For many businesses, entering into a lease is an essential and important part of their businesses. Other than payroll, lease payments are often a business’s largest expense. However, given the complexity and sheer length of a typical commercial lease, it is a daunting proposition to review and negotiate a lease on your own. This is the fourth, and final, in a series of articles discussing the major issues to be considered in a typical commercial lease.
In our prior articles we discussed rent, use, and assignments and subleases. This week, we’ll explore other, equally important, issues in commercial leases. As individual situations and circumstances of the tenant and landlord will ultimately dictate which issues are priorities, any one of these “miscellaneous” issues may well become the focal point of dispute at a given time during the term of the lease.
- Option to Renew
A lease will often grant a tenant an option to renew the term of the lease for a period of time beyond the term of the original lease. There are two factors to be mindful of in options to renew: 1) when and how the option must be exercised; and 2) rent during the option period.A tenant can generally exercise its option on or after the final year prior to termination of the original term of the lease. The lease will spell out the exact period, and the method in which the tenant must exercise the option. Tenants must typically give written notice.
Some leases provide that the rent during the option period will escalate in the same rate, year-over-year, as the original term of the lease. Others may provide that the rent will be at market rate at the time of the option period, while in others, landlords and tenants may negotiate the rent.
In most leases, the tenant will not be able to exercise an option to renew if it is in default of the current lease. In certain circumstances, a past default of the tenant, which has been subsequently cured, may restrict the tenant from exercising its option. Additionally, options are granted to the original tenant, so an assignee or sublessee of the lease will typically have no right to exercise an option.
Many tenants require certain improvements to their space for their businesses. In most cases, landlords will provide allowances to be used for such improvements. In addition, landlords will also give a period of “free rent” that will allow for tenants to finish their buildouts. The buildout provisions of a lease are often complicated due to restrictions on use of the landlord’s allowance and the various deadlines regarding rent commencement and occupation by the tenant.
- Maintenance and Repairs
Another important issue to be understood is, who is responsible for fixing what? The majority of tenants will be responsible for the maintenance and repairs of fixtures and equipment within their premises, while landlords are usually responsible for structural issues. For premises that have their own HVAC systems, tenants may be required to enter into a maintenance contract with a landlord approved HVAC vendor.If certain repairs that are the responsibility of one party are not performed in a timely manner, a lease may provide that the other party can perform repairs at the originally responsible party’s cost. By not repairing, a party may be found in breach of the lease as well. For various reasons, it is important to assess your obligations of maintenance and repair in a commercial lease.
In this series of articles, we’ve reviewed important issues that all parties should be aware of prior to entering into a commercial lease. Depending on the circumstances of the parties, one or more of these issues may be more important than another. While it is impossible to predict what will happen during the term of the lease, it is imperative that prospective landlords and tenants understand their respective rights when entering into a commercial lease.
General Counsel, P.C. – Every Business Needs a General Counsel: Led by Norman Eule, General Counsel’s Business and Tax Practice Group has over 40 years of professional experience in counseling business owners on all aspects of commercial transactions. Our attorneys have extensive experience representing a wide range of local, regional, and national companies and business ventures. If you have any questions regarding the effect of the new solicitation rules on your company, or any other business law related questions, please contact either Norman L. Eule or Robert Lee.