Price isn’t only
issue in your lease;
terms count, too
CONTRACTS ARE made up of two fundamental elements. In real estate, those are lease rates, or price, and lease provisions, or terms. A common mistake people make is focusing solely on the price of a lease, foolishly overlooking the intrinsic value of favorable lease terms. Price and cost are two completely different things.
The other fundamental law of contracts is that everything is negotiable. Negotiating favorable lease terms can save you time, money and lots of headaches. How? Let’s take a look at the inherent value of a few lease terms – that is, what do you get for the price?
Construction provisions
You want to move, you’ve done your homework, and Building X is where you want to be. Before signing on that dotted line, make sure you have a full understanding of what you will be getting for your money. Know what is included with the “base building” – does it include demising or interior walls? HVAC? Cabling?
Pay close attention to what the landlord will fund in an improvement allowance and how it is to be paid. Will the landlord complete required improvements or do you need to hire a contractor? If the landlord does the work, how can you guarantee that you get the best quality work and the best price? You should include, as a requirement of the lease, competitive bidding of the construction regardless of who is paying the costs.
What about late delivery? Delays can cause huge productivity losses. If the landlord is doing any work, assess the probability there might be delays – and what that might mean for your business. If you’re doing the work but the landlord fails to give you access to the space on time, the overtime you might pay your contractor to make up for lost time should be a landlord cost.
Insurance issues
With the ever-increasing price of insurance, it can be a significant issue – and cost – during construction and after you move in. Make sure you’ve reviewed this with your insurance advisers so you know what liability you bear as well as what is the responsibility of the landlord.
If someone slips on the icy sidewalk coming to see you, is that the landlord’s negligence and liability, or does the lease obligate you to indemnify the landlord for any injury or loss incurred by the tenant, its employees, guests and invitees?
Pay close attention to the property casualty requirements of the lease. Typically you are responsible for your contents and occasionally your interior construction, while the landlord should cover the base building. Did you know that many leases give the owner up to six months to decide whether or not to rebuild a building after a fire? If they decide to rebuild, you may still be obligated to pay rent under the lease, even if you had to relocate to stay in business and serve your customers. Negotiate for the right to terminate the lease if reconstruction is not commenced or completed in a reasonable time.
Lease flexibility
If you can foresee growth and don’t believe the lease will fit you long term, it would be wise to establish a termination provision enabling you to move to more suitable space. While this provision often comes at a price, having too little space may constrain your business and can be even more costly.
Another provision that addresses growth potential, and allows you to stay put, is an expansion option. Find out about your adjacent tenants, when their leases expire and what rental rights they have. Landlords don’t like either of these provisions, but they may be necessary to make the space fit your business.
Conversely, if you foresee stability, having the right to renew your lease (ideally at fixed rates) gives you control over the space into the future, without committing to it forever. Even with a “market rate” renewal option, you gain control over whether or not you relocate, rather than risk being forced out by the landlord.
Many leases enable the landlord to force you to relocate during the term of your lease, enabling them to accommodate the needs of other tenants. Either constrain the circumstances under which this can happen, clearly burden the landlord with all associated costs, or don’t allow this provision in the lease.
Assignment rights
Landlords reasonably request the right to approve subleases or assignments. They want to know who is in the building, whether they are creditworthy, whom to contact for emergencies and service calls and so on. Any landlord privileges beyond that infringe on your right to run your business and should be curtailed.
The perfect balance protects the rights of the tenants to run the business as they see fit, while at the same time protecting the landlord from exposure to an entity with inappropriate business activity or no credit. In some leases, the “Use Provision” is crafted to constrain future subleasing activity. Be wary of this before it becomes an issue.
Default clauses
In terms of landlord’s rights, default provisions run the gamut. If you default, and fail to cure the default after reasonable notice and time, the landlord deserves to extract some penalties. How far that goes is a matter of preference and style.
Some attorneys will strongly advocate for the most lenient treatment of the tenant in these cases. Others accept the premise that a tenant in default has failed to uphold the terms of the contract and deserves to be punished. At the end of the day, if it ever gets that far, a judge will typically be the ultimate arbitrator of the landlord’s rights.
Here’s a surprise: Most leases have all sorts of penalties if the tenant fails to perform but are silent on what happens when the landlord doesn’t do its job. The lease typically obligates the landlord to maintain the property, fix a leaky roof, plow a parking lot and so on. Include a Landlord Default provision that gives the tenant the right to withhold rent (after reasonable notice and time to cure) to pay for curing whatever defaults are alleged.
Landlords aren’t bad people. They just structure these kinds of lease provisions to their advantage. Contact an experienced real estate attorney or real estate consultant who can guide you through a review of your current lease and help structure a better one next time. In any lease, you can and should negotiate for fairness on all points.
If the terms of the lease don’t fit your business, it’s a bad deal at any price.
Contact
Jim Vos and Ann Hansen negotiate real estate deals at CRESA Parnters in Minneapolis, which specializes in tenant representation, corporate portfolio services and project management: 612.337.8498; www.cresapartners.com
