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Do you need a commercial real estate lawyer for your lease transaction?

Choosing your commercial real estate lawyer before the transaction is the key to success.

Choosing the right commercial real estate lawyer for your transaction involves a lot of factors. A wise client will ask about the lawyer’s commercial real estate transaction experience and the costs of the lawyer’s services. This should be done BEFORE the commercial real estate lease contract has been signed. The time to negotiate and ask questions about the commercial lease terms and agreement is before you sign!

Commercial Real Estate Transaction Experience

The commercial real estate lawyer should have lots of experience and focus on your particular business space, so he or she can advocate for you and protect your interests. The lawyer needs to be familiar with the type of property (the “asset”) class and the client base. A retail client will have different needs than someone purchasing raw land or leasing an office or industrial space.

Ask what kind of experience the attorney has in reviewing and drafting documentation, like commercial office leases or triple net leases. Find out what percentage of their practice is commercial real estate leasing. You don’t want someone who lists this as one bullet point among many- commercial real estate is complex and evolving, and a general practice law firm won’t have the experience necessary to negotiate in your best interest.

How many commercial real estate leases has the attorney negotiated? You want someone with enough experience to make sure you’re not leaving anything on the table at negotiation, and who can give you an unbiased view of the deal. The deal must be evaluated for risk appetite from a financial and legal perspective.

Commercial Real Estate Lawyer Costs

Contact your commercial real estate lawyer BEFORE you sign!!

Don’t try to save money by using a family or friend’s lawyer or Google to help you negotiate your lease. The intricacies of commercial real estate leasing and negotiations are not taught in law school. Only a commercial real estate lawyer, practice and experience, will be advocate for your interests. A web search will not substitute for a lack of knowledge. Commercial real estate is a complex and expensive transaction, and it’s worth it to invest in a knowledgeable lawyer.

Hopefully, the commercial lease transaction goes smoothly. The real estate lawyer will be working behind the scenes with Landlord’s representatives and brokers to secure your legal assets and your peace of mind. A real estate broker can’t provide legal advice, and the more complex the deal, the more legal items there will be. The broker is only paid if the transaction is completed, but the commercial real estate lawyer will advocate for your interests first.

Your Commercial Lease Transaction Is Unique

The commercial lease agreement is Landlord’s first offer, not an agreement uniquely tailored to your specific business. The commercial lease terms need to reflect the exact agreement between the Landlord and the Tenant. A good commercial real estate lawyer will take you through the lease document and explain the risk and reward of the negotiated lease agreement to you.

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.

What’s at the end of the standard commercial lease agreement?

Those short sections are legally binding in the commercial lease agreement and should be read and understood!

The standard commercial lease agreement will contain important information at the beginning and the end of the lease document. The beginning of the lease (before all of the numbered sections), also known as the “whereas” clauses or “recitals”, are like an introduction. They should provide general information, like the purpose of the contract and who is signing it.

RECITALS

A good commercial real estate attorney will read all of those recitals, and confirm that the information they contain is correct. The signatory entity name might change, or the suite number might not be the right one. It’s not unheard of to have an entirely incorrect address, especially if Landlord owns multiple properties and uses the same lease form for each one.

These recitals matter, and they are easy to catch and change during lease negotiations. The fun begins at the end of the lease, where important items linger that are easy-to-skim-over stuff before the signatures and the exhibits. Even if these items are the last ones in the commercial real estate lease agreement, that doesn’t mean they aren’t important. All of that “other miscellaneous stuff” is just as legally binding as the first part of the lease, or it wouldn’t be there.

OTHER MISCELLANEOUS STUFF

These sections can address innocuous things like pronoun use, or provide state-specific disclaimers (such as radon gas in Florida or CASp inspections in California). Tenant could agree to abide by the Patriot Act or OFAC rules (good!) or become bound to not record a lease (bad news in Louisiana).

These sections could include a catch-all provision. For example, instead of stating a specific notice and cure period each time default is addressed in the lease document, the drafter might put all of the notice and cure provisions together at the end of the document and make it a stand-alone section, which is applicable throughout the lease. That’s not a problem- unless it contradicts a previous section in a lease! It’s important to treat the lease as a holistic document. If a section is disclaimed or limited by another section, it’s vital to check those referenced sections in other parts of the document.

WATCH FOR INCREASED OBLIGATIONS

“Other miscellaneous stuff” sections could also impose additional obligations or limit the rights of the parties to the agreement. For example, a clause at the end of the commercial real estate lease agreement could give away venue for disputes from a Tenant-friendly to a landlord-friendly state, or even surrender litigation options in favor of forced arbitration.

Another example is that Tenant could be required to provide financial statements, whenever Landlord requests them! Negotiation tip: limit how many times these have to be provided to Landlord, once per calendar year is usually sufficient. Bonus negotiation tip: be alert for what is missing in these sections. In the financial statements example, is there a requirement for Landlord to keep these statements confidential?

It’s absolutely vital to read the entire standard commercial lease agreement from beginning to end. If you don’t, you might be surrendering important legal rights that might be in another section of the commercial real estate lease document.

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.

Landlord might contribute to Tenant’s construction costs in the commercial real estate lease!

It’s important to understand the conditions to recover the tenant allowance as stated in the commercial real estate lease.


What is a Tenant Allowance?

Tenant Allowance, or Tenant Improvement Allowance, means Landlord will contribute money to the cost of Tenant’s leasehold improvements, often referred to as “work.” Tenant is usually responsible for the work itself, and Landlord will reimburse a portion of Tenant’s costs, if certain conditions are met. The scope of the work and the conditions for reimbursement should be part of the commercial real estate lease.

There are usually conditions Tenant has to meet before receiving the Tenant Allowance reimbursement. Common conditions are:

  • Tenant has to pay its contractors first and get a lien release and receipts
  • Tenant has to submit all of its proof of payments
  • Tenant can’t be in default under the lease
  • Landlord approves the scope of work, the contractors, and the insurance

Negotiation tip: watch out for unreasonable conditions, like a time limit on when the Tenant Allowance can be recovered, or unreasonable criteria for Landlord approvals.

What a Tenant Allowance is Not

It’s important to read the commercial real estate lease to understand the restrictions on the Tenant Allowance. Sometimes, it is a stated amount, or it can be an amount per square foot of the lease space. Any amounts spent over and above the Tenant Allowance are Tenant’s responsibility- estimates from a general contractor are important!

A Tenant Allowance is not a cash advance or an interest-free loan, and if the actual costs of construction are lower than the Tenant Allowance, then the Tenant will probably only receive reimbursement for the lesser amount. The Landlord have factored in the cost of the Tenant Allowance during the term of the commercial real estate lease, so consider that when negotiating the rent amount. The Tenant Allowance could be an actual reimbursement or a rent credit.

Tenant Allowance Limits

Landlord will often limit what work can be reimbursed with the Tenant Allowance within the commercial real estate lease. Negotiation tip: If Landlord is also the contractor, watch out for a management fee or supervisory fee in addition to the construction fees. Sometimes only “hard costs” are included in the Tenant Allowance, so the following expenses could be excluded from reimbursement:

  • permits
  • cabling and wiring
  • mechanical or drawings
  • space plan
  • interior design
  • landlord supervision
  • construction management
  • waste disposal fees

Is the Tenant Allowance a Good Deal?

It depends! Tenant should ALWAYS get at least one bid, and preferably 3, on any sort of construction. Negotiation tip: do not rely on Landlord’s estimate or a verbal estimate. Actual costs tend to be higher than the original bid.

If Landlord is also the contractor, make sure that the commercial real estate lease is very specific about what work is being done, and the quality, as well. Tenant should get final approval of any work that Landlord has done, and other than minor punchlist items, Tenant shouldn’t have to accept possession until all of Landlord’s work is completed correctly.

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.

A commercial real estate attorney can save you money during your lease term!

The commercial real estate attorney must be consulted at the beginning of the transaction.

The Business of Staying in Business

A qualified commercial real estate attorney will help your business stay in business. Landlords often place disclaimers in their leases stating that both parties have been advised to retain counsel. There’s only one time in the entire lease transaction where Tenant can protect its rights and its business investment, and that’s before the lease agreement is signed.

The commercial real estate attorney will be your advocate, mitigating your legal risk, protecting your assets and making sure you understand what you are agreeing to and the consequences of that agreement.

Real Estate Brokers: Landlord and Tenant Representation

Real estate brokers are paid on commission, by Landlord. They get paid when the deal is done, and they have an interest in seeing it commence. The listing broker, while usually very nice, does not work for Tenant, and does not represent Tenant’s interests.

The broker is responsible for negotiating the business terms of the lease, but they are not lawyers and cannot give legal advice. They can help you find the location and negotiate business items, but they do not offer a legal perspective.

The attorney’s compensation isn’t tied to the transaction, which means a balanced perspective on the entire negotiation process, and representation in the best interest of the client.

Professional Operators

Landlords are in the business of being owning and managing property profitably, and will have professional service providers working for them and protecting their interests. Tenant also needs a professional to represent them in the transaction. It’s a signal of sophistication and professionalism, and an indication of a thoughtful tenant setting up for success. The Landlord will not be offended if Tenant engages a commercial real estate attorney.

The commercial real estate lease is usually one of the most complex and expensive transactions in a business life cycle. It’s a long-term, binding legal commitment, and it’s not easy or cheap to change after signature. Consumer protection laws don’t apply, like they do in residential real estate transactions. Landlords don’t use standard contracts, but have custom forms that are drafted to favor them. Landlord expect a savvy tenant to negotiate.

What a Commercial Real Estate Attorney Does

A dedicated commercial real estate attorney will provide a legal review and negotiate with your end goal in mind. Tenant want a predictable price for a safe and secure place to operate, and Landlord wants steady cash flow and a fully leased location. Don’t use an attorney that has “leasing” or “real estate” as one bullet point among many; chose someone with experience in your market, your industry, and with your type of lease.

You need a representative and an advocate who can provide strategic, business-oriented legal advice to move the leasing transaction to completion without sacrificing financial or legal protections. A good real estate broker can make a recommendation. An experienced commercial real estate attorney will protect your interests and help reach your ultimate goal: get the rights and responsibilities of each party outlined, and to negotiate a fair and equitable commercial real estate lease agreement.

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.

A simple lease is not a short one.

Most people equate simple with short. If it’s a long document, that means it’s a complex transaction and there is a lot to discuss and rights, responsibilities and liabilities to define. A good commercial real estate lease will contain a lot more information besides the rent cost and the lease term.

Investing in a qualified attorney with relevant commercial real estate experience to review and negotiate the lease will strengthen and improve the Tenant/Landlord relationship. Both Tenant and Landlord can be satisfied that there is an understanding of the responsibilities assigned and the obligations imposed on each party. If there is a dispute, it will be easy to understand how to resolve it. Tenant and Landlord will understand their rights and responsibilities, and can make better business decisions, with full knowledge of the risk.

A short lease means that many provisions probably haven’t been negotiated- the parties might not even be aware that the provisions should be addressed. The party controlling the lease has decided to let the default statutory provision (aka, “the law”) control. This is often state-specific. Some commercial real estate leases can be invalidated, or at least legally challenged, if certain items aren’t addressed, disclosed, or otherwise appear in the lease agreement.

When the law and not the commercial real estate lease controls, then someone has to review the lease and then do the state-specific research regarding the circumstances, interpret the law, and make a legal recommendation on a course of action. If there is a lawsuit or dispute, that means someone is spending even more time and resources in pursuing a remedy. This someone is often an attorney, and attorneys charge for this service.

If only one party has a commercial real estate attorney representing them in the lease negotiation, then it’s a pretty lopsided negotiation. A sophisticated, business-savvy party understands the importance of having experience and knowledge on their side to reduce risk and protect their legal rights. Landlord will most likely have legal representation to negotiate and secure the best deal, Tenant should have the same.

Landlord’s attorney will represent Landlord, not to provide a fair and equitable lease negotiation. Landlord’s attorney will not point out favorable provisions to Landlord and explain the potential consequences and risk to Tenant. Many leases now have disclaimers, stating that each party acknowledges it should have legal counsel. If Tenant was advised to get legal counsel during negotiations, and doesn’t, then the lease won’t protect Tenant, and neither will the law.

If Tenant don’t take the time to get the lease reviewed and negotiated, or the lease is too short and doesn’t cover all the things it should, then Landlord and/or Tenant will have to hire an attorney to read the commercial real estate lease anyway, do the research to find out what the relevant law is, then render legal advice. Then, a decision has to be made and a course of action decided upon, with traditional dispute resolution techniques.

A short lease isn’t necessarily a good one. It’s better to invest at the beginning in the knowledge and experience a qualified real estate attorney what they’ll bring, to secure and protect your legal interests.


Disclaimer:

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.

The Default

Sometimes Landlord or Tenant, either inadvertently or deliberately, don’t abide by the terms of the commercial real estate lease, resulting in a breach. A breach, if not cured (fixed), can create an event of default. If there is a default, then the damaged party can seek remedy. Landlord remedies could be everything from hefty financial penalties to lockout to termination of the lease and suing for the monetary balance. If Tenant has any default rights, they are often limited to actual damages or specific performance.

The Notice

It’s not fair to have consequences without knowing what the action is, right? That’s why notice is important. The defaulting party should be informed of default by the damaged party, so the offending party can take action to fix it- this is notice.

The commercial real estate lease should clearly state Landlord and Tenant’s address for notice. Negotiation tip: don’t make the premises Tenant’s sole notice address. If Tenant is locked out or doesn’t otherwise receive mail at the space, then notice may be legally delivered, but not actually received!

Notice can be delivered in different ways:

– By hand

– By email

– By mail (US Mail, certified, or registered)

– By courier service

Notice should always be required to be in writing; it’s hard to prove a phone call occurred in court. Certified mail or courier service are often the most reliable ways to document that delivery occurred, and it’s important to understand the entire notice provision to confirm when the clock starts ticking on any cure period in the event a notice of default is received.

The Cure

Once the damaged party has provided notice, there should be some time for the offending party to fix the damage, known as the cure period. That’s not always the case! In an improperly negotiated commercial real estate lease, Landlord can theoretically tell Tenant that Tenant is doing something wrong (even if it’s easy to fix), then default Tenant and immediately pursue its remedy. That’s default without a cure period!

Each party to the commercial real estate lease has an incentive to make sure that defaults are remedied as quickly as possible- Tenant wants a safe place for its employees and customers to enter into business transactions, and Landlord wants to make sure that Tenant is paying its rent. Both parties enter the lease expecting the other to abide by the agreement, but if there is a breach, it does take a little time to fix the problem.

With a notice and cure period, Tenant has to be told something is wrong AND has an opportunity to remedy the default. Negotiation tip: Non-monetary defaults usually need more time to cure than a monetary one. State the exact amount of days for cure that each default has in the commercial real estate lease.


Disclaimer:

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.

A prudent Tenant that wants to stay in business won’t object to customers coming in the door. There shouldn’t be a problem with employees or contractors entering the space, either. Unexpected entrants arriving, however, can disrupt the ordinary course of business. A good commercial real estate lease, negotiated properly, will provide security and certainty about who can enter the space and who is liable if something goes wrong. No surprise guests, no surprise legal liability or business inconvenience for Tenant!

 

Landlord Employee Entrance

A Landlord employee that is performing an inspection or a minor repair should be able to come in during normal business hours to complete their task. Negotiation tip: Request advance notification before a Landlord party or representative enters the space, so Tenant knows who should be in the space and can plan accordingly.

Most Landlords will want an exception for an emergency situation, which makes sense. If there is a burst pipe in the space after hours, then it’s more important for someone to go in there and shut it off then to track down Tenant for notice before entering the space.

 

Entrance Request: Notification vs. Notice

This isn’t a legal notice requirement (see the post on legal notice, it’s a good one!); it’s actually a notification requirement. The important part is that anyone entering the space that isn’t invited by or controlled by Tenant should not be there unless Tenant knows about it. Tenant can decide how they want to get the notification from Landlord- put it in the commercial real estate lease, and put it in writing.

 

The consequences of notification

Tenant’s business probably contains sensitive information, which shouldn’t be shared with non-employees. It could be social security numbers or bank account information for clients, home addresses and phone numbers, payment records or other personal information. Some items are protected by federal law, some should just be kept private. If Tenant is required to have advance notification under the commercial real estate lease that someone is entering the space, then it can make sure this sensitive information is stored away from prying eyes.

A Tenant representative isn’t always in the space, and Landlord representatives may enter after hours, like janitorial staff or maintenance workers performing a repair so Tenant isn’t disturbed in its business operations. It’s important for Tenant to know who is in the space when, and to have good practices to protect sensitive information.

 

Potential New Tenants

Landlord has the right to sell or mortgage the building, and it makes sense that a prudent potential investor would want to tour the space before committing. If Tenant is vacating the space at the end of the term, then it’s okay for potential new tenants to enter the space to look around. Negotiation tip: if the lease isn’t expiring, there is an option available, or there are good-faith negotiations to extend the commercial real estate lease, Landlord shouldn’t be showing the space to potential new tenants!


Disclaimer:

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.

Here are 4 tips for Landlord to entice Tenant to tour the space and sign that commercial real estate lease.

 

  1. Less Single-Purpose Space.

Less solid walls within a Tenant space! Tenant can customize the space for its use, whatever it needs at that time. More daylight can come in across the space (natural light isn’t just for the executives sitting in an office next to the window), and the space can be reconfigured as shared or private office space, open spaces for a large meeting or smaller, private huddle rooms for focus and collaboration.

Let’s get real, no one really likes an open office environment, except maybe the people in charge of controlling costs. It’s hard to focus! Which goes into…

 

  1. Customizable Space.

Make the space what the Tenant wants- just for them. Landlord will benefit from adding soundproofing within the Tenant space. If one part of the space had quiet focus rooms, which are separate from small action spaces where meet employees meet to collaborate and create in small groups, then you’ve created a win-win. Tenant can move around partitions or furniture arrangements within its space as needed, for large interactive sessions and birthday parties. With a quite focus space in one area, and a collaborative interactive on in the other, and an appropriate buffer between the two, Landlord has created a reason for Tenant to start negotiating its commercial real estate lease!

If Tenant employees are in the space all the time, it helps if they want to be there and they enjoy the ambiance. The best way to do that is…

 

  1. Add a Natural Element.

The lobby is usually the first space Tenant will enter- and their clients. If possible, add some real greenery, everyone likes plants. Even if that isn’t a practical option, the lobby can still be an open, inviting space, creating a good first impression on anyone who enters the building and creating a great mindset. Focus on welcoming people- pick seating that doesn’t just look good, but feels comfortable, while waiting for a meeting or an appointment. Lighting should be adequate, but not harsh. Pick soothing colors and if you play music, make it soothing and welcoming. A water feature (even if it’s a discreet fountain in the corner) creates peaceful background white noise, as well.

That’s great, but all of this costs money! Improve the Tenant experience and the Landlord’s budget with …

 

  1. Labor and Cost-Saving Measures.

Take advantage of smart technology and IoT (Internet of Things). Put lights and energy-gulping office equipment (printers, anyone?) on timers or motion-sensors, so they go into standby when no one is there. Add task lighting in the focus areas, and make it easy to dim lights if there’s a presentation going on. Let Tenant have some control- they can extend the time before the lights go out or make sure the printer is available on weekends, if that’s part of their business model. If anyone figures out how to make the temperature comfortable for everyone in the space, they will make a fortune.

Your commercial real estate lease will let Tenant and Landlord know exactly what to expect regarding these amenities so it’s important to negotiate for what matters to you.


Disclaimer:

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.

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!


Disclaimer:

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.