Turner Padget Insights

Before You Sign a Commercial Lease: The Top Ten Provisions Tenants Should Look Out For

Posted On May 6, 2020

Once you’ve found the perfect location for your business, it’s time to review the lease. Before you sign on the dotted line, there are several important lease provisions you should identify and consider negotiating with your future landlord.

1. Use. Your “permitted use” of the premises means the type of business that you will operate. Your permitted use should be clearly defined in the lease as broadly as possible. Anticipate the ways your business might change or expand during the term of the lease. You will want the flexibility to adapt to the marketplace if necessary, perhaps by selling different products or offering complementary services. A broad definition of your permitted use is especially important if your premises will be located in a shopping center because the landlord should agree in the lease to prohibit other tenants from engaging in that use. The landlord will also need to ensure that your permitted use is not prohibited under another tenant’s lease. Also look out for a “radius restriction” – the lease may prohibit you from operating another location of your business within a certain distance from the premises. Make sure this distance is tolerable.

2. Timeline for Initial Improvements. Make sure the lease clearly defines when your business is expected to be up and running and when your rent payments will begin. This is critical if the property is still under construction. Often, the landlord will be responsible for some improvements to the premises (the “landlord’s work”), and the tenant is responsible for the rest of the work necessary to open the business (the “tenant’s work”). The timing for opening the business and commencing rent payments is usually tied to the date of the landlord’s “delivery of possession.” Pay attention to what is required of the landlord before they can deliver possession. Must the landlord’s work be completed in full, or only substantially completed? Will it interfere with your improvements if the landlord’s work isn’t fully completed before the tenant’s work begins?

3. Duration of the Initial Term and Extensions. Make sure you are comfortable with the duration of the initial term, and think about whether the option to extend the lease will be important to your business. If the lease does include extensions, are the rent and other fees for the extension terms provided in the lease, or can the landlord set rates at the time of the extension?

4. Rent, Common Area Maintenance, and Additional Charges. Be sure to take into consideration all of the other expenses provided in the lease besides the base rent. Is it a “triple net lease”, i.e. is the tenant responsible for the real estate taxes, property insurance, and common area maintenance expenses? If the premises are located in a shopping center, does the lease make it clear how these expenses and the utilities will be allocated among all of tenants? Is the allocation based on square footage or actual use? Is there any limitation on how much the operating and maintenance expenses may increase each year, or is it open-ended?

5. Improvements and Maintenance Responsibilities. If the landlord is agreeing to make improvements, these improvements should be clearly defined in the lease. Make sure there is a procedure for you as the tenant to approve the improvements and request revisions. Also, be sure you are willing to make all of improvements that you will be responsible for under the lease. The tenant’s maintenance responsibilities for the premises and the common area should also be clearly described in the lease.

6. Business Operation; Rules and Regulations. Carefully review any rules and regulations in the lease to ensure that they will not interfere with the operation of your business. Are you obligated to be open during certain hours? Are deliveries limited to certain hours? Are there any guidelines for signage and lighting? Must your employees park in a certain area? You may wish to be guaranteed some exclusive customer parking spaces or designated spaces for curbside pickup.

7. Assignment and Subletting. The ability to assign the lease or sublet the premises could be critical if your business struggles or would simply benefit from a relocation during the term of the lease. If allowed, will assignment and/or subleasing be subject to the landlord’s approval? Will the assignee or sublessee have to operate a certain kind of business or provide financial information to the landlord? Such restrictions could greatly limit your ability to find a replacement tenant. Also, check to see if there’s a special fee you will have to pay the landlord.

8. Guarantors. If the lease requires any personal guarantors, look for the form of the guaranty agreement in the exhibits to the lease. Ensure you agree with its terms before signing the lease. The death of a guarantor may be an event of default under the lease. This provision should be removed or at least limited. For example, if two business partners are the guarantors and one dies, the surviving business partner should be given the opportunity to continue the lease by demonstrating to the landlord that the business’ finances are sound.

9. Reporting Requirements. The lease may require you to provide regular reporting to the landlord about your business’ financial status. Are these requirements overly burdensome? Pay attention to how much detail is required and how frequently you will have to provide it. You will want advance notice of any required reporting so that meeting these requirements does not interfere with the operation of your business.

10. Penalties; Events of Default and Remedies. Check to see if the late payment penalties in the lease are reasonable. You might see multiple assessments for the same late payment – an interest charge on the amount due plus a flat rate penalty. Review all events of default for both the landlord and tenant. What are your remedies in the event the landlord fails to maintain the premises or the common areas or complete repairs within a reasonable time? If the issue seriously interferes with operation of your business, will you still owe full rent and fees? Are the tenant’s events of default reasonable? Will you have sufficient opportunity to remedy any damages or deficiencies? Also, look for a provision about attorneys’ fees in the event of a lawsuit due to the tenant’s default. The lease may provide that the landlord be awarded attorney’s fees and costs from the tenant. It is preferable to remove this clause or to modify it so that the prevailing party, whether the landlord or tenant, be awarded these fees.

The main thing to keep in mind when reviewing the lease is that everything is negotiable. Often, landlords will claim that the lease they present to you is their “form lease” and they cannot make any changes. Remember that the landlord is aware that the terms of such a lease weigh heavily in their favor. If you can explain why your concerns are valid while still demonstrating that you would be a reliable tenant, you should be able to negotiate in some of these areas. An experienced real estate lawyer can assist you with identifying these issues in the lease and drafting and negotiating revisions that will better serve you as the tenant.