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5 clauses to consider when you lease commercial property

By Brenda Ezell    

Landlords have the upper hand. That’s a fact of commercial real estate leasing. Another fact is thatleasecommercial real estate leases often contain what appear to be insignificant terms—but these terms are critical to the success of small business owners, who hold the majority of commercial real estate leases.

From the start, the landlord has the advantage over the small business owner because leasing is likely the landlord’s only business, while it is often your first time leasing real property. When you negotiate a lease, consider five important clauses concerning:

• Cost,

• Terms of use,

• Transfer and termination,

• Renewals, and

• Attorney’s fees.

Cost

When you negotiate any contract, your chief concern should be how the contract will affect your business operations and profitability. Cost ranks high in a real estate lease for office, retail, industrial, or other types of property. 

The current economic climate has given tenants a slight advantage in negotiating favorable lease rates. However, there are other important lease terms that are often overlooked which can prove to be more costly than the rate per square foot if not given close attention.

• Build outs. Buildings rarely come ready-to-use, and build-out requirements often come with a hefty price tag. Pay close attention to build-out requirements and build-out allocations. The lease should clearly spell out who has responsibility for each element of build-out and should properly allocate the burden of any cost overruns.

• Franchise requirements. Franchise agreements often impose very strict and costly build-out requirements, so both the landlord and the franchise tenant must pay close attention to these requirements prior to executing the lease.

• Parking and signage requirements. These can also be costly if not considered carefully. The type of business operation will be a key factor in determining parking and signage needs. Determine whether local government approval is needed for any required parking or signage. Consider the cost of this approval before the lease is executed.

• Operating expenses. Most leases allocate operating costs, such as maintenance, insurance and taxes among tenants on a pro rata basis. Assess whether insurance requirements are reasonable under the circumstances, since the landlord may be using a form lease.

Use

Give lease terms regulating use of property the same scrutiny as terms related to cost. Small businesses are likely to locate in a multi-tenant property and therefore, therefore, tenant-use provisions can be important to the success of the business.

Landlords of multi-tenant properties want to create an attractive community with a complementary tenant mix. They also to maintain control over the types of tenants allowed to lease premises.

• Lender restrictions. The landlord’s lender may impose tenant-use restrictions, which may then be imposed on other tenants’ leases.

• Flexible-use language. Consider whether the lease has flexible-use language in the event your original business idea evolves or is no longer feasible based on market conditions. A use provision which permits “general office purposes” is more flexible than a use provision permitting “medical office purposes”.

• Special needs. Your business’ special needs should be spelled out in the lease. For example, a retail tenant might request an exclusive-use provision in its lease to prevent the landlord from allowing competing business uses in the same property. Be aware, however, that landlords generally object to exclusive-use terms for smaller businesses because they often become the subject of disputes and the landlord weighs this risk against the value of the tenant’s lease. 

Transfer and termination

The real estate crisis has demonstrated that transfer and termination provisions in leases are perhaps the most important parts of a contract. Many business owners who signed leases during the boom have fallen on tough economic times and are finding leasing costs unsustainable.

• Assignment and subleasing. Some small business owners are seeking alternatives to default through assignment and subleasing, which are the most common ways to transfer a leasehold interest.

An assignment occurs when a tenant transfers all or part of its interest in a lease to another party for the remaining term. A sublease occurs when a tenant executes a lease of the premises to a “subtenant” and conveys the same interest the tenant holds for a shorter term. Key to the small business tenant is whether the lease allows the tenant to assign or sublease its interest with or without the landlord’s consent, or whether the landlord can outright deny assignment or sublease.

Generally, the landlord wants maximum control over the tenant’s ability to assign or sublease its interest in the premises. At the same time, the tenant wants as much flexibility as possible. You would benefit from the ability to minimize your liabilities in the event the leased property is no longer suitable for your business needs.

Generally, a tenant has the right to assign its rights under a lease unless the lease states otherwise. To protect landlords from this right of assignment, leases generally contain provisions requiring the landlord’s consent to assignment or subleasing, or alternatively, prohibiting the right to assign or sublease altogether. The right to assign and sublease a leasehold interest can have a significant financial impact on a small business, should there be a change in circumstances, so  consider asking for these rights prior to lease execution.

• Termination. Termination of a real estate lease is generally a right that can only be exercised upon the default of one of the parties. However, as we know in Northeast Florida, small businesses tend to prosper and sometimes experience a level of growth that makes their existing space unsuitable. Although most leases do not allow a tenant to terminate for this reason, if you anticipate rapid growth request a lease provision that allows expansion or relocation at the same property and gives you a right to terminate if the landlord cannot accommodate your growth.

Renewal

In addition to termination options, renewal options can also prove to be valuable, particularly if market conditions change drastically. If your business is in a prime location, consider including a renewal option in the lease agreement. This can assure remaining in the same location at a reasonable cost.

Attorney’s fees

On a final note, while we always hope that lease transactions end favorably, they often do not. For this reason, ensure that the lease balances the burden of attorney’s fees in the event of a dispute. A lease provision that allows attorney’s fees for the prevailing party will accomplish this goal. When all parties must bear their own legal costs, disputes are more likely to be resolved amicably.

Brenda Ezell smallBrenda Ezell is the owner and sole shareholder of the Ezell Law Firm, which provides legal representation in all areas of commercial real estate law as well as representation in matters involving governmental regulation of land development. To contact Brenda Ezell, call  904-253-7879 or visit www.EzellFirmPA.com.


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