Negotiating Your New Lease:
A Business Tenant's Perspective

By Jeff Bennett

Let's be frank. If you are a small or medium-sized business and you don't own your own building, your lease may be your single most significant financial obligation. Even with a short lease, events beyond your control may occur that can adversely affect business operations. Tenant improvement work gets delayed, buildings sell, utility systems malfunction or require replacement, and fires happen. So when it comes time to negotiate the lease, don't limit your attention to how much rent you pay or who empties the trash at night — pay attention to everything the lease says and the collateral obligations it includes. After all, if something goes wrong, the first thing a landlord will do is look at the lease, and unless the tenant pays attention before the lease is signed, the landlord will have put itself in the driver's seat. Pay particular attention to the following issues:

Delivery of the Premises. Departure from your old space and occupancy of the new space requires careful coordination. Most basic lease forms don't obligate the landlord to deliver the premises or finish the tenant improvements on a date certain; they just delay the tenant's obligation to pay rent if the landlord is late. Make sure your lease contains a firm delivery date or requires the landlord to pay a premium (at least equal to your holdover rent) if delivery is late.

Maintenance and Repair. The lease must be crystal clear about who bears responsibility for maintenance, repairs, and replacement. Most leases allocate responsibility partially to the landlord and partially to the tenant. The obligations may be found in many parts of the lease. For example, most leases are silent about what occurs when a major building component (like an expensive HVAC unit) needs replacement. Most replacement issues involve capital expenditures, the cost of which should be part of the basic rent and therefore not to be paid by the tenant. Negotiate these issues to make sure the financial obligation that the tenant assumes is aligned with the rental rate to be paid. In the end, you must know precisely where the responsibility lies.

Have an Exit Strategy. The lease needs to accommodate the possibility that you may move before the term expires. An early-termination clause deals with the issue expressly, but you can expect to pay a premium fee for the privilege. A flexible assignment and sublease clause will allow you to find a replacement tenant. Ask to be freed of your lease obligations if you bring a national credit tenant to the space. Otherwise, seek assignment terms that limit the landlord's right to reject a requested assignment. Finally, negotiate a broad description of allowable use. This will expand your pool of assignees and limit the landlord's ability to say no to a requested assignment or sublease.

Get an Expansion Right. Moving is expensive and disruptive to a business. If your business plan projects expansion during the lease term, either lease the space up front (and sublease while you grow) or negotiate an expansion right. This may range from a firm right to take specific spaces on specific dates, to a right to submit an offer on adjacent or nearby space before it goes to the market, or to a right to match competing offers.

Insurance. Slips and falls, fires, and other casualties happen. Most leases have an elaborate means of allocating risk between the landlord and the tenant in the event of liability; insurance is one means of accomplishing that allocation. Ask the landlord to carry fire and casualty insurance and to rebuild or restore the premises with insurance proceeds. This will ensure that you will have a place to do business after a casualty loss. Also, ask the landlord to carry rental income and rent-interruption coverage. The cost of the policies usually can be passed through as an expense to the tenant, and this coverage will reduce the issues you may encounter when requesting rent abatement provisions if a fire or disruption of services occurs. If there is a common area in your building or project, the landlord should be asked to carry public liability insurance. This will limit your exposure to a lawsuit if a customer or employee is injured while using the common area.

Remember, there is no such thing as a boilerplate lease that is fair to both landlord and tenant. Make sure you fully understand the full scope of your business's obligations under your lease, and if you have questions about what those obligations are, seek competent advice.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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