Maneuvers in Commercial Leasing

Entering into a commercial lease can signify an exciting time of growth or it could be a time of change, when a company needs to downsize. Either way, it’s important to understand the lease language and what the long-lasting economic and legal implications are before signing on the dotted line. Kevin Judiscak, an attorney with Phoenix-based Engelman Berger, P.C., says many business executives who are outstanding in their chosen fields often make the mistake of thinking they have the training and experience to negotiate an advantageous lease when, in fact, they don’t know what to look for or what to look out for. Judiscak says people often mistakenly think that, other than rent, everything else in the commercial lease is “boilerplate” and is not really negotiable. “Lots of other considerations should go into the lease negotiations, like whether or not the landlord will charge separately for air conditioning on weekends, whether the lease includes reserved parking spaces and what other uses the landlord will allow in the other space at the premises,” Judiscak says.

Maintenance and repairs are another consideration, and Steve Goldstein, an attorney with Scottsdale-based Sacks Tierney, warns that if this is not addressed in the lease, tenants could be stuck with big capital expenditures. “From a tenant standpoint, you want to limit your responsibility and negotiate those provisions up front,” he says. Goldstein has been helping clients transact commercial lease agreements since 1986, and he says business executives often have misconceptions about leases. “Even though a letter of intent exchanged between the tenant and landlord is non-binding, it can help to have a lawyer involved even at that early stage. Some businesses also will rely upon the lease forms that their real estate brokers use, but even with those forms, it pays to have a lawyer take a look at it,” Goldstein says, explaining that it is important to pay attention to each provision in the lease. “Commercial lease documents are usually pretty long and tough to slog through, but well worth the time to make sure there are no hidden costs,” he says.

One common mistake Goldstein sees in leases, particularly in a booming market, relates to the commencement of the lease and how that relates to the build-out of the initial improvements. “Oftentimes, the lease will have rent structured to begin on a fixed date, but the space may not be ready. And when there’s nothing that forces the landlord to get the space done and there are delays, there’s nothing in the lease to protect the tenant. The tenant has no recourse on the lease,” he says. Escalation clauses are also important to review. “There are different ways to handle that. Most scenarios involve fixed increases in rent schedules, but on occasion you’ll see rent increases bases on CPI [consumer price index],” Goldstein says.

Getting out of a lease is not easy. “A lease is meant to give certainty to the tenant that it has assured occupancy on specific terms for an agreed term, and it is meant to give certainty to the lessor that it has assured rent for that term,” explains Judiscak. However, he notes, the law also is not punitive, so the tenant may make an informed choice that it is worth the known economic consequences to terminate the lease prematurely. One common mistake that Goldstein sees regarding to the need to get out of a lease relates to small or family-owned businesses. “It’s important to include a provision to give the tenant the chance to terminate a lease upon the death or disability of the business owner,” he says.

Lease disputes can be costly, and Judiscak says that one of the best tips for avoiding litigation is simply communicating clearly and showing sincere efforts to work things out. He says that a major source of later legal issues arises over lease guaranties by the owners of a business. Prior to signing an open-ended guaranty, thought must be given to potential limitations in amount, time and other negotiable issues, including exactly who guaranties the lease in marital or partnership ownership situations. “It’s never too early in the lease negotiation process to consult an attorney,” he says, adding that an attorney can help identify important business considerations and negotiate the lease language to beef up protective provisions and eliminate or tone down harmful ones. “The consultation may be very brief if everything is in order, but it will always be easier to address things on the front end when the parties are agreeable and interested in entering into a deal, rather than later, when a dispute arises,” he says.