Leases are rarely conducted on an entirely level playing field, as the landlord is in the business of real estate and the tenant is not. However, with planning and professional guidance, tenants can wrest away the advantage from the landlord and negotiate more attractive terms for occupancy.
“In today’s market, it is imperative that you identify hidden or unanticipated expenses in a lease,” says Richard Mersman, a partner with The Stolar Partnership. “Having a qualified attorney review the lease can save you tremendous headaches in the future.”
Smart Business spoke with Mersman about lease negotiations, what type of provisions and stipulations should be considered, and when to start the lease renewal process.
Why is it important for an attorney to participate in lease negotiations?
For most companies, lease expenses are one of the highest fixed costs on their balance sheet, second only to payroll. Certainly lease expenses — which include rent, common area maintenance costs, taxes and insurance — can have a substantial economic effect on a company’s overall financial performance.
There are a number of financial and legal issues that a tenant will face when negotiating a lease. You want to put yourself in the most advantageous economic and legal position in order to protect your income stream and your business.
What is the role of the letter of intent in the process?
A letter of intent is a tool that the tenant, and later, the tenant’s attorney, can use to streamline the lease negotiation process. The letter of intent defines the basic business terms between the landlord and the tenant.
Generally, the business terms will include key financial terms such as how much rent you are going to pay, what type of tenant improvement allowance the landlord will provide and whether or not there will be a free rent period. The letter of intent will also outline provisions with regard to expansion space, as well as relocation obligations and requirements.
When the attorney — who generally should not be negotiating the business terms — receives the letter of intent, it enables the attorney to concentrate on the legal issues at hand and not the business terms.
What type of provisions should a tenant fight for in a lease?
There are a number of provisions that a tenant should fight for. Commercial leases in today’s market are complicated, sophisticated documents. Generally, in Class A and Class B office buildings, landlords will have a specific lease form that they will provide to the tenant. Naturally, these lease forms are weighted in favor of the landlord.
The responsibility of the tenant’s attorney is to make sure that the tenant is not subject to additional expenses and/or legal obligations that were not originally contemplated in the letter of intent yet may be customary in the marketplace. Involving the tenant’s attorney early in the letter of intent negotiations can be very beneficial and can help eliminate obvious issues.
What stipulations should tenants avoid in a lease?
Make sure that there is no limitation on the use of the space; if the tenant wants to downsize, it may want to sublease space to a different type of business. Additionally, you will not want to be subject to a relocation provision without providing your prior approval. For example, you don’t want the landlord to move you from prime space in a building to space that is less attractive or desirable.
You also want to confirm the parking allocation for your company and identify where that parking will be, thereby ensuring that you have sufficient parking for your employees at a reasonable cost. Signage may also be a concern. Make sure that you have appropriate signage to identify your company within the building as well as outside the building so your customers and clients can easily find you.
Finally, be very careful about common area maintenance costs. The pro rata percentage charge should be accurate and based upon a formula of no less than 95 percent occupancy. This will protect your company’s share of the common area costs so, in the event that a large tenant moves out of the building, your proportionate share of the building costs does not increase.
How should a business go about negotiating a favorable lease renewal?
Start early. The sooner you find out where the market is and what comparable space might cost, the better off you will be. Most leases provide for anywhere between 60 days’ to one year’s notice of renewal, and 180 days is a common threshold. It is incumbent upon each tenant to determine the market rate prior to the 180-day period.
Currently, we are in a very favorable market for tenants. Landlords don’t want to lose a creditworthy, rent-paying tenant. As a result, tenants are able to negotiate a much higher tenant improvement allowance to refurbish space, as well as garner additional rent concessions.
How can a business find a qualified attorney to represent it in lease negotiations?
Referrals are generally the best method for identifying a qualified attorney, as you will likely have someone whom you respect making the recommendation. You can also turn to the local bar association and other legal directories for assistance in finding counsel.
While conducting your search for an attorney, it is important to look for specific experience in commercial leasing as it is a unique area of law that has become much more sophisticated over the last few decades.
Richard Mersman is a partner with The Stolar Partnership. Reach him at (314) 641-5125 or [email protected].
