Tips For Tenants Negotiating A Commercial Real Estate Lease

On Behalf of | Mar 31, 2022 | Real Estate Law

A lease agreement may be the difference between success and failure. With so much riding on this agreement, it is essential for business owners to negotiate one that gives them the best chance for success. Owners and managers should read any contract they sign and should not be tempted to handle it without outside guidance. This can be a mistake. Below are some issues to consider to best ensure it is fair and equitable and does not put the company at risk.

Picking the right kind of lease

The company needs to pick a lease that fits its needs. If it does not, and the landlord is inflexible in providing what the tenant needs, it is best to move on. Common lease types include:

  • Single net lease: The landlord pays maintenance, repairs and insurance, while the tenant only pays for property taxes and utilities.
  • Double net lease: The landlord pays maintenance and repairs, while the tenant pays insurance premiums for the building, property taxes and utilities.
  • Triple net lease: The landlord is responsible for structural repairs, while the tenant pays for everything else.
  • Full service or modified gross lease: The landlord and tenant split structural repairs, taxes, insurance, common area maintenance, and utilities.

These terms are shorthand descriptions, but may mean different things to different people.

Independent landlords are often more flexible, while corporate landlords of malls or large buildings are usually less willing to negotiate on their format.

Letter of Intent

Landlords often want to have a signed letter of intent. A letter of intent typically contains the agreed upon business terms, and provides a framework for drafting the definitive lease.  Be careful that the Letter of Intent specifically states that is it not binding, as Pennsylvania courts have found Letters of Intent to be binding contracts in some situations.

Negotiating the terms

Determining the type of lease is essential, but there are other terms to work out. When the landlord sends over a formal contract in writing, it is useful to save a copy of this, which can then be compared with leases for other spaces. The prospective tenant can refuse the terms outright, accept the terms or draft a counteroffer. The lease and counteroffer are not legally binding until the two sides agree to terms and sign the final agreement. Important issues include:

  • Term length: One or two years are typical, ideally with an option to renew. Shorter terms allow businesses to pivot quicker if the location does not pan out; longer times lock in rates for a predictable period.
  • Occupancy date: It need not be the same date as moving into the property. It may allow the tenant to start work on customization of the space before moving in, or to negotiate to sweeten the deal and motivate the tenant to sign.
  • Favorable clauses: These can involve preventing the landlord from leasing to similar businesses in nearby spaces, rights to modify the space to fit the business’s needs and aesthetics, control over signage, and the ability to sublease.
  • Termination clauses: It is helpful to have the option to terminate the lease without paying huge penalties or full amount for the lease term if the business closes or needs to expand.
  • Damages and Confessions of Judgment:  No one wants a default, but it sometimes happens.  Damages and confession of judgment clauses are often overlooked as legal mumbo-jumbo, but they are vitally important considerations if the business is not doing well.
  • Personal guarantees: There are times when a principal of the tenant will need to sign a personal guarantee, which typically provides additional collateral for the lease obligations. There are strategies to be considered and which may be available aimed at avoiding a personal guarantee for business leases which, for example, can involve a mortgage on a tenants’ home.  These can include providing alternative collateral in the form of security deposits and prepaid rent, or a letter of credit issued by a bank.

Getting a lease that works

The needs of each business are different, and their priorities will also differ. Nevertheless, these details offer a good foundation for a workable lease. As with all significant business contracts, it is wise to have a lawyer review the details to ensure the tenant did not overlook anything.