Commercial real estate leases can be lengthy and dense. Prospective tenants assume that much of the content other than the financial terms is unchangeable “boilerplate” language. When reviewing the lease, commercial tenants look hard at the numbers and simply try to understand the rest. In fact, many non-financial provisions in a commercial real estate lease are negotiable.
In last month’s blog, we focused on the lesser-known economic-financial provisions in a commercial lease that can be negotiated to the tenant’s favor – things like amortizing supplemental tenant improvements, scaling back restoration requirements, and capping operational expenditure costs.
This month we’ll explore four of the many non-economic lease provisions you may not realize are actually negotiable. As we said last month: Your landlord is well-aware of these details and fine print ... and you should be too!
Landlord’s Right of Relocation
Almost all leases for commercial space in large, multi-tenant office buildings include a Right of Relocation provision that allows the landlord to relocate a tenant to a similar-sized space in the building if the landlord needs to make room for another, larger tenant’s expansion. In these cases, the landlord typically will reimburse the relocated tenant’s costs for moving equipment, furnishings, and materials.
If the relocation space is slightly larger, the tenant may end up with more space than they need and a higher rent payment ... unless they’ve negotiated a “Lesser Of” clause related to the Right of Relocation.
This negotiable lease language should state that if the relocated tenant’s new lease space is larger than their original space, the tenant’s total monthly rent payment will remain the same. However, if the new lease space is smaller than the original space, the tenant will pay rent that is equal to the current rental rate for the smaller square footage, thus reducing their total monthly rent payment.
Additionally, a tenant can negotiate this Right of Relocation provision to ensure:
- The new space has equivalent or better orientation regarding exterior views, visibility from the elevators, the floor (i.e., on the same floor or higher than the original space), overall layout, and more.
- The tenant is reimbursed/compensated for additional costs related to the move – for re-cabling, updating websites and letterhead, relocating a security system, and communicating the change of suite/address to tenant’s clients, for example.
Expansion and Contraction Options
When negotiating for new space, tenants should account for realistic, anticipated growth as well as the possibility of a future need to downsize. Depending on their risk tolerance and growth prospects, they should consider the following provisions:
An aggressive, “bullish” tenant may want a Must-Take clause that preserves specified adjacent space for future expansion. In this case, the tenant is contractually obligated to lease the Must Take space and begin paying rent (ideally at the same rate they’re paying for the original space) on a specified date, typically 6 or 24 months from the date of tenant’s occupancy.
An optimistic but more cautious tenant may be more comfortable with a Right of First Refusal (also known as an ROFR) clause, which states that if another prospective tenant negotiates a lease for space adjacent to the tenant’s current suite, the existing tenant has the option (but not an obligation) to lease the space at that time, matching the terms of the letter of intent from that prospective tenant.
A Right of First Refusal clause can also be negotiated to enable that tenant to obtain the same concessions for the ROFR space as the landlord offers the prospective tenant, including tenant improvement allowances and free rent periods, for example.
A less aggressive or less optimistic tenant, perhaps one who’s largely dependent on projects and renewable contracts, may feel more comfortable with a Termination Option that allows them to downsize or give up their lease space based on certain criteria or verifiable business performance metrics such as revenue, full-time employee count, and project/contract renewals. In these cases, landlords will likely insist that their unamortized out-of-pocket costs related to that lease be reimbursed and that the tenant pay a termination penalty.
Guaranty of Lease
Landlords may require the principal owner(s) of a newer business (and especially any LLC that’s a pass-through entity for tax purposes) to sign a personal guarantee legally obligating the business owner(s) to cover their tenant’s lease obligations including:
- Total lease payments for entire lease term.
- Triple-Net obligations (property taxes, building insurance, and common area maintenance costs).
- Costs incurred by the landlord, such as real estate commissions, tenant improvement allowances, free rent, and moving allowances.
Guarantors, however, can seek to impose time limits on the duration of personal guarantees or cap the dollar value of their liability to only include unamortized out-of-pocket expenses incurred by landlord. Alternatively, tenants should also consider negotiating a larger-than-normal security deposit in lieu of a Guaranty of Lease.
Representations and Warranties
These provisions are generally included in lease agreements when a tenant is the sole occupant in a building (e.g., an industrial site or a stand-alone retail building) or in Triple-Net lease arrangements where the tenant is responsible to pay property taxes, maintenance costs, and building insurance. The new tenant can’t be certain that the previous tenant adequately addressed all building maintenance details and, therefore, the new tenant may be responsible for the consequences.
In these situations, the landlord may agree to include Representations and Warranties language whereby the landlord takes responsibility if maintenance of building’s mechanical systems were mismanaged by the previous tenant. This would include a prior tenant’s poor maintenance of the HVAC systems, for example, and the landlord would be responsible to confirm (represent) that the system is in good working order or agree to repair (warrant) these systems if the need arose during the term of the provision.
In some cases, a landlord will agree to a 6- to 18-month Representations and Warranties period, but it may be possible for the tenant to negotiate for 36 months depending on the condition of the property and current market conditions.
Final Thought
These are just a few of the lesser-known, non-financial provisions commercial tenants should negotiate to provide a level of business certainty and to avoid possible headaches in the long run.
If you’re preparing to negotiate a lease or a lease renewal, don’t gloss over the fine-print, non-financial provisions.
Please give us a call – we’re ready to put these negotiating strategies to work for your business!