November 22nd, 2013, By Don Catalano
Negotiating a commercial office lease is a challenging and time-consuming responsibility. When lease terms look familiar, many tenants take a cursory look at the clauses and sentences. In an attempt to maximize total rent, you should expect the landlord to add language or provisions that serves to meet this objective.
It’s critical for you to take the time to carefully read the lease terms and understand every word before signing the document to ensure you’re not jeopardizing your best interest. Here are three lease terms you want to avoid or add remedies to counteract them and protect your investment:
It’s only natural for landlords to try and get you to commit to a three or five year lease—especially in a soft commercial leasing market. One of the worse mistakes you can make is to lock yourself into a long-term lease. If you are forced to terminate the lease for any reason, you’ll have an obligation to continue paying the landlord until the space is leased to another tenant.
Protect yourself against economic uncertainties, outgrowing the space, or the need to relocate your business for other reasons by opting for a one-year lease. Add a strong renewal clause. If you cannot negotiate a one-year lease, settle for a two-year lease and include an option to renew for a longer term at expiration.
In addition, negotiate a fixed renewal rent to prevent unreasonable rent increases during the renewal period.
One of the most powerful lease terms in any agreement is the Termination for Convenience clause. This provision literally allows a party to end the lease for any cause or without giving a reason for the termination.
For example, if you spend $500,000 building out the corporate office space, and the landlord decides three months into the lease to exercise his right to terminate the agreement, you will have no recourse. It will not only cause you a major headache and inconvenience to relocate your enterprise, but you will undoubtedly incur financial losses.
If you cannot negotiate a deletion of this term, you can include two remedies in the lease: Notice Clause and Net Book Value Protection Clause.
A Notice provision obligates the landlord to give you more than the notice period required by your state. The minimum standard for a notice is usually 30 days. You can negotiate more time, such as 60 or 120 days, depending on factors like the term of the lease, the extent of improvements made to the space and other items.
The Net Book Value Protection clause allows you to recoup a percentage of the capital invested into the property. A common form of reimbursement is straight-line amortization of improvements you’ve made to the space, possession of fixtures or other compensation to offset your costs.
Review the lease terms to ensure it does not contain a recapture clause. Under this provision, if you request the landlord to consent to a sublet or assignment, it automatically triggers an option that enables the landlord to terminate your lease. Have this clause deleted from the contract. At the very least, insert an option which gives you the right to withdraw the request for assignment if the landlord decides to terminate the lease.
To provide additional protection, insert lease terms that will require the landlord to give you a Notice of Default following an assignment or subletting. This will give you the right to cure the default. However, you won’t have a legal obligation to do so if you decide not to regain possession of the premises.
For more great advice, check out our Tenant’s Guide to Office Lease Terms