Before you begin the finalization of a lease, here are seven key factors to consider before the ink is dry.
1. Guaranty. In today’s volatile economic environment, a landlord will undoubtedly require a personal guaranty of the lease. Consider alternative collateral such as a bank letter of credit, larger security deposits, caps on the liability of the guaranty (where several business owners, percentage liability per partner), or a limit on the term of the guaranty.
2. Operating Expenses. Operating expenses can often be an open book for the landlord, with substantial economic impact on the tenant. The first obvious limit is to negotiate a gross versus a triple net (or net lease). Another option would be to consider a “cap” or “stop” on expenses. A cap is self explanatory, the tenant limits the total exposure to expenses. With a stop, the expenses are not payable until a minimum value of expenses are incurred by the landlord and thereafter all costs above the stop become the liability of the tenant. Additionally, the tenant might consider limiting line items that are included in the definition of operating expenses under the lease, rather than accepting an open ended clause which are favored by most landlords favor.
3. Audit. Closely in line with operating expense limits, is the right to audit the records of the landlord. The audit clause typically provides reimbursement to the tenant if the audit reveals unauthorized or inaccurate charges by the landlord, and typically allows for reimbursement of audit expenses to the extent the error exceeds a certain percentage (i.e., 3%).
4. Insurance. Often overlooked is the requirement that the landlord maintain its own insurance. Although modern day lenders typically mandate landlord coverage, the tenant should review the terms of the landlord’s policy to address the types and amounts of coverages. The insurance clause should also consider repair and replacement issues, subrogation among the landlord and tenant policies, and gaps of coverages. In this Covid environment, insurance carriers are battling claims under force majeure provisions. Review both landlord and tenant policies to determine the more liberal definition, then address the subrogation issues.
5. Options. The tenant often establishes good will at its location and leaving negotiation for a future lease open until after the lease expires can wreak havoc on the tenant’s business. Obtaining rights of first refusal and options can preserve the tenant’s business and provide stability for future financial planning of the enterprise.
6. Title/Non Disturbance. Another consideration in today’s unstable economic climate is the question of title, not only should the tenant seek assurance that the landlord actually has legal title to the property, but the tenant should seek assurances that the lease will not be disturbed in the event of foreclosure. Only a properly negotiated non-disturbance clause can protect a commercial tenant from being evicted from the premises upon foreclosure proceedings.
7. Quiet Enjoyment. This clause is often thought to be interpreted in accordance with its common meaning; not true. There are many considerations that extend beyond merely avoiding an intrusive or prying landlord. Consider issues such problems with neighboring tenants, parking conflicts, road work and landlord site improvements that may affect the tenant’s use of the premises.
Robert K. Feldman
Attorney at Law
