Commercial Lease Negotiations: Achieving a Win-Win

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Searching for and finding the “best fit” property for your expanding business can be a daunting and time-consuming journey. Once you’ve found a place your company can call home and are able to agree on price and other general terms, it is easy to forget that the final step in the process could be one of the most important—effectively negotiating the specific terms of your commercial lease.

A commercial lease is a contract that binds the tenant to a wide range of terms and conditions that can have an enormous impact on the lessee’s business. As a result, commercial lease details should not be taken lightly, and a thorough legal review—not only to make sure that terms and conditions are precisely addressed, but also to ensure that the “spirit” of the agreement meets the needs of both parties—--is a critical priority.

 

As a prospective tenant, you can help to ensure a positive outcome by demonstrating respect for the landlord’s terms and conditions. Remember that the owner of a multi-tenant building has many responsibilities and liabilities to address, and so it is important to landlords that they achieve uniformity and consistency in their tenant relationships. That having been said, entering into a commercial leasing relationship requires that both parties consider any special issues that need to be addressed in a particular transaction.

Consider how many common issues addressed in lease documents could have a significant impact upon your business, depending upon the kind of work that you do. For example, office leases often bind tenants to accessing and utilizing the leased facilities for “regular business” uses. Such a restriction prevents unwarranted or inappropriate demand upon building utilities and resources. What if your business relies specifically upon not only 24/7 access to your building but also other building services? You may need to address such special needs up front. Also, common area definitions and charges are also an important issue since they can vary widely from building to building.

Assignment and subletting are often overlooked as well, since most businesses presume that they will need (and use) at least the amount of space they are planning to lease currently and will probably seek more in the future. However, more companies are co-locating with business partners on-site and this may be considered “subletting” under certain lease terms. Not to mention that you should look carefully at renewal and first-right-of-refusal clauses as you consider your future growth objectives.

Disaster response is another critical issue. Under what circumstances will your landlord relieve you of certain lease obligations if the building is involved in a fire? If flooding destroys part of the building’s HVAC system and one of the two main lobbies but you still have access to your suite, are you entitled to a reduction in rate or must you provide full payment because your suite has not been directly damaged?

Terms associated with notice to the parties should also be carefully and precisely addressed. For instance, when notice is served by the landlord concerning violations of lease terms, i.e. your landlord is taking steps toward evicting you for failure to abide by the agreement, how is notice provided—by mail, fax, or in person? Of course, the purpose of defining notice parameters clearly is so that you have every opportunity to cure a potential lease violation in a timely manner before the landlord evicts you.

Alterations to the space you are leasing are also important to analyze. Who is authorized to do what and when? When do you need to notify management of an internal adjustment or upgrade, and how have tenants generally made aesthetic alterations in the past? How is this addressed in the lease document? Remember, the lease that current tenants may have signed could be different from the one you are being presented with since many professional property owners and managers routinely revisit and upgrade their lease documents to address current considerations.

Class A building owners and managers are very particular about their properties, so lease terms may include restrictions on signage outside and inside the structure, use of a building name in business communications, directory listings, and other factors that impact your business identity. Accordingly, you should consider how the building owner’s needs mesh with your commercial objectives.

Even lifestyle factors—such as storing a bicycle on-site or bringing a pet into the building—can influence leasing decisions. Urban Outfitters, a major clothing company based in Philadelphia with thousands of employees, moved its headquarters from Center City to a site in the redeveloped Navy Yard partly because of two such lease requirements.

Ultimately, a commercial lease represents a major investment of money—and trust—between both parties. By working closely with your attorney and carefully working through the lease negotiation process—and with a professional respect for the building owner’s concerns, coupled with an acute awareness of your own need to minimize undue risk—you will achieve a win-win for both parties, and begin an exciting new phase of your business with confidence.

 

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