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Commercial Leasing

Commercial Lease Agreements

Whether you are leasing office space or retail space, your commercial lease agreement is one of the first contracts you will negotiate on behalf of yourself and/or your business.  It can make or break your business and should be taken very seriously.  The stakes are typically much higher for retail or restaurant businesses, because the costs for prime commercial real estate can be a significant portion of the overall business budget. 

A bad lease agreement can tank a business before it even begins. Any commercial lease that involves the building out or significant improvement of the space by the Tenant is particularly prone to business-ending, personal guaranty invoking pitfalls.

But how do entrepreneurs just starting out know which provisions in their commercial lease agreement could ruin their business?  They get advice from a lawyer and they use a commercial real estate broker to negotiate an LOI (Letter of Intent) with the landlord, preferably one with a CCIM designation.  Do not expect your residential real estate agent to have the skills necessary to find and advise you on space for your business.  Also, residential title companies are typically ill equipped to advise on the issues that come up in commercial leasing.  If you are a DIY entrepreneur (a Do It Yourself-er), now is not the time to DIY.  It's absolutely critical that the commercial lease you sign, and most likely will personally guarantee, has been reviewed by an attorney. 

Here are the key issues that must be addressed in your commercial and retail lease:

  • Access/Entry
  • Alterations & Improvements
  • Assignment & Subletting
  • Attorney's Fees
  • Commencement Date Certificate
  • Common Area Prohibitions For Malls
  • Confidentiality
  • Construction Allowance
  • Co-Tenancy
  • Damage/Destruction
  • Default By Landlord
  • Default By Tenant
  • Tenant Damages
  • End Of Term
  • Environmental
  • Facade
  • Governmental Regulations
  • Holdover
  • Hours/Days Of Operation
  • Holidays
  • Indemnification
  • Insurance
  • Landlord Delay
  • Landlord Maintenance
  • And Repair Obligations
  • “Most Favored Nation” Clause
  • Operating Expenses &Taxes
  • Percentage Rent
  • Gross Sales Exclusions
  • Permitted Use
  • Promotional Programs
  • Radius Restrictions
  • Relocation
  • Re-Measurement
  • Signage
  • Utilities
  • Waiver Of Landlord's Lien
  • Recordation of the Lease in Public Records
  • Subordination, Nondisturbance & Attornment Agreement

As the tenant, the key to successfully negotiating the commercial lease is to understand how the above provisions could impact your business, what terms are standard and how to get the most favorable terms your Landlord is willing to agree to.  You accomplish this in a two-pronged approach. First, you use your commercial broker to submit and negotiate an LOI on your behalf.  The broker's commission is paid for by the Landlord - it makes no sense to go at this part alone and your commercial agent will have a high likelihood of getting you more favorable terms than if you negotiate directly.  If your Landlord does not want to pay a commission to a real estate agent - this should be a red flag, and you will certainly need to engage a lawyer at that point to negotiate an LOI directly with the Landlord. The second prong of the approach comes once you receive the Landlord's initial draft of the lease.  Now is the time to have your attorney review the lease, and "mark it up."  What this means is that your attorney will revise the lease, making sure that the Landlord's provisions are softened and made more reasonable.  The lease "red line" is provided back to the Landlord and typically one more round of revisions will be made before the parties agree on the form of the commercial lease.

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