- Basic Business Operations – Ensure you can operate your business profitably from the premises. Look for advantages and trapdoors in leases:
- Permitted Uses: This clause enumerates how you are allowed to use the rented space. By implication, it makes activities outside the scope of this clause out-of-bounds. Negotiate for broad language or a method that allows you to make the necessary changes to maximize profitability. Conversely, carefully evaluate any language in the lease pertaining to restricted uses, or prohibitions on your use of the rented space.Exclusive Use: If you have sufficient bargaining power, restrict your landlord from leasing any other units on the premises to direct competitors or at least to those businesses that would impact a critical area of your income.
- Franchises: If you are a franchisee, the lease will need to include, within its “Transfer” section, certain franchisor rights to replace the tenant.
- Expansion: Consider negotiating in advance the rent for potential expansion space within the original lease. Oftentimes, speed and certainty are critical factors when a subsequent expansion arises.
- Disruption of Services: Landlords rarely agree to allow you to terminate for long disruptions in services or casualty. Instead, advocate for short deadlines for repairs and restoration of services, and consider obtaining business interruption insurance.
- Signage: Confirm the landlord’s pre-approval for any necessary signage and negotiate for a reasonable process for approval of future signage.
- Utilities: Landlords often resist installing separate meters, particularly for small tenants. Watch for language in the lease reserving the right to bill the tenant for “excess usage” in addition to pro-rated utilities. Note that, if your rented space is part of a multi-tenant property, you should also look for any language requiring you to pay for other tenants’ “excess usage.”
- Maintenance and Repair: Watch out for provisions requiring you to repair or maintain areas outside the leased premises. Seek to make it the landlord’s duty to maintain the structure, exterior, all common areas, and any shared building systems.
- Common Area Maintenance (CAM) Expenses (or Operating Expenses): Watch out for provisions requiring you to pay a pro rata share of the operating expenses incurred by the landlord in operating and maintaining the building, including common areas such as lobbies, hallways, garages, and elevators. These expenses may encompass building-wide HVAC costs and management fees (i.e., expenses associated with use of a building superintendent or management company to run the building). Often, landlords expand the list of expenditures too broadly, striving to make tenants pay as much of these expenses as possible. Lists of charges are “passed through” to tenants with slippery words such as, “Tenant will be responsible for the following costs, without limitation ….” The language, “without limitation,” enables the landlord to tack on extra charges. Ensure that the lease includes only legitimate and enumerated CAM charges. One approach is limiting CAM expenses by including language referencing a standard list of operating expense exclusions or a specific list of items the landlord can include. You also could negotiate for a cap on your share of the operating expenses.
- Insurance costs: Review and determine what insurance is included in the landlord’s current operating costs, whether there is the potential for any significant increase, and if you can, get the landlord to agree to some reasonable limit on the pass through of such costs.
Finally, most leases include an annual rent increase or escalation. Make certain that you are aware of the formula that the landlord utilizes (a fixed amount per year compared with tying rent modifications to the regional Consumer Price Index, or CPI) and negotiate for changes to that formula as needed. If the landlord insists on retaining the escalation clause, seek a cap (known as a collar) on the amount of each year’s increase or at least an exclusion on any rent increase for the first year.
- Exit Strategy – Ideally, your lease will include clauses that will impose reasonable limitations on the landlord consenting to transfers. If the lease requires you to share with the landlord excess rent received from such arrangements, ensure that it only includes rents and no other consideration you received in connection with the sale or transfer of the business. Further, deduct any tenant expenses before splitting excess rent with the landlord. Finally, where the transferee is credit-worthy, seek a release of the current tenant and guarantors.
- Default – Negotiate the result of a default on the lease. Typically, leases contain a provision providing that the landlord may elect to continue or terminate the lease if the leased premises are damaged or destroyed. Similarly, leases often provide for an abatement of rent in the same proportion that tenant’s use of the leased premises is impaired. Make sure that you understand and are comfortable with such language.