The leasing of real estate for business use has been a part of business since time immemorial.
Leases concerning business property, whether the leases are typed or printed, are, for the most part, designed to be heavily based in favor of the Landlord. These documents must then be carefully scrutinized by the Tenant and the Tenant’s lawyer, to determine if it contains the business points agreed upon by the parties and that nothing has been added that was not agreed. Generally, the lease will contain a great number of provisions that no one ever discussed previously and, inevitably the negotiation process must begin again.
When the Tenant gets the proposed lease from the Landlord, it is a heavy, thick and forbidding document. The Tenant usually does not have enough technical knowledge to understand all of its implications and then the tenant has a choice as to whether to sign it as-is, read and negotiate it without a lawyer’s help or send it to a lawyer for review.
Unfortunately, many Landlords initially present to the prospective Tenant the toughest lease the Landlord can put together and the Tenant, or the Tenant’s lawyer, must then start the negotiation process anew to eliminate the most unreasonable provisions of the proposed lease.
The number of change which the Tenant may successfully negotiate often has less to do with the skill and knowledge of the Tenant and the Tenant’s lawyer, than the amount of space that is available for rent in the marketplace. If there is a lot of space available for rent, the Landlord will be willing to consider any and all suggested changes. If there is little available space that is suitable for the Tenant, the Landlord will probably not do a lot of negotiating.
Common traps for the Tenant include the following:
- Failure to Include in the Lease Representations that the Landlord Made to Induce the Tenant to enter into the Lease.
If the Landlord or the Landlord’s broker has made specific representations during the negotiating process as to matters of importance to the Tenant, those representations should be included in the lease as a representation and warranty by the Landlord.
- Failure to Obtain a Warranty from the Lessor as to the Amount of Square Footage in the Leased Premises.
During lease negotiations, it is customary for the rent to be quoted in terms of a price per square foot, either on a monthly or yearly basis. When agreement is reached on the economic terms, the lease is prepared and it comes out with a number that was calculated, but there is no reference to the price per square foot and often no amount of space that is being leased. For obvious reasons, the Landlord wants the premises to contain as much space as possible, whereas the Tenant wants the space to be the least amount possible.
- Failure to deal with “Free” Rent Issues.
Depending upon market conditions, a Tenant may obtain “free” rent for some period of time. Is the freedom from rent only the freedom from base rent for the leased premises or is it also free of common area charges and operating expense charges? Normally “free” rent to the lessee means freedom not only from base rent but also common area and operating expense charges. Landlords often have a different view.
- Failure to Separate Improvement Rent from Base Rent.
The term “improvement rent” generally means the amount of money added to the base rent to cover the cost of constructing additional improvements to the leased premises, which cost will be authorized over the term of the lease. The improvement should be separated from the base rent because once the improvement rent has been paid the only rent that is to be paid is the base rent. In the event that there are consumer price index increases, those increases should be based only on the base rent and not on the improvement rent.
- Failure to Limit Landlord’s Delay in Delivering Possession of the Leased Premises to the Tenant.
The issue here is how long will the Tenant wait for the Landlord to deliver the possession of the premises to the Tenant. The inability of the Landlord to deliver the space to the Tenant may arise out of a number of problems, irrespective of whether those problems are within the control or outside the control of the Landlord. The Tenant should have a limit on how long the Tenant will have to wait to occupy the premises. At some point, the Tenant should have the right to walk away from the lease without penalty.
- Failure of the Tenant to Ask for Options.
There are many types of options that may apply to a lease. There are options to extend the term of the lease, options to purchase the real estate, the option to terminate the lease early, the right of first refusal to lease additional space and the right of first refusal to purchase.The granting by the Landlord of any option to the Tenant is a disadvantage to the Landlord because it restricts the ability of the Landlord to deal with the property. For that reason, Landlords are very reluctant to grant options of any type to the Tenant and the Tenant normally must negotiate for such options.
- Failure to Exclude from Operating Expenses or Common Area Charges Expenses that Should not be Charged.
The concept of the Tenant paying some portion of the operating expenses or common area maintenance charges, often referred to as “CAM charges”, is that the Landlord is obligated to maintain the property in good and proper order, condition and state of repair for the benefit of all the tenants and that each Tenant, or some of them, shares proportionately in the cost of the CAM. To the extent that the Landlord cannot include any item of expense within CAM then that has a negative value on the property because it is a cost that has to be absorbed by the Landlord resulting in a lower net operating income from the property. Therefore, the Tenant must beware that it is to a Landlord’s benefit to include within CAM as much expense as the Landlord is legally permitted, and negotiate accordingly.
- Failure to Ascertain Authority to Sign the Lease.
When a buyer of real estate is purchasing the property, a title insurance company normally insures the buyer that the grantor of the deed has the authority to execute and deliver good title to the property to the buyer. Rarely is title insurance obtained by the Tenant in a lease, yet many of the same issues exist. Is the person or entity signing the lease the owner of the property? Under most circumstances, the same person or entity who has to sign a deed to sell the property has to also sign the lease under most circumstances. If a Landlord is an individual and that individual is married, then both spouses have to sign the lease. If the lease is being signed by an agent of the owner or a trustee that owns the property, then it is up to the Tenant to determine whether the person or entity signing on behalf of the owner has the authority to enter into the lease. If there is no such authority, or if the person required to sign the lease did not, then the lease may be either void or voidable. This can be particularly disturbing to a Tenant who has invested large sums of money in the location.