Considerations in Commercial Leases

When seeking to rent commercial space for your business, it is important that your lease terms are given careful consideration. A lease, unlike a contract of sale that essentially terminates at closing, lives on for the entire term. During the term of the lease, many things can change, and it is important to seek the most flexible terms available.

A few key points are listed below:

Premises. Consider whether the space under consideration properly serves the business purpose in not just the short term but in the longer term as well. Might you need additional space in the not so distant future? There may be an opportunity to negotiate an expansion option (or if less space needed, a potential give-back of a portion of the space) that should be explored.

Use. It is important to secure confirmation that the intended use is consistent with local zoning and the certificate of occupancy for the building. Tenants should try to make the permitted use as broad as possible (e.g. any lawful use). Landlords are generally interested in keeping the permitted use quite narrow for a variety of reasons.

Delivery. The space should be delivered with all building systems in good working order and the space free of hazardous materials. The lease should be clear with respect to the condition of the space upon delivery of possession. Consideration should be given with respect to the timing of delivery as it may impact the business plan. An outside delivery date is generally an important point.

Term. The term of the lease can be a double-edged sword for a tenant. A tenant will want to have an initial term that justifies its original investment in readying the space and offers the security of not having to undertake another move too soon. However, if there is a prospect that the business may not work out or may grow beyond the space, a tenant may not want to be obligated for a longer term. A tenant may seek an initial term with one or more options to extend the lease term. A long term lease generally works well with landlords (provided that the rent is right) as it works well when the landlord seeks financing on the building. However, landlords are frequently amenable to extension options.

Base Rent/Additional Rent. Tenants should consider whether the rent under consideration is in keeping with the market – including monthly rent and the amount of abated rent. Aside from the initial base rent, there are likely to be escalations over the term which may be structured in a variety of ways. Care should be taken to closely review the definition of operating costs or common area maintenance charges (i.e. CAM charges) if they are passed on to the tenant. If the tenant is to be responsible for real estate taxes, it would behoove a tenant to limit its exposure to only increases over a base year. Oftentimes a tenant can negotiate for an audit right should there be any question with respect to how such sums were calculated.

Maintenance and Repairs. The lease should clearly delineate the respective obligations of landlords and tenants. Landlords are typically responsible for the building envelope and the building systems and the tenant responsible for its space and systems serving only that space. Under certain circumstances, a tenant may be able to negotiate for “self-help” should the landlord not under necessary repairs in a timely manner.

Default. Tenants should request cure periods and no acceleration of rent, unless over fair market value. Landlords should also be required to mitigate damages.

Assignment and Subleasing. There are many reasons why a tenant may seek to assign its lease or sublet its space. Consent of landlords is fairly standard, but the terms governing such matters should be clearly set forth, and a landlord’s consent should not be unreasonably withheld conditioned or delayed. Carveouts of consent requirements should be considered for potential sale of a business or a merger.

Security/Guaranties. The amount of security deposit sometimes goes hand in hand with the creditworthiness of the tenant and of any guarantor. If the cash (or line of credit) security is significant, thought should be given about having landlord refund a portion of the security deposit over time (provided tenant does not experience a default). Guaranties can be full or they can be limited, or a “good guy” guaranty which essentially provides that the guarantor will be off the hook provided that it provides ample advance notice and pays all rent arrears as of the date of surrender. Guaranties must be carefully reviewed.

The foregoing are just a few considerations when reviewing a commercial lease. Depending upon the type of use, the location and other factors, there will be material issues to address in an effort to protect the parties to a lease.

If you have questions about a commercial lease or any other real estate matters, please feel free to contact Stephen O’Connell or Tracey Daniels at 914-750-4160.

This brochure may constitute attorney advertising. It is not intended to provide legal advice. Receipt of this brochure does not create an attorney-client relationship with Daniels O’Connell PC.

Leave a Comment