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Succession Planning
Leasing Space
Selling or Buying a Business
Help for Troubled Businesses
Negotiation
LLCs
Advising Well
Mixing Business and Real Estate
Treating your Banker right |
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A Well Negotiated Lease
is a Key Business Asset
A commercial lease
is an important part of any Business, and a well
negotiated lease can be a vital business Asset. A
Lawyer who is experienced in lease negotiating and
drafting can assure the protection and enhancement of
this vital asset.
To be
"well-negotiated", a lease should hit on and resolve
successfully those areas of central concern to the
particular business. Negotiating a very low rent
may not make a lease "well-negotiated", if rent forms a
small part of the overall costs of the business, and if
issues far more important to the particular business are
not favorably dealt with. For example, business
location may be critical for one business, while length
and flexibility of the lease term may be vital for
another. For some, successful design and build-out
may be key. Or perhaps room for future expansion.
For yet another, the most important issue may be
protecting personal assets by avoiding a personal
guarantee.
One cannot
win all the issues. One has to pick one's spots
and hit those that are the most important to that
business -- and compromise on the rest. But one
has to be aware of and decide what are the most
important lease issues for his or her business.
And those key issues may vary significantly from one
type of business to another, and may differ for the same
business over time.
An attorney
experienced with leasing can work with you to help set
your leasing priorities from both a business and a legal
perspective and map out a course of action to carry out
those priorities. An experienced lease attorney
can help line up other key professionals: brokers who
can locate potential space and who know the current
market and its trends, architects and contractors who
can help with a complicated build-out design, and banks
and other lenders who will help finance the build-out
and other expenses of the move. Perhaps most
important, a capable lease attorney can also help you
develop a good relationship with the landlord and his or
her attorney, which may prove critical in the future if
difficult situations arise with the landlord.
Advantages
which you orally negotiate successfully with a landlord
can slip away or be undermined by actual terms of the
written lease, unless you have an experienced lease
lawyer to identify them and to negotiate changes in the
lease provisions as written. For example, an
experienced lease lawyer can identify and help protect
you against provisions which can force you out of your
location, or which can interrupt your business, or which
can impose added, often unforeseen costs on you, or
which can shield the landlord from any recovery by you
for damages caused you or your business.
An effective
lease strategy, well-carried out through good
negotiations, will assure that a vital ingredient in a
successful business has been put securely in place and
is working actively to enhance your business.
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Legal
Issues in Leases
A well-drafted, long-term lease in a good location can be one of your
most important business assets. A
poorly drafted one that does not protect you can be a definite threat to your
business. Basically, a lease can be looked at as a trade by the landlord of
giving you peaceful occupancy of your location in exchange for your paying money
to the landlord. It is essential that you have peaceful enjoyment of your
space so that you can be free to conduct your business. Usually, the way
the lease negotiation gets started is by the landlord’s lawyer sending you a
10 to 30 page lease.
I will discuss three kinds of lease provisions. First, there
is a group of provisions which make it easy for the landlord to kick you out.
These provisions disturb your occupancy and can interrupt the smooth
operation of your business. There is a second group which cost you money
or impose risks on your business. There is a third group which take away
or limit your ability to claim for damages or reimbursement when the landlord
would otherwise be liable.
There are
several clauses which can make it easy for the landlord to evict you.
These include the default
clauses which say when you are in default under the
lease and subject to possible eviction is critical here.
Almost all leases provide that you receive no notice of when you have
failed to pay fixed monthly rent when due and are now in default.
Non-payment of rent is a material default and gives the landlord the right to
force you out of your space, either through court or otherwise. You should
have a ten to fifteen-day grace period for the payment of “rent” - which
incidentally, usually includes all tax and cost escalation items or pass-throughs.
Failure to pay those items puts you in default for non-payment of rent. In
addition to rent, there are a host of non-monetary defaults, usually for not
performing certain covenants in the lease: such as: failure to maintain
insurance, keeping explosive and flammable materials on the premises, engaging
in illegal behavior, damaging the premises or the building, etc. in contrast to
rent when you know that you haven’t paid it, you may be totally and innocently
unaware that you are in violation of some provision of the lease. It is
entirely reasonable to ask for written notice and thirty days to cure the
violation before the landlord can declare you in default. Another
set of clauses which can force you out of the space
you leased are the fire and casualty clause and the
taking or eminent domain clause. Very often
the occurrence of a fire, casualty or taking gives the landlord the right to
terminate your lease and throw you out, regardless of the fact that the damage
to the building or to your space may not be that severe, and despite the fact
that you may not want to leave, or may need time to relocate. If the
building or your space is destroyed, that is easy, even though catastrophic to
you. The problem arises when your
space or the building you are in is partially damaged. The landlord may think it
is substantial, while you may think that it is not serious enough and can live
with the disruption - which is less than if you had to suddenly move somewhere
without notice or preparation. The opposite situation can take place: you
want to move because of the disruption to your business, but the landlord wants
you to stay and will only abate the rent you pay - which is clearly not
enough. In this case, you are stuck: you can’t operate your business yet
you can’t move and can only get a rent reduction. At can be called the
landlord’s renovation clause, which gives him the right to terminate your
lease and force you out with all the other tenants so that he can renovate the
entire building and lease it out at a higher rental. Yet
another clause is the subordination
clause which allows a foreclosing lender to evict
you. When you execute your lease, if it is seven or more years in length,
you need to file a notice of lease in the registry of deeds. This notice
lets everybody know that you have a right to possession of your space. It
is particularly good against buyers of the building who must accept you as a
tenant if they buy the building. The subordination clause subordinates your
lease not only to the existing lender, but to future lenders on the building, so
that if a bank forecloses in the building they can push you out even if you are
in total compliance with the lease and have paid your rent on time. This
can be catastrophic to your business, and it happens mostly in down times.
The non-disturbance clause aims to protect you by saying that as long as you
have paid your rent and are in total compliance with your lease, the foreclosing
bank has to recognize your lease and accept you as a tenant. One client
did not have this clause in their lease and the bank foreclosed and pushed them
out as a small tenant in favor of a company that wanted the whole
building. The client successfully relocated, but it was traumatic.
It is hard to get this clause, however. Banks don’t like to have their
hands tied. But if you are taking the whole building or have leverage with
the landlord, it is worth asking for.
The second class of provisions are those that cost you money or impose
risk on you.
One such clause is the
indemnification clause that is often one-sided: you indemnify the landlord for
things you might do wrong, but the landlord often does not indemnify you for
things that he might do wrong. The
clause can also be drawn so broadly that you become responsible for people and
events which are really beyond your control and shouldn’t be your
responsibility. Another clause
is the damages clause where in case of eviction the landlord seeks to make you
immediately responsible for the entire rent for the unexpired portion of your
term. In effect, the landlord attempts to imitate the acceleration
provision of a promissory note where, upon default, the lender can declare the
entire balance of the note immediately due and payable. But a lease is very different from a promissory note.
With a promissory note, you borrow and receive the entire sum of money
up-front at the beginning and then begin to pay it back. With a lease, you
in effect trade monthly occupancy for monthly rent.
You don’t owe a future month’s rent until you have occupy the space
for that period. Thus, acceleration does not apply here.
Related to the accelerated damages clause are clauses which try to take
away the landlord’s duty to mitigate damages. If you leave your space
before the end of your lease term, the landlord obviously has the right to hold
you to your lease agreement, but the landlord also
has the legal duty to use reasonable efforts to re-rent the space as soon
as possible and thus to reduce your liability for future unpaid rent. Another
clause has you warranting, as of the time you move
into your space, as to the good condition of non-visible building systems
(electrical wires, plumbing) which may serve your space but which is outside of
the space and are hidden from view behind walls and which the landlord has in
fact been maintaining. This removes
from the landlord any liability for bursting pipes, stoppage of heat or
air-conditioning, or electrical black-out caused within the building - even
though these events may be the landlord’s fault and may severely interrupt
your business.
A third class of provisions either exempts the landlord from liability
to you or removes or hinders your right to recover for legitimate claims
against the landlord. One
provision that always bothers me but which I am not
always successful in removing is the little and often unnoticed phrase
“without offset or deduction”. For
example, you will pay your rent to the landlord without offset or
deduction. This
means that even if you have a legitimate claim or offset against the landlord,
you cannot deduct the amount from the rent without being in default for
non-payment of rent. Instead, you may have to go to court to pursue your
claim - not a very attractive or practical solution for smaller but significant
claims. In any event, it puts the
landlord in a strong position of leverage against your claims. It is not
easy to remove this phrase from the lease, and nearly impossible in leases of
big buildings where the building lender may be relying on the uninterrupted cash
flow from rents to service its bank loan to the landlord.
Another provision
is that the landlord will not be personally liable for any breach or wrong, but
the tenant shall look only to the property in which you leased space is
located. It is not entirely what this clause means, but at the least, it
severely cuts down your ability to recover or collect large monetary damages
from the landlord, since “looking only to the property” means that you are
trying to collect from an illiquid and often highly encumbered asset - a
building. Finally, I will mention
provisions which limit your right to inspect and audit the records and the
landlord’s basis for charging you the operating cost pass-throughs which
usually increase every year and can, over the long-run, be quite costly.
The limitations are in terms of limited time to audit, waiver if the
audit is not done in that time period and some sort of penalty if you can’t
show that the operating cost charge to you was incorrect.
This discussion will give you an idea of what to look for in order to
negotiate a fair and even-handed lease with you new landlord, even in this
difficult, competitive, “landlord’s” market.
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