Low Rent, but a Bad Deal?

Mar 4, 2022

Rent being paid is considered, by many, to be the most important aspect of a commercial lease, however, there are many lease provisions that should be added and negotiated providing significant value and flexibility to a lease.  These provisions will not show up on a financial spreadsheet, but you can be assured that over the life of a lease they will not only save a business considerable money but also ensure the lease aligns with your business objectives.

A landlord’s standard lease agreement always favors the landlord and does little to protect or help the tenant with its business plan.  Below are six basic provisions that are almost never in a landlord’s lease form that add value and flexibility for a tenant:

  1. Option To Renew: While a fundamental right and one that most every tenant desires, the provision isn’t standard in a landlord’s lease and is only provided when requested.  Rights to renew should provide the tenant the ability to renew, with notice 9-12 months in advance of its expiration and should include a definition of market rent with consideration for typical concessions (e.g. tenant improvements, free rent, leasing commissions, etc.) and outline an arbitration process if the parties cannot agree on the market rent.
  2. Common Area Maintenance (CAM) Charges: Along with rent, CAM and other pass through expenses will make up a major portion of a tenant’s financial obligation.  Many landlords try to pass through capital improvements like a roof, HVAC and parking lot replacements and other costs to tenants as a lump sum amount, regardless of lease term remaining or age of the building.   These items can be very costly and may come at times when the tenant is least expecting them.  This language should be reviewed carefully and the obligation of the tenant should be capped or costs amortized over the useful life of the improvements preventing a costly CAM charge from occurring in any given year.
  3. Right To Terminate: While not always accepted by landlords, some landlords will allow tenants the right to terminate a lease, at a given point in time, by providing 9-12 months notice and paying a penalty of the unamortized transaction costs (tenant improvements, free rent, brokerage commission, etc.) plus several months of gross rent.  While these options are rarely exercised, the tenant’s ability to get out of its lease if an unexpected event occurs or space needs have changed can be very advantageous.
  4. Buildout of the Premises: With most leases, there is necessary buildout that is completed by the landlord to prepare the space for the tenant’s occupancy.  There needs to be a buildout timeline that requires the landlord to complete the space by a certain date with penalties for not being completed on time, a negotiated construction management and supervision fee and provisions for consequences should the construction not be completed properly.
  5. Rights To Expand & Contract: Defined rights to expand (e.g. expansion option into 2,000 SF at month 36 of the lease term) can be difficult to negotiate and many landlords will fight the request.  However, Rights of First Refusal and Rights of First Offer are often acceptable to landlords.  These rights require a landlord to first offer available space to the tenant prior to offering it to another party.  Typically, there is a designated time frame and pre-negotiated rates that the tenant and landlord must comply with.
  6. Assignment & Subletting: While generally considered a “legal” provision, there are several business points that should be negotiated to provide more flexibility to assign or sublet.  These provisions are extremely important if the tenant has excess space to mitigate or is selling its business.  Subleasing can help a tenant recoup a considerable portion of its financial obligation and lease assignment is typically a requirement in the sale of a business.

The simple fact is Landlords are in business to make money and protect themselves and their investors.  Tenants who engage a skilled and experienced broker like TaTonka Real Estate Advisors, who exclusively represents tenants and occupiers of space and not landlords, can be assured that they too can obtain appropriate protection and flexibility providing them not only an advantageous rent structure, but a great deal.