Look Before You Lease: Points To Consider In Leasing Commercial Retail Space
By Ruth Khalsa
For the commercial retail tenant negotiating a commercial lease, legal and practical disasters lurk in the shadows. Even if this is your umpteenth leasing experience, resist the temptation to be cavalier. Approach each leasing transaction with the same caution you used as a first-time lessee.
Comparing the original letter of intent and the final draft of the lease document is one of the most important tasks in the negotiation process. Are you and your prospective landlord on the same page? Did all of the terms of the letter of intent make it into the final lease? Flag any terms that are new, missing or have been changed (even slightly) from the original letter of intent. Is the changed or missing term a deal breaker? How will it impact your business, if at all?
Are there terms in the final lease agreement that were not in the letter of intent? Will these added terms cause you extra expenses or possible legal exposure in the future? Don’t assume things will always go smoothly. Could missing or newly added terms affect your bottom line?
Pay particular attention to key deal points:
Buildout expenses and approval: Buildout costs should be paid by the landlord—who will continue to benefit from the improvement long after your lease term ends. Make sure the lease doesn’t turn buildout expenses into a de facto loan that will eventually be passed along to you. You should have the right to terminate the lease if the landlord refuses to approve buildout plans within a reasonable time, say 30 days. If your circumstances require fast-tracking the buildout plan, the lease should specify a shorter approval period.
Guaranties: A guarantee means you personally are on the hook, even if the lease is in your business’ name and your business is an LLC. If the landlord wants you to sign a guaranty, you should strongly consider hiring an attorney. Can the guaranty in the lease be terminated before the end of the lease term? If you assign the lease, would the assignees be on the hook for your guaranty? Could an assignee terminate the guaranty? (Hint: unless the language of the guaranty states this, assume that an assignee would have no termination rights.)
Repairs: How are costs for necessary repairs allocated? Is the lease clear about which repairs must be handled by the landlord, and which are passed on to the tenant? For example, if the lease requires the landlord to handle roof repairs, do those expenses eventually find their way onto the tenant’s bill as a CAM charge?
CAM Charges: The acronym CAM stands for “common area maintenance” expenses. If these charges are capped in the lease, is it a cumulative or annual cap? Does the lease say that the landlord is always responsible for the tenant’s fees in case of a CAM overcharge? Or is the landlord only responsible for the tenant’s fees under certain unusual circumstances?
Relocation: Does the lease give the landlord the right to relocate you to another space? If so, would that adversely impact your business? Who pays for the move? The lease should require the landlord to pay all moving expenses and ensure the new space be “substantially similar or higher in quality” than the space you are leaving.
Indemnity: Indemnification should be a two-way street. If you have to pick up certain repair expenses resulting from your use of the property (or your clients’ carelessness), be sure your landlord has a similar obligation for damages caused by landlord negligence.
Renewing the Lease: When the lease term expires, the last thing you want to do is move to another space now that you’ve completed your buildout, furnished your retail space, and trained your customer base on your new location. Make sure your lease document spells out how much advance notice is required to renew: generally 90-120 days before the lease term expires. How are CAM charges addressed in the renewal? Do outstanding CAM charges have to be paid before renewing the lease? How will your new rental rate be calculated? Avoid open-ended language like “fair market rent at the time” of the lease renewal.
Landlord Bankruptcy: What happens if the landlord files for bankruptcy? Can a trustee decide to end your lease because the property will be more valuable if some existing leases are terminated? Engage the assistance of someone fluent in legalese to make sure that your lease includes “Subordination,” “Non-disturbance” and “Attornment” provisions.
Ignore the temptation to take shortcuts in order to get the deal finalized quickly. An experienced real estate attorney can assist you in crafting suitable lease terms to protect your interests.
Ruth Khalsa is an attorney with Hymson Goldstein & Pantiliat, PLLC, 16427 N. Scottsdale Road, Suite 300. More: www.Scottsdale-lawyers.com; 480-991-9077.