Commercial Lease Agreements: Avoiding Surprises

It is truly amazing how often landlords and tenants find themselves in an unpleasant situation because of an unforseen “surprise” during the course of their commercial lease. Usually these surprises are the result of having signed a poorly drafted lease agreement with provisions that neither party understood. In a large number of these cases, the surprise is in the landlord’s “standard lease.” At the same time, landlords are often all too eager to use a lease without understanding the obligations imposed upon them.

A commercial lease is much like a business partnership agreement. When everything is going as planned, no one bothers to review its provisions. It is only when the parties face an obstacle that the lease agreement is truly tested. Tenants fail to recognize that the landlord’s “standard form lease” is nothing more than a wish list. Unfortunately, tenants often learn for the first time that the terms of “standard form leases” do not serve their interests when an issue arises. On the other hand, often a landlord, in negotiating with a sophisticated tenant, will agree to changes to a lease that, if not thoroughly analyzed, could cause unforseen problems for the landlord as well.

While not exhaustive, the following are steps to follow by any party, whether landlord or tenant, in negotiating a commercial lease:

  1. Determine space necessary and examine all requirements, including location, amenity and service essentials, space components, and staffing needs.
  2. Survey the market, selecting qualified properties for comparison.
  3. Request proposals from landlords of the qualified properties. This will enable you to perform a comparative lease analysis to determine which property best suits your needs.
  4. Prepare a negotiations checklist. In so doing, you should solicit input from legal counsel.

Basic items to consider in preparing your checklist include options to extend or terminate a lease, liability limitations, escalations, operating expense and security deposit provisions, and rights of first refusal. There are, of course, many other considerations.

One example of an unpleasant surprise occurs when a tenant fails to negotiate the operating expense provisions of a lease. The problem lies in the fact that there are literally hundreds of ways to structure the charging of operating expenses in the “standard lease.” Unless the prospective commercial tenant has negotiated and understands the mechanism for charging operating expenses, the tenant will face unexpected and potentially financially crippling expenses.

Another unforeseen issue that can arise is a casualty loss. If a tenant has never experienced a fire or flood, he may not pay particular attention to the lease provisions regarding same. The financial losses suffered by a commercial tenant from a casualty loss can have a greater negative impact on the financial health of the tenant than unexpected operating expenses.

The above is nothing more than a cursory review of the commercial leasing process. Every situation is different. Remember, when examining any “standard lease,” that you did not draft it. There is a reason, albeit obscure, for every provision in the “standard form lease.” Almost without exception, these provisions are drafted in a manner intended to protect the party for whom they were drafted.