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7 Key Terms to Negotiate in Commercial Leases

Posted by Jason M. Venditti | Apr 30, 2019 | 0 Comments

Real 20estate
If you are leasing commercial office space for your business, below are some of the terms to pay special attention to when negotiating with the landlord:
 
  1. Personal Guarantee: Because the tenant in a commercial lease is a business entity, landlords often require the owner(s) of the business to sign a personal guarantee, guaranteeing the tenant's payment of rent.   It is sometimes possible, however, to limit your personal liability as a guarantor by negotiating the duration of the personal guarantee, or the amount to be guaranteed.
  1. Exclusive Use: Preventing other tenants in the nearby vicinity from offering the same goods/services as you is vital to the success of your business and should be a material consideration for entering into the lease.  The lease should provide for the tenant's exclusive use of the premises for its intended purpose, thus preventing the landlord from leasing nearby space to a competitor.    
  1. Option to Renew: Locking-in an option to renew your lease for an additional term at an agreed-upon rental rate will help avoid a drastic rent increase upon the expiration of the initial term and ensure your business can remain at its location for many years to come. 
  1. Assignment and Subletting: The ability to assign and sublet the premises if you sell your business is a critical.  Many landlords will try to restrict this right altogether, or place conditions on the right to assign that make it virtually impossible.  Your lease should provide that the landlord's consent to an assignment “shall not be unreasonably delayed or withheld” and place as few restrictions on your right to assign and/or sublease as possible.
  1. Rent Abatement: Most landlords will agree to some amount of ‘free rent' in exchange for a long term lease.  The rule of thumb is one month for each year of the lease.  For example, if you are negotiating a 5 year lease, it is common to ask for 5 months of free rent.  Typically, however, a landlord isn't going to go 5 consecutive months without receiving any rent, especially at the beginning of a lease.  Instead, the amount is sometimes prorated over the life of the lease to reduce the monthly rental amount. 
  1. “CAM” charges: Almost all commercial leases require tenants to pay an additional fee to the landlord for its maintenance of the common areas (common area maintenance or “CAM”).   This amount charged is typically the percentage of the overall cost that is proportionate to the tenant's share of the premises (“pro rata share”).  Like rent, this fee can increase from year to year as the landlord's expenses increase.  To help control these costs, tenants should negotiate a cap on any increase in CAM charges from the previous year (3-5%) (ex. “not to exceed 105% of tenant's share of controllable costs for the previous year”).  The tenant should also negotiate the right to audit the Landlord's expenses annually upon request.
  1. Late fees / Penalties:  All leases provide for penalties and late fees when the tenant's payment of rent is not made on time.   While it is unlikely to eliminate such provisions from the lease altogether, tenants can often negotiate to limit the amount of the late fee or penalty to be charged, as well as a sufficient grace period before rent is considered past due and an opportunity to cure before being declared in default.

About the Author

Jason M. Venditti

Jason is an experienced litigator and trial attorney who represents individuals and businesses in a wide variety of matters in state and federal court, mediation, arbitration, and before administrative agencies. [email protected] 480-771-3986

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