Tenants have limited power in lease negotiations. Prepare by understanding key issues and negotiate before agreeing to a price.
When renting office space, tenants often have limited bargaining power over the terms of the lease. Nonetheless, any leverage they may have with a landlord is usually greatest before an agreement on a price has been reached. Many clients are unaware of this opportunity to negotiate, and regrettably, contact our firm to review a lease after having already reached a verbal agreement on key terms, including price. At that point, further negotiation will be considerably more difficult.
Before meeting with a prospective landlord, tenants should prepare by identifying any issues that are important concerns. This basic due diligence can strengthen a tenant’s bargaining position enough to request an agreement in principle from the landlord with respect to such issues before committing to final lease terms. This approach also provides valuable insight into the landlord’s general willingness to cooperate, which the tenant may wish to consider when settling on a price.
Below is a checklist of common issues of importance to commercial tenants which can be helpful during the due diligence process:
Price
Negotiating the base price of the monthly rent payment is usually where the parties start. Other costs to consider include:
- security deposit (typically no more than 1-2 months’ base rent);
- utility charges (gas, electric, water, heat, AC, renovations);
- additional costs such as “operating contribution,” “common area maintenance charges” (CAM), or “additional rent” which are typically formula-driven calculations based on the percentage of space a tenant occupies in the building and represent the tenant’s share in the overall cost to operate the entire building and maintain common areas; and
- in retail space leases, a percentage of sales (a common requirement of commercial landlords in the retail sector).
Sometimes, a landlord may try to include the cost of capital improvements, in addition to routine operational costs, as a component of the tenant’s lease obligation. Unlike the above charges, this is not a standard expense in commercial leases.
Termination Rights
It is important to understand how termination works for both parties. Some termination provisions allow a landlord to terminate the lease without notice. As a tenant, written notice, as well as an opportunity to remedy during a “cure period,” prior to termination are preferred.
A lease may also require the tenant to provide advance notice of a decision not to renew, which, ideally for the tenant, is not more than 30-60 days before the end of the lease term. Finally, it is common for a lease to give the landlord early termination rights if the tenant is in breach (including acceleration of payments); but, it rarely includes the same right for tenants unless it is requested and negotiated. A tenant may wish to exit a lease early in the event a landlord is in breach, files bankruptcy or due to an acquisition.
Late Payment Fees
Late fees are often imposed when the rent is past due. In some leases, this provision also gives the landlord the right to impose fees (as a penalty) if the tenant violates the lease. However, if this provision allows such fees to be charged “immediately,” without notice, and without an opportunity to cure, the tenant may wish to negotiate better terms, including its own right to withhold rent in the event the landlord breaches the lease.
Accurate Description of Premises
A lease typically includes a description of the leased premises. It is good practice to confirm that the space is fully and accurately described in the lease, including the correct amount of square footage.
Right of First Refusal (ROFR)
A right of first refusal clause gives the tenant the opportunity to lease more space, if and when it becomes available in the building or complex, before the landlord leases it to another tenant. This issue is often important to startups and fast-growing companies with plans for future expansion. If a ROFR is not included in the proposed lease, a landlord may be willing to add it upon request by the tenant.
Construction/Alteration
While most leases prohibit ‘alterations’ to the premises, common exclusions include cosmetic improvements (like fresh paint, new carpet and window treatments) and telecommunications hookups. Tenants should pay close attention to this provision, especially if they intend to do any extensive remodeling (e.g., to suit specific business needs or capture a preferred aesthetic). If so, it is best to outline what is and isn’t included in the lease.
Signage
Not all commercial tenants require signage at the leased premises. However, if a tenant has plans to add a new sign on either the exterior or interior of the building (or to add its name to an existing sign), it will be important to address this right in the lease; and if possible, minimize (or waive) any cost associated with it.
Access to Maintenance Areas
Commercial office leases may restrict tenant access to maintenance areas such as the roof, basement, plumbing, and wiring for safety and liability reasons. If a tenant needs such access, be sure to expressly include these access rights in the lease.
Furnishings
Simply put, are the premises furnished or unfurnished? If furnished, ensure the lease says so.
Sublet Rights
Many landlords require tenants to seek their approval before entering into a sublet arrangement. Tenants anticipating this need should try to negotiate the removal of landlord’s preapproval, and pay careful attention to this provision, particularly with respect to the landlord’s ability to withhold or place conditions upon such approval.
Parking
Is parking included in the base rent? If so, how many spaces? Are there any reserved parking spaces that are off-limits to tenants?
Locks/Security
Gone are the days of changing the locks between tenants. Many commercial spaces are secured by key card systems and other security features. To ensure safety and privacy, tenants should ensure that the lease requires the landlord to update any locks and create new keycards to restrict access by the prior tenant. Ideally, the lease will entitle the tenant to as many keycards as it needs at no additional cost.
Confidentiality
Landlords may reserve the right to access to the leased premises for cleaning, repairs, maintenance, or other reasons. If a tenant is concerned about safeguarding confidential information, especially if computers and documents are going to be freely accessible to anyone who enters, the tenant should negotiate for the inclusion of landlord confidentiality requirements in the lease. Additionally, the tenant may wish to take additional measures to protect proprietary information (plans for expansion, growth, IP, etc.).
Lease Term
When a tenant agrees to a longer lease term, the monthly price is likely to be better. However, the tradeoff is less flexibility in the event a tenant’s plans change. Since most leases include early termination penalties (e.g., requiring the tenant to pay for the entire term length regardless of occupancy or need), tenants should weigh this tradeoff before agreeing to a lease term.
The Legal Stuff
Since the lease is a contract, it is always a good idea to ask your attorney to review certain legal provisions such as:
- “Good Title” - the landlord represents that it has good title to the premises being leased and will deliver the property to the tenant free of liens and encumbrances, “broom clean” and ready to occupy.
- “Compliance with Laws & Codes” – notwithstanding the usual boilerplate that (a) the premises are being leased “as is” and (b) tenant has the right to inspect, and if nothing is found wrong upon inspection, any future issues are the tenant’s problem, it is very common for the Landlord to be responsible for “latent” or hidden defects, as well as for code violations, and to be expected to comply with all applicable laws (such as ADA compliance, free from pests and rodents, no hazardous materials or environmental issues, etc.).
- "Personal Guaranty " - some commercial leases include a provision requiring the tenant to personally guarantee the lease on behalf of their business, even when the business is the actual tenant. For legal and business reasons that your attorney can further advise on, this requirement should be avoided wherever possible.
Prospective tenants that take the time to understand these common lease provisions are likely to improve their bargaining power during lease negotiations. Although it is still advisable to have a lawyer review the entire lease agreement for other risks and non-standard provisions, the issues highlighted above tend to be overlooked early on, leaving tenants at a disadvantage.
For questions about Commercial Leases, please contact Client Success at clientsuccess@outsidegc.com.