November 11, 2015
3 not so obvious tips to negotiate your commercial lease
Starting a new business or relocating your business is a time of great excitement and a time where certain business terms outshine other underlying but equally important pieces of the puzzle. When you are negotiating a letter of intent for a new lease, you and your broker will pay the most attention to the more obvious business terms, such as the fixed rent, additional rent on account of taxes and operating expenses, and whether landlord's work or a work allowance or a combination of the two will be provided for your build-out. However, there are a number of subtle factors that should certainly be addressed while negotiating your lease. The first part of this two-part article will discuss three key factors to address when negotiating your letter and which should make their way into the lease:
- Landlord's Work: A somewhat apparent business term with not so obvious specifics is landlord's work. The single biggest and potentially most time consuming issue is the amount and type of work that the landlord is providing a tenant for their build-out. As a tenant, failure to address the specifics of what you believe you are receiving from the landlord can have extremely costly side effects. It is important to make sure you are getting what you think you are getting.
If you are receiving a turn-key build-out, then make sure the lease specifies the same. If you believe you are getting a build-out similar to other space in the building then the other comparable space should be identified as a comparison to the build-out that the landlord is providing for you. Also, make sure that the landlord doesn't place an arbitrary dollar limit on the cost of the work or you may get less than a turn-key build-out. Turn-key can mean something to you and something very different to the landlord. If you are not getting a turn-key build-out but there are specific items of landlord's work that are included in the letter of intent and lease, then you need to make certain that those specific items of work the landlord is performing include all of the elements that are necessary to complete such work.
Bottom Line: Make sure the lease is reflective of what you think you are receiving. If not, it is likely the landlord will object to performing that missing work without getting compensated for it.
- Zoning Laws / Special Permits: You must be able to operate your business from the space you lease. Too often tenants will pursue spaces and sometimes enter into leases without ensuring that they are permitted to operate their business for their intended use. Don't trust what the landlord says. Make certain to do your research. Additionally, certain businesses require special permits to operate. In New York City, gyms require a physical cultural establishment permit and a restaurant or store serving wine, beer or liquor requires a liquor license. Obtaining either of these permits is not simple or easy in New York City. Special permits are time consuming and costly to begin with, and if you are not familiar with the process or requirements for such special permits, then your costs will rise and so will the time it takes to obtain the special permit to open and operate your business—if the permit is obtainable at all!
Bottom Line: If you are leasing space in a unique building or neighborhood, or if you may require a special permit, make sure you do your due diligence and know what road you need to travel and if possible include a permit contingency in the lease.
- Non-Disturbance Protection: If you are a multi-location business or a small business with a unique location, or if you will be spending a significant amount of money on building out the space you will be leasing, then non-disturbance protection is imperative from landlord's lender, superior lessor, condo board or any party who has the ability to succeed to the landlord's position. Although it does not happen often, if for some reason your landlord defaults on their loan or under their master lease or other superior obligation and the superior party should succeed to your landlord's interest under your lease, then non-disturbance protection will assure that your lease is not terminated and you don't lose your business or investment. Without non-disturbance protection a successor party might be able to terminate your lease without you having any recourse.
Bottom Line: Protect your business and your asset by getting non-disturbance agreements.
Spending more time doing your homework and thinking more specifically about your space, your arrangement and the future of your business will allow you to be better prepared to negotiate your lease, best protect your interests and potentially save you a lot of money and disruption of your business down the road.
About the author:
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Michael Sobel is a Partner in the Real Estate practice at Wilk Auslander. He focuses on the representation of landlords and tenants in retail, office, and mixed-use commercial leasing transactions, and buyers and sellers in the acquisition and sale of office and retail properties. He may be reached at: 212-981-2304 or via email at: msobel@wilkauslander.com |