Commercial Leases

Office leases? Retail leases? What's hard about that? Nothing matters but the rent. I don't need a lawyer for just a lease. Right?

Oh, if only that were true. Commercial leases, including office leases and retail leases can be among the most complicated and most important contracts that most small businesses will ever sign. Here are some of the reasons why.

Nobody needs to tell the owner of a retail business that the location can make or break the business. You've seen the space you want to lease, and you like it. It's in nice strip mall with a good mix of complementary businesses but none that competes with yours. Plenty of parking. An attractive sign at the entrance to the parking lot with the names of the tenant businesses should help your customers find you.

Here are some questions you should ask: How do you know all that will be true in 5 years? Or 10 years? What are the landlord's obligations to maintain that sign out front? For that matter, what are your rights to have your business identified on the sign? Can the landlord rent space to a competing business? What about major changes to the shopping center? For example, does the landlord have the right to construct another building in the parking lot that takes away parking space and, at the same time, increases the demand for parking? What obligations does the landlord have to maintain the parking lot? Or to remove snow in the winter? The wrong answers to those questions may mean that today's prime location could become next year's horrible location.

A business attorney help you ask the right questions about the specific language in your lease and help you negotiate the language of the lease to give you better protection against future contingencies. We once reviewed an office lease for a client, and buried in a paragraph that otherwise appeared relatively benign was a provision that gave the landlord the unilateral ability to take the leased premises away from the tenant conditioned only on the requirement that the landlord provide other space that, in the landlord's opinion, was comparable to the leased premises -- even if the space was in a completely different location. When we asked to remove that language, the landlord explained that it could not that because it had plans to tear down the building in which our client wanted to locate and replace it with a completely different type of facility. For some reason, the landlord seemed to think that was an entirely reasonable position. On our advice, our client walked away and found another location.

Most commercial leases today are net leases, which means that the tenant pays a base rent plus additional rent that is calculated from the landlord's operational costs. As a practical matter, that is, in the long run, better for both the landlord and the tenant because the landlord does not have to build into its rent a contingency to cover costs that are beyond the landlord’s control, and it provides a greater degree of transparency for the tenant. However, the formulas for calculating the additional rent can be very complicated and difficult to understand, creating the possibility that the tenant can be faced with unexpected increases in additional rent. Moreover, there are no standards for deciding what items should be included in additional rent and what items should be part of the landlord’s cost of doing business. In addition, (and this is one of the aspects of commercial office and retail leases that makes them so complicated) there are no universally accepted ways to allocate the additional rent among tenants. In fact, some methods of allocating those costs across the tenants can create windfalls for the landlord so that the additional rent paid by all the tenants exceeds the landlord’s cost of the items included in the additional rent. An experienced business attorney can help you dig through the details, so you understand the costs involved in your lease and help you negotiate the language to possibly avoid unpleasant surprises later.

What happens if someone slips and falls on the sidewalk right outside the door of your retail shop, then sues both you and the landlord? Do you have to defend and indemnify the landlord, or does the landlord have to defend and indemnify you? Who is obligated to carry insurance against that loss? Or what happens if the roof leaks, water gets into electrical equipment in your shop, and a fire is started? Is that the landlord’s risk because the landlord was supposed to maintain the roof? Or is it your risk because the first started in your shop? Those types of issues are why you need to have both your attorney and your insurance broker review your lease before you sign it and help you negotiate the allocation of risks so that you do not end up being responsible for a large uninsured loss.

Many commercial leases have terms of three, five, or even ten years, and the tenant’s right to terminate early are usually very limited. If you get a bad deal to begin with it, you may be stuck with it for a very long time.

If you ever hear that, please remember: There’s no such thing as a standard commercial lease. All commercial leases are (or at least should be) negotiable to at least some degree, subject of course to the relative negotiating leverage of the two parties. And if you do not have enough negotiating leverage to get a lease that is acceptable to you, you should be prepared to walk away and find another location. An experienced business lawyer can help you understand what a particular lease gives you and what it doesn’t, possibly help you negotiate changes to a proposed lease that make it a better deal for you, and help you decide whether you should say “No, thanks” and find another deal.