Leveling the playing field Featured

7:00pm EDT January 31, 2007

It’s not uncommon for commercial leases (including standard office and shopping center lease agreements) in the Atlanta area to stretch to 30 pages or more. Filled with legalese, leases are typically drafted to favor the landlord, but with a little know-how, savvy businesses can level the playing field when negotiating a commercial lease.

Tenants should read the lease and be mindful of their exposure to liability, says Maria Maistrellis, a partner at Gambrell & Stolz LLP.

“Tenants may not have the economic clout to rewrite much of the lease, but at a minimum they need to identify those issues that are

deal-breakers,” she says. “They also need to understand their exposure to liability, such as the landlord’s acceleration of the full amount of rent due under the lease upon tenant’s default.”

Smart Business spoke with Maistrellis about commercial leases and how businesses should negotiate them.

How can a business limit its exposure to liability when negotiating a lease?

Tenants should make sure that they receive written notice and an opportunity to cure any monetary or nonmonetary default. Although difficult to obtain, if a business can also negotiate that the landlord must mitigate its damages, this will assist in limiting the tenant’s liability. In Georgia, the lease must expressly provide for landlord’s duty of mitigation for the tenant to have the right to raise this as a defense.

How should a business negotiate the payment of common area maintenance fees?

The tenant is usually required to pay a proportionate share of expenses for maintenance of the common areas of the building (which may include real estate taxes and costs of comprehensive casualty and liability insurance coverage) based upon the ratio of the square footage being leased and that of the total leaseable square footage to all tenants (‘CAM’). If a tenant leases 10 percent of the building or shopping center but the other 90 percent is vacant, he’ll want to make sure that the formula is based on the total that could be leased (not the total that is actually leased) or he could get stuck paying 100 percent of the common maintenance costs. Also, tenants should be sure to measure the actual space they will be occupying so the CAM is based upon the usable square footage and not the total rentable square footage if not so intended.

How can a business define the expenses to be included in the formula for CAM and cap the pass-through?

Some landlords will try to include in CAM, as pass-through to the tenant, a very broad range of expenses, including capital expenditures, like replacing the roof or repairing any structural defects, or restoring casualty damages to the building or shopping center not covered by insurance proceeds.

A tenant has two alternatives. He can define the expenditures specifically excluding capital expenses and other unfair expenses, which can be a very grueling negotiation, or he can cap the annual expenses excluding the costs of real estate taxes and insurance, which would not be capped.

Also, try for a cap on any increase every 12 months based upon a percentage of the prior year’s CAM. Tenants should make sure that the CAM is adjusted at the end of each 12-month period based upon the actual expenditures made by the landlord with a credit back to the tenant for any overpayment; otherwise the landlord receives a windfall. Tenants should also negotiate the right to review and audit the landlord’s books with regard to CAM.

How can a business avoid giving the landlord a personal guaranty for the tenant’s obligations and, if possible, provide for a buy-out of the lease?

I recommend signing the lease as a limited liability entity such as a corporation, limited liability company or limited partnership and try to avoid giving any personal guaranty. If this is a new business without a track record, the landlord may insist on a personal guaranty.

Also, tenants should not grant the landlord a security interest in furnishings, inventory, trade fixtures, general equipment and machinery. A security deposit for the first and last month’s rent should suffice.

If possible, tenants should negotiate a buy-out of the lease in the event the tenant’s business is not feasible or the tenant desires to terminate. This is especially important with a new business with no proven track record where there is a personal guaranty. A buyout provides that the tenant can pay a specific amount of rent (three to six months rent, for example) for the election of terminating the lease.

MARIA MAISTRELLIS is a partner in the Commercial Real Estate Practice at Gambrell & Stolz LLP. Reach her at (404) 223-2217 or mmaistrellis@gambrell.com.