Legal Briefs

Negotiating Finesse

Landlords and tenants have equal stakes in negotiating the best leases.

Leases for multiple types of businesses are readily available in today's steady economy. Negotiating for the best terms for both owners and tenants, however, can be tricky but is attainable.

For business owners looking for the perfect storefront, leasing commercial space can take the biggest chunk out of their business expense budget, making due diligence essential. For CCIMs representing the landlord, the level of work needed to protect the client's interests will depend on the size of the client: a large company with in-house resources or a smaller business. Those representing the tenant will be protecting the interests of a person who often has little experience of the industry. 

Perspective of Tenants

It is important that commercial lease professionals be particularly skilled at forecasting a tenant's needs, as well as the reasons for specific tenant requests. Since commercial tenants typically stay in a building for at least five years and up to 25 years, the negotiation process needs to be productive.

If tenants need something from their landlord during those years, it helps if the landlord is positive during the initial negotiations. The best result occurs when both the landlord and the tenant walk away feeling good about the outcome. Of course, both parties will need to compromise on certain issues, but neither the tenant nor the landlord should feel their needs were completely disregarded.

Due diligence for the CCIM designee representing the tenant is crucial. A commercial lease provides a roadmap for the tenant and landlord relationship. This means such issues as exclusive use, provisions and exclusions, inspections, allowable activities for the property, and the landlord's legal rights and responsibilities need to be clearly defined.

Legal Protection

Leases are generally long, complex, and printed in small type. Designed to mirror a partnership agreement, the lease sets out the parameters of the business relationship.

The test of a successful lease is not when everything goes as planned. Success comes from overcoming the bumps in the relationship. Without a carefully drafted lease, a minor bump can turn into a major headache.

Typically, the Standard Form Lease represents the wishes of the landlord, which is why modifications are usually necessary. The ultimate goal is that the language of the commercial lease protects both parties if one of them exhibits a lack of integrity, or if outside events, such as natural disasters, intrude into the relationship. A couple of examples include:

Leases are usually granted for a fixed period of years. What if the tenant experiences a serious economic setback? Could the term be ended early? Generally, this would be allowable only if the landlord has agreed to such an option in the lease.

What if the tenant finds a crack in the foundation, and this crack expands into a full-blown problem following a minor earthquake? Are there provisions in the lease which will protect the tenant?

It is advisable that tenants limit their repair responsibility to the extent possible, preferably keeping the responsibility to in no worse state than at the signing of the lease. This requires a comprehensive checklist on the condition of the property, which will protect not only the tenant but also the landlord.

A well-documented negotiation could have the landlord's responses made to each request in bold type from the tenant. This allows for the back and forth requests and responses to be tracked and more easily understood. A tenant checklist can help when reviewing the landlord's Standard Lease Form and can help the landlord address each issue.

Being aware of commercial real estate trends, forecasts, data, and analytic information can offer both sides an advantage during lease negotiations. Also, recording corporate meeting minutes can provide a valuable historical window into a company's history, helping the lease negotiations. In the end, the old adage “the devil is in the details” holds true with a commercial lease.

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Morris H. Lilienthal

Morris H. Lilienthal is a lawyer with Martinson & Beason, PC,  a law firm in Huntsville, Ala. Contact him at morris@ martinsonandbeson.com.  

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