Tips for Negotiating a Commercial Lease as a Tenant

Negotiating a commercial lease can be a complex and challenging process, especially for tenants who may not be familiar with the intricacies of commercial real estate. Securing appropriate terms can be crucial for ensuring the long-term success and stability of your business. Here are some key items to keep in mind.

Negotiating a Right to Audit CAM Expenses

Understanding CAM Charges
Common Area Maintenance (CAM) charges are the costs associated with maintaining and operating the common areas of a commercial property, such as parking lots, lobbies, and landscaping. These expenses are typically passed on to tenants proportionally. Given that CAM charges can be substantial and sometimes ambiguous, it is crucial for tenants to secure a right to audit these expenses.

Securing an Audit Right
When negotiating your lease, ensure you include a clause that grants you the right to audit the CAM charges. This provision should allow you to:

• Access Records: Review the landlord’s records and documentation related to CAM expenses.
• Audit Frequency: Conduct an audit at least once per year.
• Audit Costs: Specify who bears the cost of the audit, ideally stating that the landlord will cover the costs if significant discrepancies are found.
  Having this audit right helps ensure transparency and allows you to verify that the charges are fair and accurate, potentially saving you a considerable amount of money over the lease term.

A Right to Make Permitted Transfers

Importance of Transfer Rights
Over the course of your lease, your business needs might change. You may need to relocate, merge with another company, or sell your business. In such scenarios, having the flexibility to transfer your lease can be beneficial.

Negotiating Permitted Transfers
When negotiating your lease, aim to include provisions that allow for permitted transfers without requiring landlord consent in certain situations especially the ability to assign the lease or sublease the premises to a subsidiary, affiliate, or in connection with a merger or sale of the business. In these circumstances, the lease should provide that you only be required to notify the landlord of the transfer rather than seeking prior approval. By securing the right to make permitted transfers, you maintain the flexibility to adapt to changing business circumstances without being locked into the lease.

Exclusive Use Right

Protecting Your Business Interests
An exclusive use right prevents the landlord from leasing adjacent spaces to competitors or businesses that could negatively impact your operations. This is especially important in retail settings where competition from nearby stores can directly affect your sales. When negotiating an exclusive use right, make sure to:

• Define the Scope: Clearly specify the type of business or services that are restricted. For example, if you operate a coffee shop, the exclusive use clause should prevent the landlord from leasing space to another coffee shop or similar establishment.
• Specify Remedies: Outline the consequences if the landlord violates the exclusive use clause, such as rent reductions or lease termination rights.
• Term Length: Ensure the exclusive use right extends throughout the entire lease term, including any renewal periods.
  Having an exclusive use right protects your business from direct competition within the same property, helping to maintain your market share and profitability.
  

Extension Rights

Securing extension rights (also known as renewal options) in your lease can provide long-term stability for your business, allowing you to plan for the future without worrying about relocating. When negotiating extension rights, consider the following:

• Number of Extensions: Specify the number of extension periods and their duration. For example, you might negotiate two five-year extension periods.
• Notice Requirements: Clearly outline the notice period required to exercise the extension right, typically ranging from six to twelve months before the current lease term expires.
• Rent Terms: Define how the rent will be calculated during the extension periods. This could be based on a predetermined increase, market rate, or a combination of both.
  
  Including extension rights in your lease gives you the option to continue operating from the same location, providing stability and reducing the risk of business disruption.

Right to Make Permitted Alterations without Landlord Consent

As your business evolves, you may need to make changes to the leased premises to better suit your operations. Having the right to make certain alterations without landlord consent can save time and reduce administrative hurdles.
To secure this right, consider including the following provisions:

• Scope of Alterations: Clearly define the types of alterations that can be made without landlord consent. These might include non-structural changes, interior modifications, or improvements up to a certain cost threshold.
• Compliance Requirements: Specify that all alterations must comply with building codes, safety regulations, and lease requirements.
• Restoration Obligations: Clarify whether you will be required to restore the premises to its original condition at the end of the lease term or if the alterations can remain.
  By negotiating the right to make permitted alterations, you can quickly and efficiently adapt your
  space to meet your business needs without unnecessary delays or costs.

Co-Tenancy Clause

Importance of Co-Tenancy Clauses
A co-tenancy clause can be particularly beneficial for retail tenants in shopping centers. This clause allows tenants to reduce rent or even terminate the lease if key anchor tenants or a specified number of other tenants leave the shopping center, significantly impacting foot traffic and business.

Negotiating Co-Tenancy Clauses
When negotiating your lease, consider including a co-tenancy clause that specifies:

• Trigger Events: The conditions under which the co-tenancy clause is activated, such as the departure of a major anchor tenant.
• Remedies: The options available to you if a trigger event occurs, such as reduced rent, a rent-free period, or lease termination.
• Duration: The time frame within which the landlord must replace the departed tenants to avoid triggering the co-tenancy clause.
  A co-tenancy clause protects your business from the negative impacts of decreased foot traffic and helps maintain a viable business environment.
  Negotiating a commercial lease as a tenant requires careful attention to detail and a thorough understanding of your business needs. By focusing on these concerns at the outset, you can create a lease agreement that provides flexibility, protection, and long-term stability for your business.