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Dungeons & Dragons!
How to Negotiate a Commercial Lease Part 2
By Robert Alsted 

            Site acquisition/business development expert Robert Alsted continues his step-by-step instruction through the twisted maze of commercial real-estate leases. Now that you have learned the basics, in Part 2 he shows you how to apply them to make the most favorable deal for a school lease.

Step Three: Lease Review

            The following are standard lease clauses with my reflections. They may or may not be exactly as your lease appears, but close enough.

            Parties. For advance planning and in case should you need an early exit from the lease, you would prefer your business to be a corporation rather than signing the lease as an individual. This way, you are not personally liable, but it’s just the opposite for the landlord. If you are a corporation, the landlord may require you to sign personally as well. Should this be the case, you can always stipulate that you, as a person, are to be removed after a number of years.

            Term. If your building is a new building, the term of the lease could be a point of frustration for you, in that the landlord may limit you to fewer years than you would like. This happens when he/she may be looking for a specific type of

Tenant and are only dealing with you on a short-term basis. Even if the term is

Short, if you have negotiated renewal options and keep your rent paid on time, you will most likely get to lease the facility for as many years as you will want.

Renewal Options. Normally, renewal options are those that let you renew your lease if certain conditions have been met, like having kept timely payments and basically all other terms of the lease have been honored as agreed. One common rule is to get as many renewal years as possible. So, if your original lease was for 5 years, you would most likely ask for three 5-year renewal option periods. Option periods are normally the same length as the initial term, but do not have to be.

Understand that renewal options do not freeze the rent amount, so your rent schedule could be the same as your original agreement or modified.

            First Rights. It’s highly likely that the building or complex you’re leasing will be sold at some point. Depending on the size of the overall complex, the landlord may or may not be willing to agree, but you should always ask for a “first right of refusal.” This is simply the owner giving you the first right to buy the building/complex.

            Rental. This will not only identify the monthly rental payment (and yes, you do call the monthly payment “rent,” even in a lease), but should also spell out the total amount to be paid over the life of the lease.

            Payable. Normally, the due date is the 1^st of the month, but you can choose any date you would like. The lease will most likely have a late payment date and late fee. So make sure you allow plenty of time, especially if the address to send the payment to is any distance away. Some businesses offer a discount for electronic payments and you could offer this as well for a reduction in the rent.

            Security Deposit. Virtually all landlords will require a security deposit. Many times, they will ask for this in addition to the first and last months’ payments. They are telling you two things. One, that they see you as a credit risk, and two, they like to keep the security deposit in an interest-bearing account. Many landlords, when pushed, will return your deposit after the first year and you can ask that the interest be returned to you as well.

            Use. Make sure you have some flexibility. The local occupancy code should be met, but you may want to be able to have the right to use the space for another type of business or sub-let to a different type of business.

            Something like: “Tenant shall have the right to use said space for a martial arts school or any other zoning accepted use.” This way, even if the current zoning doesn’t permit the other use, you may be able to get a “use permit” or “variance” to the use, both through the zoning agency.

            Sub-Lease and Assignment. Even with the highest level of optimism and good business planning, you may find yourself needing to either shut down or expand. Sub-leasing allows you to turn over your space to someone else. The good news is that you can always charge them a higher rate if the market allows, pocketing the difference. The bad news is, you are still responsible for the lease.

            Assignment of the lease can allow you to be free and clear as long as the landlord approves of the new prospective tenant.

            Repairs, Alterations and Improvements. Generally, you will have a NNN (triple net) lease, and therefore, virtually all of your repairs are your responsibilities. So, remember how important your initial site inspection [see Part 1 of this article] will be.

            Alterations and Improvements costs will also come out of your own pocket. Too, unless you have done something that the landlord or the next tenant likes, you will also be responsible to return the site to its original condition. It’s not feasible that a standard martial arts location will have to deal with this condition. But just in case you want to build another Taj Mahal, be forewarned.

            Property Taxes, Insurance, Utilities. Again, these are normally your responsibility. If you have a location with its own meters, then the numbers will be easy to understand. If you’re in a shared building complex, the landlord will use a percentage factor; i.e., the relationship of your unit as a percentage to the overall site. Pay very close attention so that your percentage is correct and stays correct. It’s also worthwhile to include in your lease that when the landlord presents you with a bill for these or any items, he/she includes a copy of the original or total bill.

            Signs, Parking, Landscaping. When it comes to these items, take nothing for granted. While the local zoning agency probably has restrictions, the landlord may not know them or he/she does, but doesn’t want you to know. In advance of signing a lease, you should make a trip to said zoning agency to get the facts. You can never be too prepared with too much knowledge.

            Entry. The landlord will want to be able to enter your space for occasional/casual inspections to make sure all is well. Mainly, he/she will want access to show the space to a prospective tenant or buyer at the end of your lease term, if you have already notified him that you will not be renewing.

            You certainly should give your approval, but you want at least 24 hours notice, which is fair and normal.

            Building Rules. Not much to talk about here unless you see something you don’t like. While you may not be able to have it eliminated, you should always include the word “reasonable” in the lease so the landlord will have some restrictions. “Reasonable” is also a good word to have in place should you need to go to court over the matter.

            Damage, Destruction and Condemnation. These are events that the landlord normally doesn’t want to see happen. But no matter which of these three aspects may take place, you should restrict its impact on you. Make sure you have a clause that cites the following: “Any damage to -- or destruction and condemnation of -- the property must affect more than 25% of the building before the landlord can automatically cancel your lease.”

            Additionally, you should include that you have the right of investigation and, should you find that any criminal activity (like a fire) has taken place that is affecting your lease, you then have the right to recover your loss.

            You can also include that you want to share in a percentage of any insurance or condemnation monies received by the landlord, relative to how much the said action has affected your space. At a minimum, you should receive relocation funds.

            Default. If you don't pay as agreed, there isn't much that you can

do. The landlord will usually consider your rent late if it’s paid (or not paid) anywhere from 5 to 10 days past the due date, with your lease subject to default if no payment has been received after 30 days from the due date. You may be able to adjust this to 15 days for a payment grace period, based on the premise that your payables payments come from a third party -- like your CPA. Therefore, any eviction action should not take place for 60 days for the same reason.

Also, for any issue other than a late payment, you might want to link any eviction action that the landlord plans to take to some legal proceeding that he must have gone through before your eviction. You might also want to have the right to correct the infraction before any legal proceeding, should the legal proceeding be against you.

            Subordination. This is normally included so that if the landlord wants to put a new loan against the property, the position of your lease will not get in the way. Again, you may want to try and slip “reasonable” into the language of the lease.

            Notice. Any and all notices should be in writing and served sufficiently in advance so as to not affect your business. For fire inspections, 24 hours should be okay, but for repairs where your instruction may be distracted or interrupted, one week’s advance notice should be a minimum.

            In the area of the reason for the notice, you may want to have some language (usually an addendum) that if the action causes a financial loss to your business, the landlord will compensate you for that loss. For example, say there is a pipe leak of some kind and it runs under or over your space. Maybe there was damage to your space or not, but in any event there will be an interruption of your business to fix it. The landlord may require you to have insurance to cover your loss, but either the landlord or the other tenants should have insurance. You want them to cover your loss so that your premiums aren’t raised for something that was not your fault.

            Brokers. Some, but not all leases allow for brokers and their fee. Many times the landlord has a separate agreement in place with the broker. Did you use a broker? No? Then why shouldn’t the landlord compensate you in place of the broker?

            The landlord cannot, by law, compensate you with a commission if you don’t have a real-estate license. But, he can reduce your monthly payment if you are in need of some TI’s (Tenant Improvements). Not to mislead you, but in some jurisdictions one may argue that any compensation can be viewed as a commission. Yet, one can also argue that while you don’t have the right to a commission as the party in the transaction, you do have the right to ask for and receive a reduction.

            Tenant Improvements. You may not have heard about these. They are normally part of a commercial office lease. But simply speaking, the landlord in commercial offices has an amount of money available for any new tenant to help with how the tenant wants his/her space improved. This may be a stretch for you and your martial arts lease and yet, if you are looking to occupy space in an upscale complex, you should ask, since it may in fact be available. Not sure that you can trust the landlord? Ask another tenant.

            Waiver. This will show up less and less, but it has to do with the landlord is asking you to give up certain rights related to a variety of applications. Most states laws don’t let you be put into a position to give up certain rights, even if you sign them away. If you have any questions (and this is one reason why you should always get an advance copy of the lease), ask your attorney.

            Memorandum of Lease. Most landlords and tenants don’t want the world to know of their dealings, especially in the public records or document recordings. But you certainly want those who need to know that you have a lease that could affect the title of the property, so that a one-page memorandum is recorded.

Step Four: Lease Signing

            If you have used a Letter of Intent option, then the actual lease signing should be a snap. You may still want to have the final lease reviewed by your attorney (or a realtor as well, if you have chosen that direction). In any event, don’t assume that the final draft includes all of the elements of your Letter of Intent. Never assume!

            If you haven’t used the Letter of Intent option and haven’t had an attorney review the lease either, make sure that you read and understand each clause before you sign. Many times, the landlord or his/her representative will be sitting across from you while you read through the lease. If this causes you any discomfort or distraction, just ask them to leave the room, or ask if there’s a vacant room that you can use while you go over the document alone. And take your time!

Step Five: The Reality Check

            Once the lease is signed, moments of doubt and buyer’s remorse may set it. But in all honesty, if you have done your homework, then you should have no doubts about having done the right thing.

Make a copy of your lease and store the original in a safe place. Pay your monthly obligation and get on to the move-in stage!

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