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Negotiating a commercial lease

| May 10, 2021 | Real Estate Law

Most companies do not own the facilities from which they conduct their business. The agreement by which a business rents space from the owner of the property, called either a landlord or a lessor, is called a lease. Leases can be either oral or written.

Pennsylvania law provides a variety of protections for residential tenants, but almost no protection for a commercial tenant, so the lease defines the rights, responsibilities and obligations of both the landlord and the tenant. Because the lease is so important to a business it should be in writing so that there is no ambiguity in the terms and conditions.

A commercial lease is a complicated document that can be from about a dozen to close to a hundred pages in length.

What is contained in a commercial lease?

The written lease memorializes the terms of the deal between the landlord and tenant. It conveys real estate from the landlord to the tenant for a period of time, subject to its terms and conditions.

The lease should describe the space that the tenant will occupy, specify the amount of the rent, and establish the dates when it starts and ends.

The rest of the lease governs the nature of the business that the tenant may conduct, lists of tenant and landlord responsibilities, prohibited activities, tenant’s rights and landlord’s rights, and the remedies if either party breaches the lease.

How negotiable is the lease?

Negotiation is the process of balancing the tenant’s priorities against the landlord’s. Theoretically, all of the terms of the lease are negotiable, but most are standard, or what is called “boiler plate.”

The ability to tailor the lease to the tenant’s specific needs depends on a variety of factors. These include whether the space is in an office building, a shopping center, a warehouse, or if it is an entire building or just a portion. If there is a low occupancy rate in the area, or even in the building under consideration, can affect the degree to which the landlord’s initial proposal can be modified.

Also, the economic strength of the parties may affect the flexibility of the landlord, as will the desirability of the tenant with respect to the other types of tenants in the facility. Someone renting a 1,000 square foot office in a multistory office building will have less clout that someone taking five floors. The landlord might not have a complete free hand.

The terms of the landlord’s mortgage, or condominium documents, if a commercial condominium, or exclusivity clauses imposed by other major tenants may tie the landlord’s hands.

What are some of the issues?

The issues will vary with the type of business, but will include the rent, pass-through (or CAM) charges, length of the lease, rights to assign or sublet, security deposit, renewal options, rights and remedies of the parties, whether there will be any personal guaranties, tenant fit out, periods of free rent, hours of business, exclusivity, and so on.

Of special importance in Pennsylvania are confession of judgment clauses, and whether a memorandum of the lease should be recorded.

How can a lawyer help?

The lawyer’s job is not to make the business decisions, but to point out to the client the legal effect of the various terms of the lease so that the client can judge their importance.

Based on experience, the lawyer can point out the various “what if” scenarios to the client. The lawyer will advocate the client’s position, attempt to get the best deal for the client, and to make sure that the written lease properly and adequately documents the final agreement, and expresses its terms in clear and unambiguous terms.

This article contains a few of the many issues that may arise and must be addressed by the tenant or landlord in negotiating a lease.  It is also for informational purposes only and not intended as legal advice.  Do not hesitate to contact us with questions or concerns about your specific situation.