Commercial Lease Negotiation: Priority Issues for Landlords
It is impossible to know what issues will actually arise during the term of a lease. Hence, it is important for a landlord to hire an attorney to carefully analyze the landlord’s specific situation, spot potential problems and address them in the lease agreement. The process of addressing these issues in the lease, however, can become very contentious since landlords and tenants often disagree about the terms that the other party wishes to include in the lease. This may lead, in turn, to multiplication of disagreements and eventually even ruin the deal altogether.
Therefore, it is very important for the landlord to prioritize the issues in order to know when to concede an issue and when to hold the ground and insist on an agreeable resolution. In this essay, I will identity and discuss six most crucial commercial lease issues for the landlord; these issues are worth fighting for and must be given priority in a commercial lease negotiation.
A. Tenant Payments During the Term of the Lease Agreement
This is the most fundamental part of the lease agreement – the lease agreement (“Agreement”) must require tenant to make the rent payments for the duration of the lease agreement. In order to do so, the landlord should consider adopting four strategies. First, the Agreement should clearly set forth the tenant’s obligation to pay under the lease. Second, the landlord should strive to minimize the number of conditions to the obligation of the tenant to pay rent and operating expenses. Third, minimize the number of events that give the tenant the right to terminate the lease. Finally, eliminate the right of the tenant to set-off payments if the landlord defaults. Similar attitude should be adopted to the rent abatement situations.
B. Control Over the Leased Property
Leasing the property does not automatically mean that the landlord should give up all control over it. Usually, a landlord’s attorney will insist on requiring landlord’s consent to anything that could interfere with the smooth operation or safe condition of the leased property. Another strategy is for the landlord to retain reasonable control over who will occupy the leased property.
C. Unhindered Ability of the Landlord to Finance or Sell the Leased Property
Closely related to the previous topic of control, the landlord should make sure that his ability to finance and/or sell the leased property is left unhindered by the provisions of the Agreement. It is also suggested that the Agreement includes provisions typically expected by lenders, such as subordination and attornment requirements as well as provisions mirroring typical borrower-to-lender covenants.
D. Clear Obligations and Reasonably Enforceable Remedies
This is another priority area for the landlord. The Agreement should set forth clearly both parties’ obligations and responsibilities, conform notice requirements to the landlord’s standard practices, and provide for reasonable remedies such as: adequate security (security deposit, guarantees, letters of credit, etc.), record-keeping of the tenant’s gross sales, realistic late fees and interest, and the landlord’s self-help rights.
E. Insurance and Indemnification Provisions
The Agreement should strive to make sure that there is an insurance against every risk, whether the insurance is provided by the landlord or the tenant. It is suggested, however, to avoid needlessly requiring both landlord and tenant to carry multiple levels of insurance coverage.
F Avoidance of Unexpected Costs
The Agreement should plan for unexpected costs by providing for expenses that vary based on occupancy. The landlord should work toward including in the Agreement provisions reimbursing him for out-of-pocket expenses in connection with attorney’s fees incurred in dealing with tenant requests for lease assignment and sublease. Other professionals’ fees (such as design professionals who review or supervise construction projects) may also be incorporated in the reimbursement provisions.
Conclusion
The purpose of this essay is to familiarize the readers with the very dense and complex landlord issues in a commercial lease negotiation setting. Obviously, in order to achieve better understanding by my non-lawyer audience, I necessarily over-simplified the issues and greatly narrowed the description of the lease provisions. I hope, however, is that I provided sufficient legal background for you to be able to better explain your goals and wishes to the attorney who will be drafting your commercial lease agreement.