10 THINGS TO KNOW ABOUT COMMERCIAL REAL ESTATE LEASES

Pen.
Pen.

Many, If Not Most Things Are Negotiable. This includes rent, maturity date, when rent starts, tenant improvements and many of the “boilerplate” items. If the tenant is not an experienced negotiator and has a tenant representative, working for her, she can often get concessions from the landlord by knowing what is out there that competes with the space being rented and what amenities are available to the tenant. If the tenant is on her own, a good real estate attorney can often get concessions worth thousands of dollars or save you from committing to a bad lease.

Rent Increases/Lease Commencement/Rent Commencement. Most landlords will have yearly rent increases tied to an index, like the CPI or something else, so that a schedule of rent increases is in the lease. This is negotiable. Lease commencement is the day the lease starts. If a tenant is having substantial tenant improvements done before moving in, they will want this date to be as late as possible, and can negotiate it to start when the tenant improvements are done, or later. Alternatively, rent commencement occurs when the tenant actually starts paying rent, which can be several months after the lease commences. Often the landlord will offer a month or two free rent if substantial remodeling is taking place. This can be requested by the tenant if it’s not offered, and will often be allowed, especially if the property has been sitting on the market a while.

Tenant Improvements/Work Letter. Once a contractor has given a bid for what tenant improvements will cost, and it is established whether the landlord or the tenant or both will be participating in paying for these improvements, a work letter will outline unforeseen or hidden construction costs. The tenant will want to minimize unforeseen costs relating to the base building definition issues, defects and building code compliance matters, and getting competitive bids, particularly if she is paying for some or all of the costs.

Property Tax Increases. Most leases will establish a base year property tax that each tenant pays, and then charge tenants a specified percentage increase each year during their tenancy. Landlords will seek to pass on property tax increases in the event of a change in tenant ownership, which can be substantial. Tenants should seek to prohibit this in the lease if they can.

Tenant Portion of Operating Expenses. The Landlord will seek to pass on all of his/her operating expenses for the building to the tenants. Tenant should attempt to make the language as narrow as possible, and to limit certain items, such as landlord’s charitable expenses, from being passed on. By foreseeing possible future expenses, these can sometimes be delineated or removed from the language sought by the landlord. Tenant should have the right to audit the landlord’s books for the building, to verify that actual costs are being allocated and the landlord is not “padding” the bill to the tenant.

Assignment and Subleasing. In case the tenant needs to leave, she wants to ensure that subletting is an option available to her, which is not always the case.

Load Factor. This is expressed as a percentage, and represents the square footage of common areas (such as lobbies, elevators, stairs, hallways, bathrooms) divided by the total square footage in the building. Older buildings will typically have higher load factors than newer buildings. So if a tenant is leasing 1,000 square feet at $2.00/square feet and there is a 20% load factor in the building, she will be paying for 1,200 square feet typically ($2,400/mo.), and should take this into consideration when looking at various buildings. A property with a low load factor could be a better deal even if the rent per square foot is higher than a property with a high load factor, but lower per square foot rent. The load factor can be dependent on the landlord and his/her calculations, and is negotiable. Tenant should measure the square foot of proposed premises with an architect or engineer. Typically for less than a Class A bldg. the load factor is more, say around 14%, in San Francisco. Newer buildings commonly have lower load factors.

Hazardous Material Remediation. Tenant can ask for an inspection if the building is over 30 years old or if the Tenant has reason to suspect asbestos or other harmful/carcinogenic materials are in the floor or ceiling tiles, for example. Getting rid of the offending material can be negotiated as to who pays for it. Tenant can also negotiate to prohibit the materials remediation cost from being passed on as a capital cost to the tenants in the lease itself.

Is the Space/Building ADA Compliant? California Civil Code §1938 requires leases signed after 7/1/13 to disclose whether or not the property was inspected by a Certified Access Specialist (CASp), and if so, whether it met all applicable accessibility requirements. If not, the tenant can request that the landlord undertake such inspection. Otherwise, the tenant can be successfully sued for not complying with the Americans with Disabilities Act, as happened to a client of another attorney I know whose retail shop didn’t have a wheelchair accessible bathroom.

Non-disturbance Issues. Many lenders and landlords now include these agreements in their lease and state how and when they can come into the tenant’s space, and under what circumstances.

In summary, Commercial Leases are very involved and a tenant would be wise to consult either a really good tenant broker, or a real estate attorney to understand all the ramifications of what they are committing to and/or to have the attorney or broker represent them in negotiations to get the very best deal possible.

Need help with drafting, review or negotiation of a commercial lease? Nancy Lewellen can help you do this with ease. Contact her today at nyl@palladianlawgroup.com or 415-399-0993 for a free 15-minute consultation.

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