Tips on Commercial Leases

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Tips on Your Tenant Lease of Retail, Office, and Executive Suite Space

I want to focus on overlooked provisions when a tenant, whether it be an entrepreneur, a consultant, or a business owner, is negotiating the landlord’s form for 1) office lease, or 2) retail lease in a shopping center or taxpayer, and 3) executive suite space arrangement. Since prospective tenants are focused primarily on rent pricing, and the term and termination provisions, some of the risk factors that are driving the rental pricing may be overlooked. I will identify a key point in each of the three types of leases:

1. Retail lease in shopping center or taxpayer: Tenant may find they have base rent and percentage rent as well as common area charges to pay for, all based on the current state of the shopping center or the taxpayer strip of stores. A key lease term to negotiate is the occupancy rate of the shopping center, or the taxpayer, or loss of an anchor tenant. Your lease loses value when the shopping center or taxpayer turns into a ghost town because a large anchor tenant leaves, or in cases of a small taxpayer, if a traffic driver such as a coffee shop leaves. Therefore, negotiate that if the occupancy rate of the shopping center dips below 75% of rentable space, or the supermarket or anchor department store (R.I.P. Ames) leaves the center, you, the tenant, will have the option to terminate your lease or reduce your rent.

2. Office Lease: Tenant always wants to anticipate future growth, and perhaps, a downsizing as well. Many tenants are focused on their rights to sublet space, or assign their lease, in cases in which they may move out of the premises. That is the subject of another article. I want to point out that you want to include in your lease a “right of first refusal” to expand to adjoining offices in the building if they become vacant during your tenancy, so that you won’t necessarily have to move out of the building. Plenty of times a landlord will try to play checkers with tenants and move them around to new offices within the building (or other properties owned by the landlord) in order to accommodate a growing tenant, but having a right of first refusal on adjoining space, oftentimes with a rent pricing for that new space established in the lease, is a provision the tenant should strongly consider, since the costs of moving to another building are often prohibitive.

3. Executive Office: What issues could possibly affect taking a temporary, or even long-term, lease at an executive office space? That’s a question often asked of me by tenants, some of whom are entrepreneurs, consultants, financial advisors, who just need a desk for their laptop and the usual accoutrements of an executive space, such as phone lines, reception, conference room, shared copying equipment, and camaraderie. Since not everyone taking executive office space is just going to be leasing on a short-term basis, what a tenant should be aware of is that oftentimes the manager, or landlord, of the executive suite is themselves a tenant in the building, and you would deem them a “sub-landlord,” holding a master lease with the landlord for the floor(s) constituting the executive suite. What you want to make sure of is: what are the terms of the master lease your executive suite landlord has with the landlord; if the master lease is due to expire soon, your lease or arrangement within the executive suite is subject to a master lease, and your occupancy rights will be terminated unless the master lease is renewed. Of course, if the master lease is renewed on terms that are pricier than the current master lease, expect that these costs will be passed along to the tenants in the executive suite.

In conclusion, there are various issues a tenant should know when negotiating an office lease, a retail lease, or an executive suite office, and like all negotiations, there will be market factors that will dictate the leverage each party to the lease will have.

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