A commercial real estate lease should be unique and negotiated especially for Tenant’s specific needs. There’s a lot to consider, but there are some common elements in virtually every commercial real estate lease that should be carefully negotiated and completely understood before Tenant signs on the dotted line. It’s a good investment to hire an expert to review the commercial real estate lease and assist in negotiating a fair and equitable agreement.
Here are 5 tips when negotiating any type of commercial real estate lease:
1) Limit that personal guarantee! A personal guarantee goes beyond the business entity. The signer of a personal guarantee is responsible, personally, for coming up with the cash if the business doesn’t have enough money. Landlord wants to protect the cash flow, which is understandable, but there’s a lot more on the line for the guarantor- who knows what events could happen, outside of your control, that affects Tenant’s ability to pay the rent? If the business runs out of money, then Landlord can come after your personal assets. Try offering a hefty deposit to reduce or limit the guaranty, or to reduce it.
2) Watch those insurance requirements! Tenant should carry its own insurance (if there’s a franchisor in the mix, they will usually set the requirements), but the requirements should make sense within the context of the business. If it’s a NNN (triple net) lease, then Tenant is contributing to Landlord’s insurance costs. Check out my post on Proportionate Share and make sure Tenant isn’t overpaying for Landlord’s insurance- or any other expense. Also, make sure Landlord is actually carrying insurance!
3) Delivery vs. Acceptance of the location. Tenant expects to receive the space in a certain condition. If the space is already built out, Tenant wants it clean, ready to furnish and fixture, and vacant. All of the systems in the space should work, as well. If the space isn’t already built out, then Landlord and Tenant need to negotiate the condition in which it will be delivered. Will Landlord deliver the space finished out to Tenant’s specifications (a vanilla box) or will the space be roughly built out and ready for Tenant to come in and finish the final touches (a gray shell)? If Landlord delivers the space to Tenant, and it’s non-compliant, Tenant should not accept delivery. The commercial real estate lease (and other key terms, like rent) should hinge on Tenant getting exactly what it negotiated for (it’s okay to have an exception for punch-list items, especially in a newly constructed space.). Few things are worse than having to accept a space and pay rent when Tenant isn’t able to operate its business inside the location.
4) Parking. Very few locations can rely completely on public transportation to bring employees and customers. It’s important people have a safe, well-lit parking area that is easy to navigate. Tenant may be concerned about directional signage, dedicated parking spaces, or parking charges. Ask for what Tenant (and possibly the franchisor) wants in the commercial real estate lease.
5) Exclusivity. It’s important to you (and the franchisor, if there is one) to be the only tenant with that particular kind of business in the immediate vicinity. Landlord shouldn’t put a direct competitor right next door. If another landlord wants to put a competitor in a space on their property, there isn’t much Tenant can do, but it makes sense, when negotiating a commercial real estate lease, that Landlord will respect Tenant’s desire to be unique within the shopping center. Tenant will want to have remedies if Landlord doesn’t abide by the commercial real estate lease, but at the same time, don’t make it too easy for Landlord to kick Tenant out of the space to install a competitor in there, instead.
Bonus tip! In case you need another reason to read your commercial real estate lease closely and understand it:
None of the commercial real estate lease provisions should be automatic, such as a termination or a rent acceleration- Tenant should get notice before these occur. Tenant will want to negotiate for notice (and cure periods) in the event of a default, so Landlord doesn’t declare an automatic default.
A good commercial real estate leasing attorney can negotiate your commercial real estate lease, to give you security and reduce legal uncertainty so you can focus on your operations!
This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.