Last week, we gave you five terms you can expect to see on a standard commercial lease. This week, we will offer five more.

Remember that before entering any negotiations with a commercial landlord, it’s important to have professional representation. Professional representation provides you the good working knowledge of commercial leases that should also help you negotiate a better contract and avoid legal issues down the road

1.  Use and Exclusives Clauses

Use and exclusive clauses are some of the trickiest parts of a commercial lease. They define how you can and cannot use the property you’re leasing. These clauses can be very specific or very broad, so read them very carefully and really think ahead to ensure that you are ok with the restrictions the landlord is putting in place. For instance, landlords might have use clauses that:

• Restrict the type of business you can conduct, which may preclude you from expanding your business into new areas.
• Restrict the manner and style of any signs or advertising on the premises.

An exclusive is the other side of a use clause, and they state that you alone can do something and other tenants cannot. These are often used to ensure that competitors can’t move in next door. An exclusive clause of one tenant becomes a use clause for another tenant. Typically only well-established tenants will have the power to get exclusive clauses.

2.  Improvement and Alterations Clauses

The ability to improve and alter the premises often takes up a lot of the lease contract and is a vitally important point. Issues about design, aesthetics, and what is “appropriate” can be complex, so expect to negotiate a lot over this issue. In addition to deciding what is allowed and what is not, also consider who should pay for any changes and how those changes impact rent.

3.  Maintenance Clause

It may not be the most exciting of clauses, but maintenance clauses can be one of the biggest sources of strife between a tenant and a landlord. Aside from the initial issues of what bills will be paid and by whom, pay careful attention to who is responsible when problems arise, how any maintenance issues are to be resolved, and how they will impact rent. Landlords may also put in generic language about keeping the building “up to code” – make sure that the landlord defines exactly what codes he or she is referring to.

4.  Insurance Clause

There are a host of business insurance options available, and your landlord may require you to carry basic forms of insurance such as property and liability insurance. In addition to the basic forms of insurance, consider negotiating for rental interruption insurance (in case something like a natural disaster disrupts your business) and leasehold insurance (to protect you if your lease is canceled for reasons beyond your control).

5.  Operating Expenses and Taxes

Landlords typically treat operating expenses and real estate taxes either as an inclusion in the gross rental rate or as an additional cost to Tenant to be determined by the Tenant’s proportionate share of the building they occupy. If Landlord charges Tenant for operating expenses and taxes as an additional cost to Tenant, these costs may increase annually due to tax and other price increases for the Landlord to operate the building.

There are a host of other significant clauses to keep in mind when negotiating commercial leases. Professional representation can help in understanding these clauses.

Below is a list of five terms you should expect to see in a standard commercial lease.

Before entering into any negotiations with a commercial landlord, it’s important to have professional representation. Professional representation provides you the good working knowledge of commercial leases that should also help you negotiate a better contract and avoid legal issues down the roaad.

1.  Rent Clause

For almost any business, but especially smaller businesses, the amount of rent expected monthly is one of the most important issues when it comes to a commercial lease. While rent may seem fairly straightforward, there is a good deal of negotiating room available, even if the rent itself is already established. For example, in your rent clause you may want to negotiate:

• Automatic rent increases: what they’re based on, when they are in effect and how much the increase should realistically be.

• Tenant improvement deductions:  whereby the landlord agrees that approved improvements to the building will result in rental decreases.

• How much of the landlord’s operating costs will be passed on to you.

• Establishing a method for dealing with unanticipated rent issues and increases.

2.  Rental Rate

This is the dollar amount that Tenant agrees to pay for possession and use of the premises. The rental rate is typically calculated on a per square foot basis by month or year and is typically quoted as a gross amount or as an amount net of operating expenses such as common area maintenance (CAM), taxes and insurance. For example, rent may be quoted at $20 per square foot triple net (NNN) per year with operating expenses totaling another $10 per square foot per year. Rent could also be quoted at $30 per square foot gross per year with no additional charges for operating expenses.

3.  Description of the Premises Clause

The description of the premises clause is crucially important, so make sure that it accurately describes what you intend to rent. If you are renting an entire building, then this may be fairly straightforward and could simply be the building’s address. However, if you are renting just a portion of the space, you should make sure that the lease describes that space in sufficient detail.

It may also be helpful to address “access” issues in this clause, to ensure that you, your employees and your customers have easy access to your rented property. Other items you may want to consider mentioning in the description include shared areas, such as conference rooms, storage rooms, and parking.

4.  Parties Clause

The listing of the parties to the agreement is a fairly straightforward clause, but the key thing to watch out for is the use of correct business names. One of the primary reasons for using businesses, and not doing business in a person’s name is to shield individuals from liability. Make sure that your business name, not your actual name, is on the lease.

5.  Term Clause

The term clause can seem fairly straightforward as well, but requires more of your attention than you might think. Many lease terms begin when they are signed, and in your case, that may be well before your business is actually up and running. Even if a landlord agrees that no rent is due until you move in, other terms of the lease may become effective immediately, such as the need to carry insurance. The requirements of these terms can be expensive, especially for a new business. The best approach is to write in several start dates for different obligations under the lease – such as when to move in, when rent is first due, when you need to have insurance, etc.

Stay tuned for five more lease terms next week.

You’ve probably been told to make sure you read the fine print before signing anything. Most of us know we need to, but sometimes everything we read isn’t easily understood.

Signing a commercial office lease is no exception.

Lack of clarity should never be the reason you ‘just sign’ a lease. We thought it would be beneficial to highlight three of the most misunderstood lease clauses, which are: Non-Disturbance, Subordination, and Attornment.  These are very technical terms, which is why they are the most misunderstood.

Non-Disturbance

When faced with either subordination requirements in the lease or landlord requests for subordination, a tenant should seek the protection of a non-disturbance agreement. It is prudent for the tenant to obtain a non-disturbance agreement from any existing mortgage lender holding a mortgage on the property when the lease is executed. The tenant should avoid agreeing to “automatic subordination” clauses that could undercut its priority or modify such provision to state that it shall only become effective after the lender has executed and delivered a non-disturbance agreement in favor of the tenant. With respect to the issue of security of tenure of the premises, a non-disturbance agreement restores the tenant to the same position as it would have been in had the lease continued to have priority over the mortgage and places the lender in the same position as a lender enforcing security on a property with a prior ranking unsubordinated lease.

Subordination

As illustrated by the two examples set out above, the rights of the tenant greatly depend upon whether it has “priority” over the lender’s mortgage. This tenant priority may be lost (a) in accordance with the terms of the lease or (b) pursuant to the provisions of a subordination agreement. In many leases, the tenant has agreed to a provision stating that “the tenant hereby subordinates its lease to any present or future mortgage made by the landlord registered against title to the property”. Such an “automatic subordination” clause, without corresponding “non-disturbance” protection, could severely undermine the rights of the tenant in a landlord loan default situation. Many lenders wish to have such a prior position so that they may elect to “pick and choose” which of the leases the lender will agree to honor if a loan default occurs.

Attornment

If a mortgage has priority over a lease, upon loan default, and enforcement by the lender resulting in taking possession of the property, the tenant is in turn free to leave. Case law has confirmed that a tenant, subsequent in priority, may be permitted to escape its long-term, above-market lease obligations upon the completion of a foreclosure by a lender or otherwise upon the lender entering into possession. In a soft leasing market priority of the mortgage over the tenant’s lease may subvert the lender’s desires. The lender should be asking the tenant to “attorn” to the lender in these circumstances. Attornment would consequently protect the lender from the risk of the tenant vacating when the tenant has been paying above-market rent for the leased property. A well-drafted attornment clause will include an obligation of the tenant to attorn to any successor in title including any purchaser the lender might sell the property to following or as part of the exercise of the lender’s loan enforcement remedies.

For more information on these clauses, click here.