Landlords typically propose the form of lease, and typically it is neither possible nor cost effective for a tenant to amend the document. Generally, the bigger the landlord, the less flexible they will be on deviating from their proposed form of lease. So, the job of a tenant is to make sure they are aware of what is in the lease and focus negotiation efforts on key points:
Three Key points
- Ensure business points in the letter of intent/term sheet are reflected in the lease. This is a basic function, but oftentimes I see significant economic terms that benefit the tenant (free rent periods, termination rights, or tenant improvement allowance rights) left out or misstated in the lease.
- For net leases with tenants agreeing to pay a prorata portion of operating expenses, demand clarity on operating expenses and request a standard set of tenant protections. Watch out for landlords trying to use the operating expense provision as an additional revenue stream or a “piggy bank”. The average tenant does not know what the “market” terms of a net operating expense provision are and, frankly, most do not read these provisions much less have the capacity to negotiate the terms.
Tenants should avoid:
- Landlords who look to complete a capital repair or replacement and force tenants to pay for the entire improvement in the year it was completed.
- Landlords who find reasons to increase the common area cost for a one-time event and then keep the common area costs at that higher level year after year.
- Landlords who charge high management fees and asset management fees through common area costs.
The list could go on endlessly. Thus its critical to have an attorney, who deals daily with operating costs and current market terms, negotiate on your behalf.
- Improvements to the property, before the commencement of the lease, can majorly benefit tenants. But be aware that a poorly drafted landlord or tenant improvement section can have unintended consequences. Tenants are typically responsible for improvements over the amount that a landlord has agreed to contribute. How can a tenant ensure a landlord does not treat the tenant’s obligations to pay any costs, over the tenant improvement amount, as a blank check?
In most situations it is unrealistic for tenants to demand a perfect lease. Instead tenants should focus their efforts on key terms such as the three critical areas described above. Ultimately, a tenant needs to understand the lease terms and confirm that their lease is common in the marketplace.