Six Tenant Tips for Leasing Space

So, you have decided to start a new business or expand your existing business, and you have found the perfect location. For most businesses, that means you will be leasing your new space.

The first step in the leasing process will involve negotiating the “business” terms of the lease, which should be reflected in a letter of intent. These terms will include a description of the space (by size and location), the term of the lease, any renewal options, the rental rate during both the initial term and any renewal options, a description of any work the landlord is required to do in the space, and a statement as to any “tenant improvement allowance” to be provided by the landlord to reimburse the tenant for all or part of the work the tenant performs to improve the space. Although letters of intent are often very brief, a tenant should make sure it includes everything of real importance to the tenant, such as rent concessions and signage.

The next step for most tenants will be reviewing the proposed lease from the landlord, which may well be a lengthy document. Needless to say, reviewing every word of a lengthy lease is a significant undertaking, particularly when you realize that one misplaced word (such as “not”) can create a huge problem. Moreover, the reality is that a typical lease imposes very few obligations on the landlord, while imposing an enormous number of obligations on the tenant. Additionally, it is not unusual to find that the lease does not accurately reflect some of the terms that were agreed to in the letter of intent. Thus, the question a tenant faces is how much effort (and legal expense) is it willing to devote in trying to rewrite the lease to make it fair and accurate, and how cooperative is the landlord likely to be in that effort. Perhaps the only good news here is that most (but not all) landlords are willing to consider revisions to their lease form, so keep in mind that “if you don’t ask, you don’t get.”

Here are a few negotiating tips and some potential issues to look for in reviewing a lease. Note: many of these tips are applicable only to multi-tenant properties.:

1. Delivery Date. Although the lease will likely specify a target date for delivery of the space, most leases say that the landlord is not liable if it misses that target. That means that the tenant would remain obligated to take the space whenever the landlord finally delivers it – even years after the target date. Always include a “drop-dead” date by which the space must be delivered or the tenant can terminate the lease.
2. Pro Rata Share. Leases for multi-tenant properties generally state that each tenant is responsible for its “pro rata share” of the operating costs, real estate taxes, and insurance charges relating to property. Although most leases calculate each tenant’s share as a percentage of the “leasable” space on the property, some landlords will change “leasable” to “leased.” The difference can potentially be enormous. If you are a 5,000 square foot tenant in a 100,000 square foot building, and your pro rata share is based upon “leasable” square feet, your share will be 5 percent. If your share is based on the “leased” square footage of the property, and all the other tenants move out, you will find you suddenly have 100 percent of the leased space and are responsible for 100 percent of these charges!
3. Reciprocity. A good guiding principle in any lease negotiation is the idea that what is “good for the goose is good for the gander.” For example, if the landlord is entitled to recover its attorneys’ fees if it prevails in any lawsuit against the tenant, then the tenant should also be entitled to recover its attorneys’ fees if it prevails. If the tenant has to indemnify the landlord for any claim that results from the tenant’s use of the leased space, the landlord should have to indemnify the tenant for any claim that results from the landlord’s operation of any areas that are not under the tenant’s control (such as if someone slips and falls in the lobby of a multi-tenant building or a multi-tenant shopping center.)
4. Landlord’s Consent. Whenever the landlord’s consent is required for anything under the lease, it should not be unreasonably withheld. The grant or refusal of the landlord’s consent should never be in the landlord’s “sole discretion.” Since leases will often have many provisions where the landlord’s consent is required, the most efficient way to address this concern is simply to include a section at the end of the lease that states: “In any case where the landlord’s consent or approval is required under this lease, such consent or approval will not be unreasonably withheld, conditioned, or delayed.”
5. Landlord’s Repair Obligations. The landlord’s maintenance and repair obligations are often ridiculously brief. At a minimum, the landlord should be required to maintain the property in compliance with all applicable laws and in a manner comparable to comparable buildings in the same metropolitan area. Specific maintenance obligations imposed on the landlord should include:

(i) structural repairs to the building(s), including the floor slab;
(ii) maintaining the roof in good condition and free of leaks;
(iii) maintaining the surfaces and components of all exterior walls;
(iv) keeping the property clean and properly drained;
(v) keeping the parking areas and entrances free of snow, ice, water and other obstructions;
(vi) maintaining and repairing all paved portions of the property, including parking lot striping;
(vii) maintaining all landscaping; and
(viii) maintaining all electrical and mechanical systems (although retail tenants are generally responsible for all electrical and mechanical systems – including the HVAC system – exclusively serving the tenant’s own space).

6.Landlord’s Insurance and Waiver of Subrogation. Since the landlord’s cost of insuring the property is typically passed through to the tenants on a pro rata basis, a tenant should get the benefit of that insurance. This means that if a tenant accidentally leaves a coffee pot on and burns down the building, the cost of rebuilding should be paid by the landlord’s insurance and the tenant should not be liable to the landlord for that cost. Two things are important here: (1)the lease should require the landlord to maintain full replacement cost coverage; and (2)the lease should contain a mutual “waiver of subrogation” clause providing that neither party will make a claim against the other for any loss that is covered by the injured party’s insurance.

Of course, there are many more potential pitfalls for a tenant in a typical lease. As with any agreement, a tenant’s best defense will be to make sure it reads and understands its lease and obtains competent legal counsel to help with the review and the negotiation process.

© Riley Bennett Egloff LLP^®

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Posted June 17, 2024, by John L. Egloff