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Generally speaking, the majority of landlords consider their calculation of the rentable square footage (“RSF”) of a space to be non-negotiable.
From a tenant’s perspective, although not necessarily pleased to do so, the vast majority take an “it is what it is” mindset as to a landlord’s calculation of the loss factor (also referred to as “load factor”).
In certain markets, such as New York City, due to loss factor calculations including such things as the elevator shaft, a building’s lobby, stairways, public bathrooms, multi-tenanted floor hallways and other common areas, the rentable square footage a tenant is charged generally runs from a relatively low of 20% to quite possibly 40% or more over and above the usable square footage of a space.
“USF” stands for unusable square footage.
“RSF” stands for rentable square footage.
The “common area” of an office building can include such items as the building lobby, stairways, management office, a tenant’s private bathroom, hallways and elevator shafts.
A loss or load factor calculation is higher for space on a divided, multi-tenant floor when compared to that of a single-tenant user floor.
A loss or load factor calculation is greater for space on divided, multi-tenant floors because there is more common area on a divided floor.
Depending on the nature of the deal, marketplace, financial strength of the tenant, size of the space, and negotiating leverage that a tenant brings to the bargaining table, a large prospective tenant may request both (a) a verification of the RSF calculation by way of re-measurement or architect certification and (b) that the loss factor (also referred to as “load factor”) calculation be based on a locally, regionally, or nationally recognized measurement standard.
In certain markets, it would not be unusual for a tenant to request the inclusion of language in their letter of intent requiring the percentage used by the landlord for the loss factor calculation to not exceed a certain set amount.
If a retail space in an office building does not have access through a door within the space to the lobby of the building (effectively rendering their retail space void of any building common areas), a reasonable argument can be made by the tenant that the rentable square footage calculation be equivalent to the usable square footage calculation for their space.
As a general rule, a tenant improvement allowance being provided to a tenant by a landlord should be calculated using the space’s usable square footage, and not its rentable square footage calculation.
A carpet vendor or contractor should base their proposal for flooring of a space on the carpetable area of the space, and not the landlord’s rentable square footage calculation.
If a tenant is receiving an improvement allowance from its landlord, although it would most definitely prefer to have its space measured with a low loss factor (also referred to as “load factor”), one benefit of a higher loss factor is that attributable to the fact that its calculation is based on the higher rentable square footage calculation, and not a lower usable square footage calculation.
Generally stated, virtually all commercial landlords feel that it is their right to (a) receive all or the majority of rental profits from the space it leases to a tenant, and (b) control the “tenant mix” (i.e., who will occupy space in its building).
It is important for a landlord to insert language into its initial lease draft which allows a landlord the right to recapture and/or leaseback a tenant’s space if and when a tenant requests to assign its lease or sublease its space.
It is important for a landlord to insert language into its initial lease draft which allows a landlord the right to consent to a tenant’s request to assign its lease or sublet all or a portion of its space.
It is important for a landlord to insert language into its initial lease draft which allows a landlord the right to require the tenant entity, and any lease guarantors, to remain liable in the event of a lease assignment.
From a tenant’s viewpoint, in the case of an assignment of its lease involving (1) a sale of a tenant’s assets or business, or (2) a transfer to a related entity such as a parent, affiliate, subsidiary or franchisor, or a sublet to a permitted subtenant such as one for a permitted desk sharing arrangement, landlords should waive their right of recapture, leaseback, profit sharing and, subject to terms and conditions agreed to by landlord and tenant in advance, the need to obtain landlord’s consent.
From a tenant’s viewpoint, a narrowly defined “permitted use” provision limits a tenant’s right to sublet its space or assign its lease.
A tenant should counteract a narrowly defined “permitted use” provision in the initial draft of a lease by amending the language to be as broad as possible (e.g., changing “a nail or hair salon” to “a nail, wellness, hair and/or beauty salon, and/or other retail uses pertaining to the health, appearance, and/or fitness of both men and woman, with the ancillary sale of men and woman’s clothing and health related products”).
Tenant advocates should attempt to secure language that states that if the majority principal or principals of the assignee sign a guaranty similar in form to the straight, limited or good guy guaranty signed at lease execution by the principals of the assignor, then the assignor’s principals (i.e., the original guarantors) will no longer have any personal liability subsequent to the effective date of the assignment.
A common landlord condition and restriction found in a renewal option provision is to limit the exercise of the renewal and expansion options of tenant to the original named tenant only.
In a retail lease, the longer that remains on the term of the lease, the harder it will be for a tenant to extract a greater value from its assignee.
Tenant advocates should attempt to secure language that states any renewal and expansion rights contained in the lease must extend to any related entities and permitted assignees of the named tenant.
Subject to previously agreed upon terms and conditions, tenants should attempt to secure the right to a partial sublet (i.e., a desk sharing arrangement for up to 20% or more of the tenant’s space) without the landlord’s prior consent.
S.I.P. (“SIP”) stands for search, identify, and plan.
The S.I.P. (“SIP”) process should take at least 9 months.
If your lease is expiring in roughly nine (9) to twelve (12) months (or less) and you have no intention to renew, you should believe that it’s too early to start looking for new space that is suitable for your business and financial needs.
From a tenant’s perspective, the preference would be for a tenant to hire a broker who has a “goal line-to-goal line” mentality, with the ability to take you through the dizzying process of securing the perfect space, steer you away from bad buildings and less than desirable landlords, operationally speaking, and relentlessly pound the pavement for you.
If you are a retail tenant, the tenant advisor you select should be cognizant of every location in the market with good retail mixes and appropriate foot traffic and have the perfect blend of demographics suitable to your business.
Once the space search has been accomplished, a tenant should prepare a matrix or spreadsheet comparing the various costs, amenities, locations, pros and cons of the spaces searched by the broker on behalf of the tenant.
Many landlords will do a test fit for a tenant at little or no cost, although others might not depending on the context of the deal and the market. A number of furniture vendors, with the hope that the prospective tenant will ultimately use their services, will prepare a space fit design plan for a tenant at little or no cost as well.
Tenant advocates should consider submitting only one proposal to create an “air of competition” around their leasing process.
The “E” in the “ACNE” principle refers to Emancipation.
In the “ACNE” principle, the “A” refers to analyzing the counter-proposals or RFP’s.
In the “ACNE” principle, the “C” refers to counter-propose. After analyzing the proposals and RFP’s, tenant representatives should not prepare counter-proposals to submit back to the landlord.
According to the “ACNE” principle, the “N” stands for negotiate and refers to negotiating the counter proposals or RFP’s, and later on in this stage, the lease itself.
In the “ACNE” principle, the “E” targets the landlord, among other things, to evaluate the tenant responses, engineer the potential space layout and ultimately execute the letter of intent for the space selected.
Budgeting and the preparation of design and/or construction documents for the space are paramount in the “ACNE” principle.
With regards to the construction build-out and move-in stage, one of the first steps and top priorities for tenants is to review and approve construction drawings, regardless of whether the drawings are prepared by the landlord’s or tenant’s architect.
As part of the construction build-out and move-in stage, one of the steps for tenants is to order any long lead items, and new equipment or furniture, and given that the majority of landlords will want to be involved with your telephone and internet wiring, let the landlord handle the work with tenant’s telephone and internet wiring.
If the landlord is building out the space, tenants should make sure, if the context of the deal so dictates, it will be on the hook financially for all of the build-out cost.
One of The Lease Guru’s Six Pack Program of Steps for the construction build-out and move-in stageis to have a kickoff meeting with all parties who will be part of the construction and build-out process in order to set expectations and get on the same page.
One of The Lease Guru’s Six Pack Program of Steps for the construction build-out and move-in stage notes that during the construction process, the parties involved should have weekly or bi-weekly periodic meetings – whether by phone, video conference or at the job site.
When the construction is deemed “substantially completed” by either the landlord or tenant’s contractor, tenants should arrange an inspection of the space and make sure that only minor punch list items (e.g., those which do not impact the tenant’s ability to move in and enjoy the space but for minor inconvenience) which the contractor cannot complete within 30 days remain.
A landlord will never have “substitute space language” first appear in their initial draft of the lease without also including the language in the term sheet.
It is common for a landlord’s “substitute space language” to first appear in their initial draft of the lease without including the language in the term sheet.
By incorporating space relocation language into the lease, it provides a tenant with a greater amount of flexibility.
A landlord’s right to relocate a tenant’s space allows the landlord the flexibility to (i) provide a current tenant the ability to expand its space by combining with an existing tenant’s space on the same floor, and/or (ii) attract a “big fish” tenant by being able to relocate a “small fish” tenant.
Whenever there is space relocation language in the lease, a tenant should either strike the language in its entirety, or heavily negotiate the language so as to share in some of the benefits that inure to the landlord when exercising its relocation right.
Generally speaking, a smaller tenant has greater negotiating power than a larger tenant with regards to a space relocation clause.
If a tenant does not possess enough negotiating power to entirely strike the space relocation language from the lease, the tenant should attempt to make it so that the landlord can’t exercise the relocation right until at least 24 to 36 months after the lease commencement date.
If a tenant is unsuccessful in entirely striking a relocation provision, the tenant should try to include language that the relocation space must be comparable to its existing space in terms of finishes, the amount of overall windows, bullpen space, windowed offices, useable square feet; and if in a high rise building, the location of the space in terms of the view; and if retail space, in a still visible and well trafficked location.
If a tenant is required by its landlord to have relocation language in the lease, the tenant should secure language stating that the tenant shall be reimbursed for any and all costs associated with the move, including but not limited to, wiring, cabling, data, moving, stationery and other out-of-pocket costs.
If a tenant is unsuccessful in entirely striking a relocation provision, the tenant should seek to include language that if the rentable square feet of the substitute space is bigger than its existing space, the base rent, additional rent, electricity inclusion factor and tenant’s pro-rata share of CAM and/or real estate taxes will be increased.
It is imperative that tenants include language in the relocation clause that it shall have no obligation to remove or restore any improvements made to the space from which it is relocating.
By bringing tenants to a landlord’s building, effectively, brokers help a landlord pay its and its employees’ salaries and other expenses.
Given that a tenant’s broker has (or should have) access to listings of essentially all spaces in the sub-market that fit a tenant’s needs, the use of a broker will save a prospective tenant time, money and opportunity costs in searching for a suitable space.
Generally speaking, if a tenant doesn’t have a broker in a retail deal, landlords will pay less than a full broker commission on the lease.
Brokers can add value for a tenant by (i) knowing which landlords have a reputation for being “tenant friendly,” (ii) helping tenants secure favorable lease concessions during the letter of intent negotiations, and (iii) acting as a trusted consiglieri to the tenant’s attorney during lease negotiations based on that broker’s knowledge as to what the landlord has granted on prior deals.
Given that a broker is only paid if the deal is consummated, a broker has an incentive to reconcile the parties’ differences during negotiations, and accordingly should have a “we can work it out” mindset to help ensure the transaction closes successfully.
When representing a tenant, rarely will a broker make inquiries about the financial status, character and reputation of the landlord.
Brokers aid landlords and tenants when there is competition for a tenant or a space by helping the side they advocate for to convince the other party that the tenant or space they represent is right for the other party.
A business’s ability to make an informed decision about their real estate needs is only enhanced by the knowledge a good commercial tenant representative brings to them, not only about the marketplace, but also about how to navigate the leasing process and choose among the many attorneys, architects, contractors, designers, furniture providers and other trades a business will need to rely on when looking for new space.
In the event of a lease renewal, a good tenant’s broker has the ability to work with a landlord while advocating for its client by convincing the landlord (as well as its client, the tenant) that it should never give up on a good thing (even if the space needs some cosmetic improvements and/or space efficiency reconfiguration).
Brokers can help a tenant trying to restructure their lease by conveying to the landlord that unless it is willing to grant the tenant some sort of temporary rental relief to help the tenant weather the economic distress it is currently confronted with, the landlord very well may soon be confronted with vacancy turnover, loss of revenue and a myriad of other turnover costs (i.e., a full brokerage commission for the next incoming tenant as well as tenant improvement build-out allowances, free rent concessions and professional fees).
Given that landlords and their listing agents generally have far more experience in negotiating letters of intent and leases than a tenant does, it is in the tenant’s best interest to hire a broker to look out for their best interest.
A broker can save a tenant’s or landlord’s company money in terms of valuable time and salaries not spent on staff whose primary responsibility would otherwise need to be managing the leasing process.
Generally speaking, a landlord’s or tenant’s company is likely to save more money in terms of both time and salaries spent managing the entire leasing process on its own versus hiring a broker.
It is generally in the tenant’s best interest to not hire a broker, and negotiate with the landlord on its own.
A tenant becomes a holdover tenant if they fail to vacate the premises as required under the lease at the expiration of the lease term.
Landlords should include in their lease that the tenant indemnifies and agrees to defend and hold the landlord harmless from and against any claim of loss derived from tenant’s delay in surrendering the premises.
Landlords should include in their lease that if the tenant holds over its possession after the expiration or earlier termination of the original term or any extended term, such holding over shall not be deemed to extend the term or renew the lease, but such holding over thereafter shall continue upon the covenants and conditions set forth in the lease, except that the charge for use and occupancy of such holding over for each calendar month or part thereof (even if such part shall be a small fraction of a calendar month) shall be the sum of 1/12 of the highest annual rent rate set forth in the lease, times 200% to 300%, plus all other additional rent due under the lease.
Tenant advocates should try and negotiate that the holdover rent is no greater than 150% of the highest annual rent rate set forth in the lease.
Ideally for a landlord, the lease should include a rental penalty, but not indemnity language, in the event of a tenant holdover.
Ideally for a landlord, the lease should include both indemnity and rental penalty language in the event of a tenant holdover.
Tenants should not try and delete any indemnity language in a holdover clause.
Many landlords will require that a tenant’s wiring and cabling must be tagged by the tenant and removed by the tenant prior to the lease expiration or earlier termination of the lease.
Tenants don’t need to worry about their wiring or cabling being removed from the premises at the lease expiration or earlier termination of the lease.
An argument can be made by the landlord that the wiring and cabling left in the premises by a tenant after lease expiration should be considered a holdover due to tenant not fully vacating the premises.
One way older buildings compete with newer buildings, where it’s hard to compare in terms of their physical amenities, is by providing enhanced tenant services.
Most landlords believe that a comprehensive and creative amenities package can be used to (i) seduce current tenants to remain as such and (ii) attract new tenants to the building.
A structured amenities package may include: (i) on-site massage therapy, (ii) general wellness classes, (iii) sleep pods for power naps, (iv) a fitness center, and (v) dry cleaning and laundry pick up services.
It is advisable for landlords to have an “it is what it is” mindset in relation to tenant services, and not go beyond delivering HVAC to a tenant’s space Monday through Friday.
Landlords must be creative in terms of the tenant services and amenities packages they offer when attempting to retain current tenants and also attract new tenants.
Landlords should include language their lease that states that the tenant has sole right to prescribe the weight and position of all machines, mechanical equipment, and ventilation systems within the space.
Whether you are a retail or office tenant, use of vibration absorption materials need to be part of the equation when designing and building out your space.
Public establishments such as restaurants and bars should have echo-absorbing panels on walls and ceilings.
A tenant’s creation of noise and vibration disrupting other tenants in the building has no effect on a tenant’s right of quiet enjoyment of its space.
Landlords should require that a tenant immediately notify landlord of any noise complaints a tenant receives.
Tenants who are concerned about privacy during business meetings and negotiations should consider installing extra insulation, sheet-rocked ceilings, and/or extended walls in their office space.
A landlord advocate should include in a lease that if a tenant does not promptly rectify poor performance involving noise and vibration complaints, landlord has the right, at landlord’s own cost, to install sound and vibration attenuation countermeasures to stop the disturbance.
The following remedies are commonly found in leases to help a landlord deal with noise and vibration issues from a tenant:
A tenant should request that its landlord install solid wooden doors, as opposed to hollow doors, to cut down on noise emanating from its office space.
If a tenant’s operations are known to be louder than a traditional office space, a landlord should include language in its lease stating that tenant will use commercially reasonable efforts, and will cooperate in good faith with landlord, to address any issues that arise in this regard. But, so long as tenant uses commercially reasonable efforts, no such noise or similar issue will be grounds for any claim of a default or breach to tenant of this lease.
Landlord termination and/or demolition clauses are often found in the letter of intent (“LOI”) or term sheet.
In most instances, landlords attempt to avoid discussions revolving around termination and/or demolition clauses until lease negotiations begin, hoping it will go unnoticed and unnegotiated by the tenant.
For a landlord, a demolition clause reserves the right for a landlord to terminate an existing lease, providing landlord the ability to demolish the building, make material improvements or substantial renovations with limited notice to tenant.
Landlords generally draft demolition clauses very narrowly.
A Landlord should draft a demolition clause broadly, providing landlord the ability to terminate a tenant’s lease with little or no financial obligation.
Tenants need to be wary of a demolition or straight out termination clause, given the potential consequences.
Under a demolition or termination clause, regardless of the circumstances, tenant advocates should not request to be compensated for the unamortized costs of its leasehold improvements to the premises.
If a landlord agrees within a demolition or termination clause to compensate tenant for the unamortized costs of leasehold improvements, landlord should implement a cap as to what amount of hard cost improvements can be amortized.
If a landlord agrees to compensate tenant for the unamortized costs of leasehold improvements, landlord should require tenant to supply landlord within 60 business days of completion of any tenant’s work, (a) full and unconditional lien waivers, (b) proof that tenant’s work has been done in accordance with applicable laws with proper “sign offs,” and (c) paid receipts and cancelled checks for the work performed by tenant for which it seeks to receive such reimbursement.
Tenant advocates, especially those in a retail setting, should negotiate for language in a termination clause stating that if its lease is terminated, tenant is entitled to a stated amount in line with what tenant would have received if tenant sold its business five years or more from the lease commencement date.
Generally, in regards to a demolition and termination clause, tenants should not attempt to negotiate for the return of its security deposit prior to the termination date.
Tenant advocates should negotiate for the ability to vacate the premises earlier than landlord’s specified termination date, upon which tenant shall no longer have any further obligations under its lease.
In regards to a termination and demolition clause, tenants should attempt to negotiate for as much landlord notice as possible so tenant has sufficient time to plan for the future and relocation of its business.
If a tenant is unable to eliminate a demolition or termination provision, the tenant should request that landlord’s right to send a written notice to terminate the lease shall not “sunrise” (or be allowed) until a specified date (e.g., between 4-6 years from the rent commencement date in a 10 year lease).
Tenant advocates should negotiate for a “sunset” provision within a termination and demolition clause stating the date after which landlord’s right to terminate its lease expires.
A tenant friendly sunset provision should state that (a) landlord shall only have a two year window to terminate its lease from whatever date is agreed upon as the “sunrise date,” and (b) if landlord does not send a termination notice to tenant within one year of the sunrise date, the tenant shall at no cost have the right to terminate its lease at any time on six months prior written notice to landlord.
Landlord advocates should not incorporate language into its lease stating that landlord will suffer severe and irreparable damage in the event that the premises is not vacated and surrendered by tenant by the termination date.
Upfront costs to a landlord incurred on a typical office lease transaction may include, free rent concessions, a tenant improvement allowance and brokerage commissions.
The following are among the primary factors that determine how much free rent a landlord may give to a tenant: (a) current market conditions; (b) whether the lease is for office, retail or industrial space; and/or (c) the length of the lease term.
Although there is no hard or fast rule of thumb, depending on market conditions, the deal type (office, retail or industrial) and other concessions being granted to a tenant, it would not be unreasonable for a tenant locking into a five year deal to receive two to five months of free rent and those committing to a ten year deal to receive four to nine months of free rent.
Tenant advocates should only consider asking landlord for one hundred percent of the free rent concession to be granted up-front.
Landlords, as a rule of thumb, prefer to grant free rent concessions versus that of tenant improvement allowances.
Tenants should include language providing the return of the full amount, or the unamortized portion of, any free rent concessions granted in the event of their uncured default, lease termination by landlord, or as a condition to get out of a straight, limited or good guy guaranty.
The amount of security deposit requested by a landlord should be based upon how much risk the landlord feels it should have given its due diligence and financial outlay incurred in entering into the lease.
The amount of fixed rent should cover a landlord’s operating costs for its building and financing costs for its mortgage on its building.
Unless the cost of such is considered in the calculation of fixed rent, a landlord should make sure that its tenants pay their proportionate share of real estate taxes based upon the amount of square footage tenant is leasing in proportion to the total square footage of the building.
An operating expense escalation is a provision within a lease which provides that as a building’s operating expenses increase above what they were in the base year of the lease, tenant agrees to pay its pro-rata share of those increased expenses.
A real estate tax escalation is a provision in a lease agreement wherein the tenant agrees to pay its pro-rata share of any increase in real estate taxes on the leased property over and above a pre-established base tax year.
Most operating expense definitions within a commercial lease are very broad, and many include a number of costs of a capital nature as well as those with built-in profit components.
An important carve-out for a tenant to request for an operating expense provision may include an annual cap (typically around five percent) on an operating cost escalation increase or, at a minimum, on those costs that are considered “controllable” by a landlord.
An important carve-out for a tenant is to include capital expenditures in the operating expense definition.
As a landlord, the percentage increase in base rent the tenant pays should be on an annual compounded basis.
From a tenant’s perspective, in order to limit its costs to those actual in nature and without markup from a landlord, utility charges should be direct from the local utility.
From a landlord’s perspective, if the space that is being delivered does not then have direct meters in place to measure the tenant’s consumption of utilities, its lease should provide that the cost to install the meter shall be paid by landlord.
Some landlords include language within a compliance with law provision to have its tenants pay a portion of the costs associated with landlord complying with applicable building code laws, rules and regulations.
From a tenant’s perspective, tenants should be obligated to “comply with law” and remedy any current non-compliance of the premises, as of the lease commencement date.
At the bare minimum, a landlord should have tenant reimburse landlord for any costs that landlord may incur as a consequence of tenant’s request to assign its lease or sublet its space.
Examples of cost reimbursement and protective language for landlords to include in its good guy guaranty may include: (a) guaranteeing that all work started by a tenant will be completed and paid for lien free (in short, the equivalent of a construction completion guaranty); (b) the tenant being required to give landlord between sixty and one hundred eighty days written notice prior to its space being surrendered; and (c) requiring tenant’s owner to reimburse landlord for those costs initially incurred by landlord relating to its lease of the space if surrendered within the first three to five years of the lease term.
Tenants should negotiate into its lease that its security deposit will be reduced in one or two month increments after a period of two to four years from the lease or rent commencement date (provided it is not then in default of its lease beyond the expiration of any applicable notice and cure period).
Essentially, all activity relating to marijuana is illegal under federal law.
Cannabis is a controlled substance, therefore, federal authorities may enter business establishments and charge those involved with forfeiture proceedings.
It is advisable for landlords with tenants in the cannabis business to create a profit sharing scheme, such as percentage rent from tenant’s revenue.
Landlords cannot have a financial stake in a tenant’s cannabis business because it is technically an illegal business.
Landlord advocates should incorporate language into its lease outlining the time for which a tenant must get a cannabis license in relation to the lease commencement date.
Although there is a high potential for a tenant’s licensing application to not comply with the changing state or local marijuana laws, cannabis related termination language in its lease is not imperative.
Landlords with tenants in the cannabis industry tend to have a lack of stable and secure cash flow due to the uncertainty in the cannabis and real estate industry with regards to how state and federal regulations will be decided.
Most landlords, along with tenants in the cannabis industry, would prefer to have leasing disputes resolved by the way of arbitration, as opposed to litigation.
In a cannabis related lease, both parties must waive, acknowledge and agree that any defense of “federal illegality” will be prohibited from being raised by either party to any landlord or tenant breach or default under the lease by the non-breaching/non-defaulting party.
Landlord advocates should include language for tenants in the cannabis business that are non-growers and non-processors along the lines of, “The sale of marijuana and marijuana-related products shall not be included in the definition of hazardous substances.”
In a cannabis related lease, in regards to the use clause, landlords would prefer to have a broader use clause to allow tenants to have an exit strategy by way of an assignment or sublet.
In a cannabis related lease, tenant advocates should add the following language to the use clause, “Notwithstanding anything herein to the contrary, landlord acknowledges and agrees that the use of the premises for the permitted use (including the sale of marijuana and marijuana-related products) shall not be a violation of this lease (subject otherwise to the terms and conditions of this lease).”
In a cannabis related lease, language relating to landlord’s access to the premises does not need to be in conformity with state and local cannabis laws.
Generally, in regards to a cannabis related lease, institutional lenders will lend on the property, regardless of the “illegality activity” concern.
There are many financing and banking concerns for the landlord in leasing space to a tenant.
Landlords and tenants, in particular tenants who are growers, must take into consideration Department of Building regulations, and decide whether tenant’s fixtures and equipment comply with applicable code.
Generally, in cannabis related lease negotiations, tenant advocates should not incorporate language in its lease requiring landlord’s assistance in the event that new laws or rules are enacted relating to a myriad of items, including licensing.
In most instances, landlords should take a liberal stance in complying with tenant’s request to grant a tenant improvement allowance for a stated amount when negotiating the terms of a cannabis related lease.
When negotiating with a cannabis tenant, landlord advocates should include the following language in its lease, “Landlord shall not lease to or permit any other occupant, concessionaire or tenant within the building or property adjacent to the building owned or controlled by landlord or any affiliates thereof to operate a marijuana dispensary or similar use to that of tenant.”
In a cannabis related lease, it is imperative that the landlord specify the proper method of payment from the tenant, as the landlord cannot accept cash payments.
In lease negotiations with a cannabis tenant, it is in the landlord’s best interest to maintain the right to terminate its lease if a change of law or prosecution of law concern arises.
In most instances, a fire and casualty clause creates significant exposure to a landlord due to the lack of protective language for the landlord.
A landlord is usually allotted a significant amount of time to inform the tenant of whether or not they will rebuild after a fire or casualty.
Tenant advocates should include an option for tenant to cancel its lease if (a) the casualty occurs during the last two years of the lease term, or (b) the casualty occurs at any time, and the restoration will take between 90-180 days from the fire or casualty, depending on the type of tenancy.
Whether due to it being required by the landlord, inadequate abatement of rent language contained in the lease and/or because you need temporary space, tenants should maintain insurance against loss of rent or rental value due to a fire or casualty in an amount equal to the annual rental for the demised premises.
In the event of a fire or casualty, generally, a landlord will provide a tenant with a rent abatement, regardless of fault.
Many landlords will include in the initial draft of the lease that if a fire or casualty is caused by tenant’s negligence, not only will tenant not receive a rent abatement from the date of casualty through the date of restoration, but tenant will also be liable for restoration costs.
Most fire and casualty clauses effectively allow a landlord to take advantage of a casualty that occurs by being able to cancel a tenant’s below market lease in a market that has risen significantly since lease execution.
Tenant advocates should attempt to delete language in the lease that makes tenant liable for restoration costs in the event of a casualty caused by tenant’s negligence.
To protect against a landlord being able to take advantage of a casualty that occurs by canceling a tenant’s below market lease, tenant advocates should include language in its lease that provides that in order for the landlord to cancel the lease, they must concurrently terminate leases affecting at least 35%-50% of the rentable area of the space leased to tenants in the building exclusive of any rentable area leased by landlord.
Generally, tenants are afforded a full rent abatement following a casualty or fire, regardless of the amount of damage caused.
If the lease states that tenant shall be entitled to a full rent abatement only in the case of a substantial casualty, tenant advocates should try and insert language that provides that the premises shall be deemed substantially damaged if more than 20% of the premises are damaged, if the premises are not accessible, or, if in tenant’s reasonable judgment, the premises is not usable for the proper conduct of tenant’s business operations.
Generally, in a fire and casualty clause, a landlord’s restoration obligation extends to delivering the premises back to tenant with the improvements made by tenant prior to its occupancy.
Generally speaking, a landlord’s restoration obligation after a fire or casualty includes delivering the premises back to tenant as a vanilla box, without the improvements made by tenant prior to its occupancy.
In order to give tenant time to perform its work, tenant advocates should attempt to negotiate language in its fire and casualty clause which states that tenant’s liability for rent shall resume 30 days after landlord has performed its work and delivered the premises to tenant.
Most leases allow a landlord a maximum of 150 days after a casualty to inform tenant whether landlord will demolish, rebuild or terminate the lease.
Tenant advocates should include language in the lease that requires landlord to inform tenant of its decision to demolish, rebuild or terminate the lease within the earlier of (i) 90-120 days of the casualty date, or (ii) when landlord is notified of how much insurance money it will be receiving.
Most leases provide for a rent abatement between the casualty date and the landlord work substantial completion date, regardless of whether tenant is then in default of its lease.
Tenant advocates should at a minimum, insert language into its fire and casualty clause stating that as long as tenant shall not be in monetary or material nonmonetary default under the lease after the expiration of any applicable cure period, then tenant will receive a rent abatement between the casualty date and landlord’s substantial completion of the restoration work.
Generally, a landlord is liable to a tenant for any loss or damage resulting from any other tenant occupying the space adjacent to or adjoining the demised premises.
A tenant advocate should make sure that the lease requires the landlord to maintain insurance on the building for no less than 95% of its replacement value against loss or damage due to fire and other casualties.
In deciding the amount of security deposit to require from its tenant, a landlord will, among other things, evaluate its initial costs (such as how much landlord is paying for any tenant improvement allowance and brokerage fees) and review the tenant’s and its principal’s financial statement, historical track record and business plan.
A tenant’s financial standing is the sole factor a landlord will use when calculating the amount of security it will request and whether or not they will ultimately agree to a future reduction of a tenant’s security deposit.
Generally stated, the shorter the lease term, the greater the tenant concessions and the greater the risks uncovered during a landlord’s due diligence, the greater the amount of security deposit a landlord should demand.
A “burndown” clause essentially states that, so long as tenant is not in default of the lease at a particular point in time during the lease term, then tenant’s security deposit will be reduced (either by way of a return of such reduction or a rent credit).
A “burndown” clause is a useful vehicle for a tenant to negotiate when a landlord requires a security deposit, which is significantly larger than what the tenant anticipated or can afford to lock up for the full term of the lease.
In order to do a “burndown” of the security deposit in the form of a letter of credit, tenants will usually need to provide the landlord with the instruments and authorizations required by the issuer of the letter of credit.
Landlords should require as little security deposit from a tenant as possible to partially mitigate against its short and long term risks.
When negotiating a “burndown” clause when the security deposit is in the form of a letter of credit, it is essential for tenants to negotiate for language stating that upon receipt of the instruments and authorization from the issuing bank, landlord must promptly execute and deliver an amendment to the letter of credit reflecting the reduced security deposit amount.
Tenant advocates need to ensure that the security deposit burndown is applicable so long as tenant is not in default “beyond any applicable notice and cure period.”
Generally, landlords prefer to warrant that the building is in compliance with the Americans with Disabilities Act (“ADA”).
If tenant is unable to negotiate language reflecting landlord’s warranty that the building is ADA compliant, tenant should at least attempt to secure language stating that the premises leased to the tenant is ADA compliant.
Tenant advocates should negotiate for language expressing that landlord is solely liable for existing and future compliance under the ADA, and should indemnify and hold tenant harmless from and against all damages, claims, liabilities, actions and proceedings relating to any failure by landlord to comply with the ADA.
Tenant advocates should negotiate language stating that tenant has no obligation to comply with ADA except and only to the extent that it is applicable to the interior of the premises and only if required as a result of tenant’s alterations or manner of (as opposed to permitted) use.
Landlord advocates should provide in the letter of intent and in the lease that not only shall tenant take the premises “as-is,” as of the lease commencement date and at all times thereafter at tenant’s sole expense, tenant must comply with all present and future laws, rules, codes, orders and regulations of all governmental and quasi-governmental entities, boards, departments and commissions (including but not limited to the ADA).
Landlord advocates should include the following within its lease: “Tenant hereby acknowledges and agrees that notwithstanding anything to the contrary contained in the Lease, it shall be Tenant’s sole responsibility, at Tenant’s sole cost and expense, to install (or modify, as the case may be) any additional restrooms (or modify a bathroom that is in compliance with the American with Disabilities Act, if required) within the Premises as required by any rules, regulations, laws and/or codes of any governmental or quasi-governmental agency prior to the opening of Tenant’s business operations.”
Tenant advocates, if the context of the transaction permit, should wherever possible insist on the following language: “Landlord represents and warrants that the common area and the Premises as of the Lease Commencement Date are (or will be) in compliance with all applicable governmental and quasi-governmental laws and regulations (including, without limitation, ADA Requirements).”
It is in the landlord’s best interest to provide language stating that tenant shall have no obligation to comply with ADA, and landlord shall perform any acts necessary or appropriate to comply with ADA.
It is imperative that a landlord require within its lease that their tenant furnishes, from time to time when requested by landlord or a prospective purchaser or mortgagee of the landlord, a certificate signed by the tenant confirming the stated certifications and representations contained therein within no more than 10 days following receipt of said certificate from landlord.
In regards to a tenant’s obligation to sign an estoppel certificate requested by a landlord, prospective purchaser or mortgagee, most leases do not impose a time restraint on the tenant as to when tenant must sign and deliver the certificate from the date of receipt.
An estoppel certificate can potentially act as an amendment to the lease by changing the terms contained in the lease.
Prior to a tenant’s execution of an estoppel certificate, there is no need for a tenant to review every term in the certificate and have an attorney review the document.
Estoppel certificate provisions may include some of the following: (i) the date of the lease, names of the landlord and tenant, and the exact premises; (ii) that the lease has not been modified changed, altered or amended in any respect; (iii) the exact rent per month and when it has been paid through; (iv) that the lease is in force and effect; and (v) the lease expiration date.
There is no need for a purchaser’s advocate to make it an express requirement under the contract that the seller deliver from every tenant of the property an estoppel certificate before closing.
As an advocate for a seller, if a buyer requests for the seller to provide an estoppel certificate from each of their tenants as a condition to the closing, you should try and negotiate to only be required to provide an estoppel for major tenants and from 65%-80% of the remaining tenants. Furthermore, that the buyer has to accept seller’s own estoppel certificate from any such non-major tenant who fails to supply an estoppel.
Most sellers will create a condition precedent to the closing that seller must deliver estoppel certificates from all of the tenants in the building prior to closing.
If the context of the transaction and market conditions allow, landlord advocates should consider adding the following language to the estoppel clause in the lease, (i) that the failure of tenant to submit the estoppel certificate shall result in a $500/day penalty; and (ii) that the failure of tenant to submit the estoppel certificate shall allow landlord, as tenant’s attorney in fact, to execute the estoppel provided by landlord as if tenant had executed such estoppel.
Tenants will never receive an estoppel certificate with terms that deviate from the terms of their lease.
At a minimum, landlords should include language in their lease that allows the landlord to enter the tenant’s premises at any time upon reasonable notice, or without notice in the event of an emergency, in order to examine the premises and make any repairs or improvements landlord deems desirable or necessary.
A tenant should attempt to negotiate into the provision that allows landlord access to the premises that in addition to the landlord being required to provide prior reasonable notice prior to any intended entry (unless in events of emergency), that the tenant or his representative must accompany the landlord upon any such entry and that landlord will use “commercially reasonable efforts” to minimize interfere with the tenant’s use and occupancy of the premises.
A tenant should readily agree to allow its landlord to include in its lease that in any situation, landlord is allowed to enter the premises when the tenant is not present.
Tenants should attempt to negotiate language within its lease requiring its landlord to provide a partial or full abatement of rent during any period the landlord is making improvements to the premises and landlord is materially interfering with the tenant’s use and enjoyment of the premises.
Landlords should include in their lease that if the tenant vacates its entire premises during the last month of the term of the lease, landlord has the right to (i) enter the premises and (ii) make any improvements and alterations without any rent abatement or liability to the tenant.
Landlords shouldn’t make sure to have the right in the lease to change any common areas and entrances in the building without the consent of tenant.
A tenant should request in their letter of intent and the lease a provision permitting them access to the property prior to the start date of its lease for the limited purpose of installing furniture, workstations and cabling and/or wiring and for storage purposes, provided it supplies landlord with its certificate of insurance prior to such entry).
Tenants should include a provision within its lease that gives them access to the premises 24/7/365.
A “failure to deliver possession clause” can be described as when a landlord fails to give access of the premises to a tenant by the commencement date stated in the lease.
An “as-is” condition provision does not relieve the landlord of any liability as to the condition of the premises at lease commencement.
An “as-is” condition provision effectively allows a landlord to make no representations or warranties of any kind or nature as to the fixtures, equipment and systems serving the premises.
Except if provided for otherwise in a lease, a commercial tenant will have no recourse against an unsatisfactory condition of the premises, if it has agreed to accept the premises “as-is.”
In a letter of intent and lease, a landlord advocate prefers to include language that states, “Tenant acknowledges that tenant’s taking of possession of the premises shall be conclusive evidence that the premises were in good and satisfactory condition at the time such possession was so taken.”
It is in a landlord’s best interest to include language in a LOI and lease stating, “Landlord shall be responsible for making any improvements or alterations therein or for spending any money to prepare the premises for tenant’s occupancy.”
A tenant advocate prefers to include language in a LOI and lease stating, “Landlord shall not be responsible for making any improvements or alterations therein or for spending any money to prepare the premises for tenant’s occupancy.”
A tenant should attempt to negotiate for language that the landlord represents that on the lease commencement date, landlord shall have substantially completed all of the work landlord is required to complete as described in the lease.
Landlords and their representatives should advocate for language along the lines of, “Landlord represents that landlord’s work will be free of defects for a period of one (1) year after the lease commencement date.”
Landlords and their representatives should advocate for language along the lines of, “Tenant represents that the premises and all electrical, heating, ventilating, air conditioning (if any), plumbing and other systems affecting the same have been inspected by tenant and by tenant’s engineers (or that tenant has waived such inspection or will conduct said inspections by the lease commencement date).”
If a landlord is providing air conditioning and heat, the majority of the time the lease does not address what minimum temperature must be maintained by the landlord in the winter or what maximum temperature is permissible during the high temperature months.
In most office leases, HVAC is provided by a landlord on weekends.
The American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) have a comfort chart of recommended maximum and minimum temperatures that should be maintained in a building.
Tenant advocates should either negotiate building temperatures, or request that the landlord comply with the chart of American Society of Heating, Refrigerating and Air Conditioning Engineers (ASHRAE).
Most office leases provide HVAC during the hours of 8:00 AM – 6:00 PM, Monday through Friday.
Tenant advocates should negotiate with the landlord to provide some combination of: (a) HVAC to tenant’s space from 8:00 AM- 1:00 PM on Saturdays; (b) for the landlord to install a supplemental HVAC system in highly used and/or “after-business hours” areas of tenant’s space; and/or (c) reduced after-hours cost for heat, ventilation and air conditioning.
Landlord advocates should insert language into its lease that provides that tenant shall be required at their own cost and expense to: (i) maintain the air conditioning system, equipment and facilities; and (ii) maintain an air conditioning service repair and full service maintenance contract with an organization approved by the landlord.
If the lease is silent on the issue, at lease expiration, the tenant automatically remains in possession of the entire A/C system.
Landlords should put into its lease that at all times the A/C system remains the property of tenant.
Landlord advocates should make sure that the lease provides that at lease expiration, tenant shall surrender the entire A/C System in good working order and condition to the landlord.
Tenants should try and negotiate that the landlord is responsible for any required replacement of the HVAC system, including without limitation, for major parts and components, to the extent that same is not caused by the negligence, wrongful acts or omissions of tenant.
In many leases, lighting and electricity through wall outlets will be provided by a landlord 24/7/365.
If a landlord charges for any electric usage in excess of 55-60 hours per week, tenants, at a bare minimum, should make sure that the electrical service through the electrical outlets is supplied to the space 24/7/365.
Generally speaking, a tenant’s utility expense would be greater if charged directly from the local utility company, rather than charged by the landlord.
From a landlord’s perspective, if electric is being supplied directly from the local utility provider and a space does not have direct meters in place to measure tenant’s consumption of electricity, the lease should provide that the cost to install and maintain the meter is on the landlord.
The use of sub-meters as a means of measuring a tenant’s electric or water consumption can act as a profit center for a landlord.
In a situation where the landlord provides electric and water to the tenant as measured through sub-meters, it is not uncommon to find a five percent (5%) to fifteen percent (15%) surcharge added to the cost of a tenant’s electric or water bill to cover not only the cost to landlord of having the meter read by a third-party, but also to cover what landlords like to refer to as their “administrative fees.”
In a situation where the landlord provides electric and water to the tenant as measured through sub-meters, tenants should make sure that any administrative fee charged by the landlord is added on to the landlord’s actual cost of purchasing the utility.
Tenant advisors need to confirm whether or not the landlord has sufficient power in the building to meet the tenant’s required electrical capacity, and if the landlord does, whether the landlord is willing to provide it at a reasonable cost.
A landlord advocate should state in its lease that landlord shall be liable or responsible to tenant for any loss, damage or expense which tenant may sustain or incur if either the quantity or character of electric services is changed or no longer available.
Landlords should insert into their lease that tenant covenants and agrees that at all times its use of electric current shall never exceed the capacity of existing feeders to the building or the risers of wiring installations.
Landlords should insert into their lease that landlord may never discontinue any of the utility services under any circumstance without a decrease in tenant’s rent.
For a tenant in a more suburban setting, having prominent monument and/or building signage is a must (assuming tenant has the requisite negotiating power to request same).
For tenants in urban settings or multi-floored suburban buildings which periodically require scaffolding, tenants should negotiate that (i) the scaffolding must double-height; (ii) the landlord should produce and hang the signage for the tenant at its sole cost and expense; and (iii) if the tenant is near a street corner, replacement signage will not only be hung over the store, but on the scaffolding of the cross street to that of the tenant as well.
Tenants in urban settings or multi-floored suburban buildings should not worry about negotiating any rights with regards to the landlord putting up scaffolding at its building.
Where zoning permits signage on a building’s roofs or sides, it is in the landlord’s best interest to not readily give away the space to tenants. A building’s roof and sides can become profit centers for a landlord in the way of signage placement for those wishing to advertise.
When making a decision as to what signage will be allowed on its building, landlords don’t need to consider the fabric, culture, demographics, ethnicity and/or politics of the community before allowing a particular sign to be hung by its tenants.
Listings on the first floor lobby directory are generally limited to the tenant’s proportionate share of the building based on the square footage of its space.
Tenants should consider requesting the right to lobby signage during the negotiation of the letter of intent.
Landlords should include language in the lease stating that tenants may install any sign at the premises at tenant’s sole option.
Landlord’s consent to a tenant’s proposed signage should be subject to and conditioned upon compliance with all applicable codes, laws and regulations of any governmental or quasi-governmental entity.
Tenants should consider having a schematic or picture of its proposed signage pre-approved by its landlord and annexed to its lease.
Signage includes any words and/or designs on windows, doors, canopies, awnings, billboards and other areas outside of the premises.
Landlord advocates should negotiate that the landlord, and not the tenant, is responsible for obtaining any necessary licenses and permits for any of tenant’s signage.
Where appropriate, landlords should consider the insertion of language in its lease requiring tenant to hire landlord’s competitively priced building signage company.
Landlords should make sure they have the option, upon prior notice, to compel tenant to remove any sign in the event such sign, in landlord’s sole but reasonable discretion, interferes or conflicts with landlord’s overall scheme of decoration or décor of the building.
Tenant’s should attempt to delete any right that landlord has to remove signage that landlord deems interferes or conflicts with landlord’s overall scheme of decoration or décor of the building, or at the very least, make sure any such removals, signage redesign and hanging is at landlord’s expense.
Landlords should negotiate the right, at any time, to remove any sign or other attachments to the premises, including canopies or awnings, at such times as it may be necessary or desirable to make repairs to the structure of which the premises forms a part, provided landlord will replace same at landlord’s own cost and expense.
Landlords only need to worry about tenant’s initial signage installation and not about tenant placing any further signage at the premises.
In most cases, the tenant has more leverage in the lease negotiating process after the letter of intent is fully negotiated.
A lease becomes effective once the LOI terms have been agreed to.
One of a landlord’s primary goals is to avoid vacancy of its space.
One of the reasons a tenant loses a significant portion of its negotiating leverage following the LOI stage is because it has gotten a bit “financially pregnant” by hiring its leasing attorney, architect and other third party professionals.
The LOI is a legally-binding document.
The LOI sets the playing field on which the parties will be negotiating the lease.
Most initial lease drafts are arguably among the more one-sided, offensive legal documents known to mankind.
Although a commercial lease is a legal document, most of the language within a lease is of a “business nature.”
Generally, LOI’s are negotiated between attorneys and owners.
When advocating for a tenant, you would prefer to keep the LOI and whatever definitions found within it as narrow as possible.
When advocating for a landlord, leasing professionals should be as detailed yet as broad as possible wherever possible when it comes to preparing and/or negotiating the LOI provisions.
When advocating for a tenant, leasing professionals should be as detailed, yet as broad as possible when preparing and/or negotiating LOI provisions.
Although there is no hard and fast rule as to how large or small the LOI should be, as a general statement, the preferred length of a tenant’s LOI is around one (1) page.
As a tenant advocate, it is imperative to create exit strategies from the lease for clients in the initial draft of the letter of intent.
A tenant should not agree to language within a LOI stating that the premises may be used for any lawful use.
Given that landlords should want the use clause to be as narrow as possible, for a tenant that is going to use the space as a nail salon, the landlord’s draft of the letter of intent should state that the premises may be used as a nail salon and for no other purpose.
As a tenant advocate, where the lease commencement date is tied to landlord’s substantial completion of landlord’s work, at a bare minimum within the letter of intent, the “substantial completion” definition should provide that it shall be deemed to have occurred when landlord’s work has been completed except for minor items which (1) shall not cause interference with tenant’s business operations or the use of the premises and (2) can be completed or remedied by the landlord’s contractor within a reasonable period of time thereafter not to exceed thirty (30) days.
Where the lease commencement date is tied to landlord’s substantial completion of landlord’s work, tenant advocates should insert the definition of substantial completion in their LOI.
If the landlord is performing work to prepare a tenant’s space, from a tenant’s perspective, it is not necessary for the definition of “substantial completion” to be included in the letter of intent.
A property’s lack of a certificate of occupancy that conforms with a tenant’s intended use is not a substantial risk for tenant.
Tenants should negotiate for “outside date” language by which the landlord must substantially complete landlord’s work by an agreed upon date (the “outside date”), and if landlord fails to do so, tenant will receive a day of free rent for each day of delay in landlord delivering the space beyond the “outside date.”
If deleting “outside date” language from a LOI and lease is not an option for a landlord, landlords should make sure that before “outside date” penalties can arise, such penalties are subject to force majeure and tenant delays.
If the lease commencement date is tied into the date landlord’s work is substantially completed, landlords should attempt to have the lease commencement begin on whatever day the premises are actually substantially completed (as opposed to 3-5 days after giving tenant notice of substantial completion).
If the premises are being delivered to a tenant in “as-is” condition, landlord advocates should attempt to have the lease commencement date be the date that a fully executed lease is delivered to tenant or its attorney.
A landlord will generally prefer to amortize any of its costs associated with the lease over the term of the lease, rather than to pay them upfront.
The longer the lease term from a secure and rent paying tenant, the better for the landlord when it comes to refinancing and/or selling the property based off of the net operating income of the building.
From a broker’s perspective, the free rent period should be added to the desired term of the lease (rather than subtracted from the lease term), given that the longer the term of the lease, the larger its commission will be.
When advocating on behalf of a tenant on a potential 10-year deal, try to secure a 5-year lease term with a 5-year option period to provide the tenant flexibility.
Whether you represent a tenant or a landlord in a lease negotiation, it is important to recognize that free rent concessions generally are part of the equation.
In determining the amount of free rent a landlord will give a tenant, a landlord will evaluate current market conditions, the type of use (retail, office or industrial) and other concessions being negotiated such as if there is a tenant improvement allowance and the amount of landlord’s work being requested by a tenant.
Depending on the market, deal type, and other concessions being granted to a tenant, a reasonable amount of free rent for a tenant agreeing to a 5-year deal is between 1 to 2 years.
When a tenant vacates a space, the landlord will incur loss of revenue from the vacancy turnover.
Instead of asking for one hundred percent of a free rent concession to be granted up-front, to make it more appealing for a landlord to grant more free rent, tenant advocates should consider offering to bifurcate the free rent requested by spreading it out over a period of months in either full or one-half month increments.
Landlords should consider adding to its initial lease draft that upon the occurrence of an uncured default by tenant, any rent abatement, concession or other allowance given to the tenant shall be deemed of no further force or effect; and the unamortized amount (calculated on a straight line basis over the initial lease term) of any rent concession, brokerage fee or other allowance should be immediately become due and payable by the tenant to the landlord.
Tenants should attempt to negotiate that any landlord recapture provision relating to free rent should “sunset” (become null and void) after a pre-specified date in the lease (e.g., the 2nd or 3rd anniversary of the rent commencement date).
From a landlord’s perspective, the LOI should limit the ability to exercise the renewal option right, so that it is personal to that of the tenant only.
For a retail tenant, the existence of a renewal option does not make the value of its lease significantly stronger.
Tenants should negotiate for the right to exercise the renewal option by not only the named tenant, but also by any parent, affiliate, subsidiary or permitted assignee of the named tenant.
For a lease where the rent will be pre-established for the renewal term, tenants should attempt to have the landlord provide a tenant improvement allowance at lease renewal of roughly $5 to $15 PSF.
Ideally for tenants, the rent for the renewal term will be fixed and not based on fair market value (“FMV”).
As a landlord advocate, not only should you insist that the renewal term rental will be 100% of the fair market value (“FMV”), but you should also create a floor on the FMV by providing that the renewal rent shall be no lower than the net effective rent at lease expiration plus 3% to 5%.
For renewal rents based upon fair market value, tenant advocates should seek for (a) the renewal term rental amount to be 90%-95% of fair market value, and (b) the fair market value to be based upon all “relevant market factors.”
In many leases, in addition to a real estate tax escalation, among the more popular (or unpopular, depending on your perspective) rent escalation provisions are those which require the tenant to pay its proportionate share of operating expenses over a base year, and an agreed upon increase in fixed rent based upon a predetermined percentage increase.
Generally, most landlord advocates prefer a CPI or straight predetermined percentage bump in the rent as opposed to an operating expense escalation.
To the uninformed tenant (and a large portion of leasing professionals negotiating the clause), the language contained in an operating expense clause operates as a profit center for the landlord.
Decorating, snow and ice removal, and service contracts are generally not included in the operating expenses of a building.
Most operating expense definitions found within a commercial lease are extremely broad, and moreover, many include a number of costs considered to be capital in nature and contain built-in profit components.
Tenants are in the business of leasing out their space for profit, and conversely, landlords are in the business of leasing out space from a tenant to conduct their business operations in order to make profit off of such operations.
An example of how tenant advocates can lessen the way the operating expense clause can operate as a “profit-center” for the landlord is to make sure that any item of a capital nature included in operating expenses is based upon the remaining term of the lease to the useful life of the capital expenditure itself using Generally Accepted Accounting Principles (“GAAP”), and not on the useful life “as determined by landlord in its sole discretion.”
Landlord advocates should consider requiring its tenant to use a firm, which will charge the tenant for an audit of landlord’s operating statement on a contingency basis.
Tenants should attempt to negotiate that in no event shall the initial payment required by tenant relative to the operating base year occur prior to the twelve month anniversary of the rent commencement date.
Tenants who are paying their proportionate share of the increase in operating expenses over a base year don’t need to be concerned with the specific year the base operating year will be.
A strong argument can be made that when a tenant pays a percentage rent increase in addition to the fixed rent in lieu of an operating expense escalation, the landlord is actually “double dipping” and creating more profit for itself (given that the percentage rent increase is effectively applied against the landlord’s operating costs and profit margin).
Tenant advocates should insist that percentage rent increases be applied on an annual cumulative basis (instead of, for example, every 5 years).