Key Issues to Negotiate in Commercial Leases

By: Robert Bramlette

Unemployment is below 4%! The second quarter GDP was above 4%! Fortune 50 companies are moving offices into downtown Chicago. Developers are building, and new office space is coming on the market. Entrepreneurial clients are searching for space in order to attract millennials who want to live and work in the city. We are in the ninth year of expansion; however, many business owners are concerned that the imposition of tariffs or the inverting of the yield curve may have a negative impact on their business. Business executives remember the Great Recession, and they know they must manage every expense meticulously. One of the most significant company assets is the real estate that it owns or controls. For those companies that lease space, rent is usually a very substantial expense. Whether you are leasing retail space in a mall, strip center, free standing location, office space, commercial or industrial space – credit-worthy tenants can negotiate favorable terms. 

Businesses must be extremely careful with short and long term planning. For shrewd managers, this may be an opportunity to acquire a prime location or additional space; relocate to a more favorable location; or extend your lease under favorable terms. Economic risks may be minimized by having the flexibility to assign or sublet the space in the future without stringent landlord requirements. Also, options for additional space may provide opportunity for future growth at reduced prices or provide a “windfall profit” in the event the landlord wants to “buy back” the space as an attractive space becomes in high demand.

Every provision in a lease should be analyzed, and managers should consult with attorneys and real estate counselors with respect to real estate opportunities. The following are a few points to consider in lease negotiations:

Lower rent payments

  • lower per square foot payment
  • restructure percentage rent payments

Include right to terminate, “kickout” provision or reduce rent in various events. Examples include:

  • anchor tenant vacates
  • specific percentage of the mall or center “goes dark”
  • your business does not reach a minimum level of sales
  • amenities of the office building are discontinued
  • eliminate early termination penalties

Right to assign or sublease

  • negotiate a broad use clause
  • limit the items for which landlord consent must be obtained
  • exclude provisions that trigger landlord’s consent in the event of a change in control of the tenant

Obtain option to extend the term at specified rent

Include option to obtain additional space at specified rent

  • consider the option in the existing facility or another facility controlled by the landlord

Tenant Improvement Allowance

  • if there is concern about the landlord’s ability to fund the allowance, then have the landlord provide the improvements or pay the money into an escrow and use the funds soon
  • obtain the right to use the allowance as rent

Common Area Maintenance Charges

  • insert specific amount that is to be paid by landlord
  • annual cap on increases
  • exclude various operating expenses from CAM calculation
  • obtain audit rights

Make certain that HVAC units are in good operating condition

  • cap the amount of maintenance, repairs, and replacement expense to be paid by tenant
  • require landlord to provide periodic maintenance
  • require landlord to replace when necessary

Obtain right to cure landlord defaults (e.g., failure to maintain and repair parking lot, HVAC, etc.) and have the right to set off against rent

  • obtain the right to reduce rent if amenities are eliminated

Obtain favorable signage

Legal

  • obtain favorable jurisdiction for disputes
  • eliminate provision that tenant pays landlord legal fees

Chicago, Illinois 312-377-1501 | Schererville, Indiana 219-488-2590

Chicago, Illinois

312-377-1501


Schererville, Indiana

219-488-2590