Companies seeking to lease a corporate
facility justifiably spend a great deal of
time and focus with a qualified broker hammering out location, rent, term and
other primary business points. Many executives mistakenly feel that once the key
deal points are covered in a letter of intent
or otherwise, the rest of the lease document
is mere “legalese” or “boilerplate.”
That kind of thinking will get you burned.
The lease agreement has been carefully
drafted and refined by the landlord’s attorneys. Consequently, the overwhelming majority of the terms contained in the lease are
heavily weighted in the landlord’s favor.
These terms often include critical provisions such as the method for calculating
triple-net pass-through charges. At the very
least, having the lease agreement closely
reviewed by qualified legal counsel will
help level the playing field between the tenant and the landlord.
“The tenant and the landlord often have
totally different views about the intent of
the initial draft lease document,” says Tom
Turner, managing partner with Procopio,
Cory, Hargreaves & Savitch LLP and a long-time commercial leasing expert. “The landlord typically expects the tenant to use the
document as a starting point for negotiations. The tenant often assumes that boilerplate leases are all about the same so the
detailed terms aren’t worth negotiating.
This assumption can leave the tenant
extremely vulnerable.”
Smart Business spoke with Turner about
the negotiable elements generally contained in “standard” lease agreements.
What are some negotiable financial terms
contained in boilerplate leases?
Provisions regarding the pass-through of
triple-net operating expenses should be
reviewed carefully, because the language
often shifts the majority if not all of the
operational expense responsibility to the
tenant. The lease should expressly exclude
numerous inappropriate expenses from
the pass-through calculation. In addition,
the tenant should have the unfettered right
to conduct an audit of the costs after the
fact. It is important that the audit not be restricted as to when it is performed, what
time period it covers or who the tenant
chooses to conduct it. Many other financial
components, such as late charges and
holdover rent, security deposits and other
credit enhancements, are often presented
by the landlord as ‘standard,’ but are in
reality very much negotiable.
Are lease expansion and termination provisions negotiable?
The right to extend or terminate the lease
or to shrink or expand the space are negotiable areas that are often overlooked.
It is not unusual for a lease agreement to
have a heading titled ‘Option to Extend,’
but in reality provide the tenant with little
more than an option to negotiate. This really isn’t a tenant benefit at all. The tenant
needs to work carefully through the lease
language to make certain that these are
truly enforceable rights that are also workable from a practical perspective.
As an example, if you think your business
may be growing, you may want the right of
first refusal on any adjacent space that becomes available, on pre-established terms.
Moves under any circumstances are costly,
so by anticipating growth, you can eliminate much of the cost of expansion by simply adding on rather than relocating. But if
you are not careful about the detailed language of the lease, you may end up with a
worthless right to sit down and talk with
the landlord.
Why are boilerplate relocation provisions
problematic?
In the event of disasters, such as floods,
fires or earthquakes, the lease typically
allows the landlord to evict tenants or move
them to an alternate location of the landlord’s choosing. You can bet these provisions are overwhelmingly favorable to the
landlord, so it’s important to spend the effort
to assure they are fair and reasonable.
Also, it isn’t uncommon to find a hidden
provision near the end of a standard form
lease that gives the landlord the right to
actually relocate the tenant to other premises, almost on an unrestricted basis.
Usually, if you push back, this provision will
simply be deleted; at a bare minimum,
should relocation be required, the tenant
should have the right to acceptable comparable space and be completely reimbursed
for all related expenses.
What eviction provisions should tenants
watch out for?
I have seen landlords actually searching
out a basis to put a tenant into a technical
default, in order to give them the boot in
favor of a more attractive deal. As an example, the landlord requests that you deliver
an estoppel certificate and subsequently
evicts you, without recourse, if you deliver
the certificate a day late. As the tenant, you
want to retain the right to be notified of any
default and a specific time frame to cure it
before you can be evicted.
By closely reviewing the entire lease document before signing it, the tenant can gain
important leverage by negotiating all of the
terms and conditions up front, when the
landlord and the brokers are eager to get
the deal done.
TOM TURNER is a commercial real estate attorney and the managing partner with Procopio, Cory, Hargreaves & Savitch LLP.
Reach him at [email protected] or (619) 515-3276.