By: Cindi E. Cohen
Lerch, Early & Brewer's Legal Update
Commercial leases are often the subject of complex and protracted negotiations. Most commercial leases are quite lengthy and usually are drafted by the landlord’s attorney; therefore most commercial leases are very pro-landlord in their terms. A tenant’s ability to negotiate significant changes in the lease form is dependent upon a number of factors, including the market in general, the financial strength of the tenant, the term of the lease and the square footage being leased. However, even when the tenant is not in a strong negotiating position, most landlords will agree to some changes to the basic lease form.
The following are a few examples of provisions in a commercial lease which are likely to be the subject of negotiation:
Operating Expenses
Many leases pass through to the tenant either all of the operating expenses related to the common areas of a building, shopping center or project, or at least increases in those expenses over a base year. The lease may include a general statement of this pass-through of expenses, along with a non-exclusive list of items which will be included as part of operating expenses. The tenant may want to include its own list of items that will not be considered as operating expenses, some of which exclusions may be acceptable to the landlord and some which will not. In addition, the tenant will want to include a right to audit the landlord’s books and records relating to operating expenses, to make sure the amounts being charged are accurate and appropriate. In return, the landlord will want to put restrictions on such audit rights, including restrictions on when the audit can be performed and who performs the audit.
Assignment and Subletting
Most leases provide that the tenant cannot assign the lease or sublet the premises without the consent of the landlord. The tenant will want to make sure that such consent is not unreasonably withheld, conditioned or delayed. The landlord may want to include conditions that the tenant must satisfy in order to obtain the landlord’s consent. Many leases also include a provision allowing the landlord to recapture the premises, rather than consent to an assignment, or a provision that the landlord will be paid some or all of the profit the tenant would otherwise receive in connection with an assignment or sublease. Such recapture and profit sharing provisions can be negotiated to limit the recapture rights under certain circumstances, more narrowly define “profit” in connection with an assignment or sublease, or limit the applicability of these provisions in connection with the sale of a tenant’s business. The tenant might also try to negotiate the ability to assign to an affiliate without any restrictions.
Renewal Rights
Leases often contain provisions giving the tenant the right to renew the lease for an additional term or terms, after the expiration of the original term. The parties may need to negotiate the advance notice required for the exercise of the renewal, and any changed terms during the renewal period, especially the new rent. If rent is to be based on fair market value, it is important for the parties to agree upon how fair market value will be determined and what factors are to be taken into account in making that determination.
As mentioned above, these are just a few examples of commercial lease provisions which are often the subject of negotiation. Therefore, it is important for tenants to review the initial lease form with their attorneys.
Cindi Cohen practices primarily in the fields of real estate transactions, including leasing and acquisitions and dispositions, general business transactions, financing, foreclosures and general lender representation. To talk with Cindi about your lease, contact her at cecohen@lerchearly.com or 301-657-0169.
This article originally appeared in Lerch, Early & Brewer's Legal Update, 2010, Vol. III. It is for your information only and is not intended to constitute legal advice. Please contact your attorney for more information.
Copyright 2010 by Lerch, Early & Brewer, Chtd.
