Many of us, and even us lawyers, go through life giving little thought to many contracts we enter into. The cellular service company’s terms of service, the car rental agreement, the waiver form from a youth sports organization—even if we take the time to read these contracts, we assume that there’s not much we can do even if we don’t like what we’re signing up for.
But we shouldn’t approach all contracts this way, particularly when it comes to contracts for your business. One of the big mistakes business owners make is uncritically, and without proper legal review, accepting contracts that are placed before them by a counterparty. One of the most common situations that many business owners face is being asked to sign a lease agreement by a commercial landlord.
As a business owner, don’t just accept the landlord’s agreement. It’s likely one-sided. And most landlord’s are willing to negotiate—and if they’re not, that’s a sign that you might want to find a different space to lease.
By just signing the landlord’s lease, you’re putting your business—and perhaps you, individually—at risk of agreeing to obligations and waiving rights that you never would have if you understood all of the lease agreement’s terms and conditions. And in many cases it’s not just what’s stated that you have to worry about. There are often important things left out of a lease that need to be added to protect a tenant. That’s why it’s so important to work with experienced legal counsel before signing a commercial lease.
Here are some of the most important clauses and provisions that a tenant and their lawyer should focus on when reviewing a lease.
Many commercial buildings have multiple units and tenants. A tenant should insist on a specific description of the area it will occupy, including square footage as well as the tenant’s right to utilize common areas. For example, a building may include a rooftop or outdoor space that a prospective tenant may assume can be used for entertaining customers, employee gatherings or other purposes by any tenant in the building, but may find out after-the-fact that another tenant has negotiated exclusive use of such space.
It seems obvious that a commercial tenant should focus on the amount of rent it will pay. And the amount of rent they’re obligated to pay is, in fact, the provision most tenant’s pay closest attention to. But the problem is that it can be difficult for a business owner to understand, with certainty, how rent is being calculated in a commercial lease. Rent amounts are often calculated according to complicated formulas that take into account a landlord’s property taxes, maintenance costs, and other factors. Without a clear understanding of how such leases, called “net leases”, work, a tenant may unintentionally bind itself to financial obligations it wouldn’t have otherwise agreed to.
The range of things that can go wrong in a leased commercial space range from minor (a leaky faucet) to major (a leaky roof that needs replacing). Tenants who take a do-it-yourself approach to commercial leases are often surprised to learn that they have taken on the responsibility to maintain and repair a commercial space, even for major repair or replacement costs. These types of provisions should be negotiated so that a tenant knows exactly what they’re getting into.
When a prospective tenant is presented with a commercial lease by a landlord, there’s a good chance that it lacks mutuality in many key areas, such as indemnification and waiver of claims, among other things. For example, it’s common for a landlord’s form agreement to include an indemnification clause by which a tenant agrees to indemnify the landlord in the event of an injury due to a tenant’s negligence. The problem is that such provisions often lack mutuality—there’s no obligation for the landlord to indemnify the tenant if the landlord is negligent. A reasonable landlord should agree to reasonable mutuality in a commercial lease.
Many tenants don’t want to commit to a long-term lease of five-plus years. But even during a three-year term, a tenant will likely make improvements and other investments in the property that it may be costly to walk away from. Negotiating a renewal option is a way to avoid a long-term commitment but reserve the right to at least have the option to stay in a property upon the expiration of an initial lease term.
If the owner of a competitive consumer business, such as a hair salon, rents space in a multi-unit building, they’re almost certainly doing so with the expectation that the landlord will not rent space to a competitor. But unless language to this effect is included in the lease, there’s nothing stopping a landlord from allowing a competitor to move in next door.
Some commercial leases are twenty-plus pages long, and at the end of such leases there are likely provisions that describe what happens if a legal dispute arises between a landlord and tenant. Issues that are commonly addressed include where a lawsuit can be brought (e.g., a state court in a particular local jurisdiction) and what state’s law applies in the event of a lawsuit, among other things. While these types of provisions are often referred to as “boilerplate”, it doesn’t mean they shouldn’t be thought through and negotiated. The alternative for a tenant is to be unpleasantly surprised to have waived a right to a jury, or even to have agreed to pay the landlord’s legal fees in a dispute.
Don’t Take Things for Granted
Leasing commercial space is an exciting step for any business owner. But it’s not something to enter into lightly. And it’s critical not to simply agree to all of a landlord’s proposed lease terms. Doing so can be costly.
Your landlord almost certainly had a lawyer draft its form lease. As a business owner, you should have experienced legal counsel review and negotiate commercial leases to protect your interests. Please contact Zana Tomich with any questions or for assistance.
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