Commercial leases generally have many more complexities than the average residential lease, and are oftentimes involve and require significant negotiation. This article will look at a few of the many areas that tenants should consider before entering into a commercial lease. Future articles will touch upon some of the other, numerous points to address.
Oftentimes, commercial spaces need certain construction completed to meet the specialized needs of the tenant, such as restaurant fixtures or electrical needs for hardware intensive business. These improvements can be costly and time consuming, and can lead to substantial disagreement between the parties. As a result, it is imperative that the parties have a clear understanding of what the tenant and landlord’s responsibilities are going to be with regards to the construction.
Tenants should have a specific plan for the construction that lays out as many deadlines as possible, as well as specifics on what construction will actually be done as an addendum to the lease. The lease can even go so far as to incorporate a list of all the work that will be done that specifically identifies the types of materials used to avoid any confusion or ambiguities. Having a clear and detailed plan will help avoid disputes once the construction begins.
The tenant should also should consider negotiating in a liquidated damages clause if the landlord does not timely complete the build-out, such as free rent for each day of delay. Further, if the landlord’s failure to complete the build-out continues beyond a certain time period, the tenant should try and negotiate the right to terminate the lease.
While most leases are dated and commence on the same date, in many cases the commencement date will be some other date, such as the date which coincides with completion of landlord improvements. If the commencement date is different than the date of the lease, make sure that the following issues are dealt with:
- Objective tests should be set forth rather than ambiguous conditions. For example, “substantial completion” should be supplemented by a requirement of final approval of the improvements by the City or some other signoff that is easy to determine.
- The tenant should consider including a provision to withhold rent until the landlord has substantially finished and a termination provision if the improvements are not finished and if the term has not commenced.
- An addendum to the lease should be executed to document the commencement date.
- It should be made clear whether or not the “additional rent” obligations begin before the commencement date.
These are just a few of the numerous issues that can arise when entering into a commercial lease. Stay tuned for future articles that outline additional red-flag areas to watch out and negotiate when entering into a commercial lease.
If you are looking into entering into a commercial lease and would like assistance reviewing the negotiating or reviewing the agreement, or if you have any other questions about real estate legal issues, contact Brewer Offord & Pedersen LLP at (650) 327-2900, or on the web at www.BrewerFirm.com.