Part I of the Small Business Real Estate Series focused on the due diligence a small business owner should conduct when evaluating commercial locations. Once you have decided on the location that best suits the needs of your business and budget, the next phase is to negotiate the commercial lease. Even if you, as Tenant, employ the assistance of a leasing agent, you are ultimately responsible for complying with the terms of the lease. It is important to ensure you are entering into a lease that you fully understand and is acceptable. It is possible to have the landlord’s leasing agent represent you as well. You will be required to sign an agency agreement, and the leasing agent will have duties to both you and the landlord. The implications of dual agency will be the subject of a future discussion in this series. This discussion will assume the tenant is employing his or her own leasing agent for the negotiation.
At the beginning of the negotiation process, you will receive a lot of information from either the landlord or its leasing agent. Although much of the information will be general in nature, there will also be information a prospective tenant should consider carefully before entering into a lease. It is important that you keep very good notes about the specific representations being made by the landlord and its leasing agent, and have them incorporated into the lease. As a general rule, any verbal statements or representations made by the landlord or its agent prior to the signing of the lease are not enforceable. If the statements and representations are important, they must be part of the lease. Should a conflict arise and end up in court, judges are not likely to consider verbal statements made during lease negotiations that are not expressly set forth in the signed lease agreement. No matter how harsh the terms of the commercial lease, the courts will enforce the lease regardless of whether the tenant believes he or she is being treated unfairly.
It is up to you and your leasing agent to try and negotiate the terms of the lease. The landlord will draft a lease that favors its own interests, not yours. Be aware of the “standard” pre-printed form presented by landlord’s agent as the “accepted“ industry form. It requires as much careful review as the form the landlord has prepared for its own use. Be sure you can live with the terms of the lease. If you feel strongly that something is not right, and the landlord is unwilling to be accommodating, do not sign the lease. It is better to walk away than be intimidated into signing an agreement you are not comfortable with.
Commercial leases are typically extensive, including dozens of pages of terms with numerous exhibits, addenda, rules and regulations. They may also include sign criteria and “work letters” with a schedule of improvements for the landlord and the tenant to complete. It is critical that you read and understand each and every term and condition of the lease, its exhibits, addenda, and other provisions, such as subordination, attornment, insurance, subrogation, relocation, indemnity, waivers and remedies. It is important that you understand the potential consequences of every section of the lease. Otherwise, you may have a rude awakening should there be an issue with the landlord down the road. Also, landlords and tenants tend to file away the lease agreement and ignore it until it is up for renewal or an issue arises. It is always a good idea to review your lease often and ensure both you and the landlord are in compliance.
Given the complexity of commercial leases, many terms of which cannot be understood without expert assistance, it is wise to seek legal advice from an experienced real estate attorney to ensure your interests are represented fairly in the agreement before it is signed.
The next topic of the Small Business Real Estate Series is the continuing personal guarantee, which is one of the most important, yet least understood, attachments to a commercial lease.
David Brnilovich is a member with the law firm of Jennings, Strouss & Salmon, PLC. His practice includes real estate, construction, corporate governance, small business formation, dissolution, purchases and asset sales, estate planning and estate planning litigation. Mr. Brnilovich can be contacted at firstname.lastname@example.org or 602.262.5898.