Commercial Leases

Business leases (also known as commercial leases) are increasing in complexity and length, with the potential for many pitfalls if the reviewer is not careful. Whether your business is entering into a lease for simple office space or a large retail operation, it is worth the effort (and relatively minimal cost) to have an attorney review the commercial lease and, if necessary, negotiate the legal terms of the lease with the landlord.Here are some of the most important considerations for potential tenants of all commercial leases:

Personal Guaranty

Landlords often require one or more personal guaranty of the lease. Your first goal should be to try to negotiate the guaranty language out of the lease altogether, by offering the landlord added security, such as a larger security deposit. If that does not work, and you believe the lease will be profitable enough to risk personal liability, you should try to include as many limitations into the guaranty as possible. Landlords will negotiate with you on such limitations, but you need an attorney to guide you on the appropriate language to best protect you.

Breach and Default Provisions

You should require written notice followed by a grace period before the landlord may exercise default rights; the grace period allows a cure period for the tenant to make a late rent or comply with another requirement of the lease. Otherwise, in Florida, the landlord must only give you 3 days to pay or vacate the premises.

Additionally, you should try to negotiate a maximum amount of damages in the event of tenant default, such as three months of base rent, similar to the negotiations referenced in the section regarding personal guaranties, above.

Finally, and most importantly, most commercial leases have consequences once a default is uncured and many such provisions give landlords the right to re-enter the premises and lock you out, without a court order to do so. While self-help for commercial leases is not permitted in Florida, your preference must be to protect yourself from the landlord’s attempt to exercise self-help instead of trying to file a lawsuit against the landlord after it has already occurred.

Assignment of Lease

Every tenant needs to have some right to assign the lease as part of an overall exit strategy for the lease. Assignment generally becomes necessary if you decide to sell your business. The right to assign the lease can be critical, because it will allow for the natural evolution of the tenant’s business (such as the sale of the business or merger, expansion, or consolidation of multiple locations).

Typically, commercial leases prohibit assignments of the lease without the landlord’s prior written consent. Moreover, the lease usually characterizes a sale of the business, a merger, or a transfer of more than 50% of the stock as an assignment requiring the landlord’s consent.

You should try to negotiate as much as freedom for yourself to assign the lease as possible. Typically, landlords will agree to permit assignment with prior written consent, and that such consent cannot be “unreasonably withheld”. This is vital because the standard for reasonableness will keep the landlord in check if this provision ever needs to be exercised.

Relocation

Commercial leases now have provisions permitting the landlord to relocate their tenants as they see fit. This can be devastating to retail tenants and, at the very least, highly disruptive to other types of commercial tenants. If your proposed lease has a relocation provision, the first negotiating stance to take is that it can only be exercised if the premises are part of some construction project.

If the landlord does not agree to limit the provision to construction related events, you should attempt to limit the provision in other ways. Some examples of other limitations to the relocation provision are: (a) limit the portion of landlord’s property where your business can be relocated; (b) demand reimbursement of cost for relocation, abatement of rent during relocation (while your business is down) and reduction in rent if the new space is not comparable commercial space; and (c) secure a veto provision so if you do not like the substitute space, you will be able to reject the space without terminating the lease

Conclusion

Commercial leases have become more complex and lengthier in recent years. It is important to review each provision of the lease and understand what ramifications can come from those provisions if/when they are applied. Some of the more complex legal terms should be referred to an attorney who can advise you, and if necessary, negotiate those provisions with the landlord.