises may give the landlord the ability to terminate the lease. In the typical commercial lease, the landlord requires the tenant to get the landlord’s consent prior to any assignment or sublet.

Negotiate several exclusions from the consent requirements, including assignment or sublet. In the absence of a release, the tenant will continue to bear the economic risks of paying the rent and all other charges under the lease for the balance of the lease term, including any existing options to extend or renew (“Options”) following an assignment. The tenant should attempt to get a release of liability for the Option periods.

Termination, Relocation or Expansion Rights: A tenant who has not had its lease carefully read may be surprised to learn that the landlord has reserved the right to unilaterally terminate the lease or relocate the tenant. A termination provision in favor of the landlord allows the landlord to unilaterally terminate the lease, usually on the occurrence of some condition. A re-location provision allows the landlord to relocate the tenant to other premises within the building. An expansion provision, on the other hand, may give another tenant the right to expand into the tenant’s premises and may allow the landlord to terminate the tenant’s lease or relocate the tenant. Ideally, a tenant should not agree to such clauses.

Tenant Improvements: Determine whether the landlord will be designing and constructing the tenant improvements at its sole cost (a “turnkey” arrangement) or whether the landlord will be giving the tenant an allowance, with either the tenant or landlord designing and constructing the improvements (an “allowance” arrangement). A well-written lease provides that the tenant is the owner of all tenant improvements, and allows for their removal at the expiration or termination of the lease. Many retail clients, especially restaurants, put a tremendous amount of money into the outfitting of a commercial space. The tenant needs to insure that the improvements it makes, once installed in the premises, do not become the property of the landlord and can be removed at the expiration of the lease or transferred to any purchaser of the business.

Signing a long-term lease without insisting on proportional concessions from the landlord. Of course, most landlords prefer that commercial tenants sign long-term leases (5, 10 years or longer). However, in return, you should ask for certain items in relation to the length of the lease, such as free rent for a period of time and/or a tenant fit-up at the landlord’s expense.

Relying on the landlord’s word that your business is approved for zoning. Get permission from the city or township zoning officer before entering lease negotiations. Your landlord may really believe what he tells you, but he’s not the one who makes that determination. It doesn’t matter how good the lease deal is — if the town won’t let you go into the space you’re considering, you’ve wasted valuable time negotiating a lease. Or maybe the landlord is bad faith.

Option to renew: A well-written lease provides for a term that includes options to renew. If location is critical to the business’s success, it is important that the lease allow for renewal options. In a down economy, it is recommended that the tenant establish the financial terms for the renewal term now, versus waiting to renegotiate at a later date. A lease that indicates the terms will be negotiated at a later date, will leave the window open for the lease to be terminated by the landlord based upon the inability to reach a meeting of the minds between the parties regarding economic terms.

The lease can also provide a right of first refusal, if the landlord wants to sell the leased place. In the best case, the lease may provide a surrender option at a specified price at the lease is entered

The rent: A well-written lease clearly defines all financial components of the lease, including rent, additional rent, common area maintenance and percentage rent. Repairs are inevitable when a lease is for a term of years. The parties should clearly define their obligations for repair and maintenance in the lease. For example, who is responsible for repair and replacement of the heating and air conditioning systems, roof, structure, plumbing and electrical components of the leased premises?



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