Negotiate These Lease Provisions to Protect Your Business
Our guest is Michael Boxerman of Marcus & Boxerman, Chicago Franchise Attorneys. Planning. Innovating. Achieving.
Michael is a nationally recognized franchise and business attorney experienced in representing businesses and their owners in commercial transactions, commercial lease negotiation, litigation, arbitration, and mediation. Michael concentrates his practice in franchise, restaurant, and hospitality law, and advises clients in a wide range of other industries, including retail, manufacturing, distribution, real estate, and professional services.
Signing a commercial lease always involves some degree of predicting the future. You know what’s good for your business now, but you can’t be certain what it will need five, ten, or twenty years down the line. This is why it’s important to keep your options as open as possible without sacrificing stability in the process. Remember, commercial leases are not a take-it-or-leave-it agreement. Even large, sophisticated landlords expect a tenant to negotiate many aspects of a lease. When negotiating a lease, look out for provisions that restrict your use of the premises and business operations, make sure you’re not overpaying, and prevent financial roadblocks by limiting your personal obligations and making sure landlord’s liens don’t interfere with your business.
Review some negotiation tips for important commercial lease provisions below.
Sublease & Assignment Restrictions
As a business owner who might sell your operation in the future, you must have the right to sublease the premises or assign your lease. Overly restrictive sublease and assignment provisions severely restrict your ability to sell your business. A lease must provide that the landlord will not unreasonably withhold, condition, or delay consent to a proposed subtenant or assignee. Even better, your lease would permit you to freely assign your lease to whomever acquires your business. A lease should never contain a provision permitting the landlord to terminate the lease or recapture the premises rather than consent to a proposed sublease or assignment, nor should your landlord be entitled to share any portion of the purchase price you receive for your business.
By removing a relocation clause from your lease, you can ensure your customers will always be able to find you. A relocation provision permits a landlord to move your business to another location in the same building or shopping center to make room for another tenant. Even if the landlord covers the entire cost of relocation, a relocation will still cost you a great deal in lost business during and after the move, because you may need to shut down your operations to relocate, returning customers may be unable or unwilling to find your new location, and you’ll likely incur other indirect costs and hassles of moving such as reviewing your web presence and editing your advertising. If a landlord insists on a relocation provision, be sure to carefully delineate which rental spaces are acceptable (for example, if you are currently in an endcap, make sure you can only be relocated to another endcap), require the landlord to pay for all direct and incidental costs of the move, require that the landlord cannot make you move during your busiest season, and reserve the right to terminate your lease if the new space is unacceptable.
Don’t sink funds into building-out your business just to have it demolished a few years later. Demolition clauses allow a landlord to terminate your lease to redevelop or demolish a property and are often found in leases for older properties. If a landlord insists on such a provision and you want the location, limit your potential losses by insisting that the demolition right remains inactive for a certain period of time to ensure that demolition does not occur near the beginning of your lease term, and ensure the landlord pays you for your business upon termination.
Exclusivity & Permitted Use Clauses
Make sure that your competitors don’t move in next door by carefully tailoring exclusivity and permitted use clauses. Exclusivity clauses help your business by preventing your landlord from leasing spaces in the shopping center to competing businesses, while a narrow permitted-use clause may keep your business from expanding. When negotiating an exclusivity clause, you should aim for the broadest protection the landlord will allow. Conversely, if your landlord insists on a permitted use clause, make sure it does not cut off a valuable avenue of growth or expansion for your business.
Continuous Operation Requirement
Don’t contractually bind yourself to operate 24/7. A continuous operation provision requires you to continuously operate your business during the days and hours set forth in the lease. If you were not to continuously operate your business during those times, the landlord could terminate the lease. A more even-handed lease should remove any continuous operation requirement or at least provide exceptions to continuous operation, permitting you to close for repair, remodel, refurbishment, casualty, or force majeure.
Only pay for the space you get. Commercial tenants often overpay for their spaces because the premises is measured inaccurately. “Phantom space,” the extra space listed on lease agreements that does not actually exist, costs you extra money in base rent and common area maintenance expenses, and quickly compounds over a five or ten-year term. Make sure you’re getting what you pay for by negotiating the right to re-measuring the space, either before you sign or within a short period after the landlord delivers your space to you.
Common Area Maintenance
Don’t let your landlord pass the buck to you with inappropriate common area maintenance (CAM) costs. Certain CAM costs make sense for tenants, but your landlord’s capital expenditures, tacked-on administrative and management fees, and other charges may mean greater costs than you should bear. Try to get a cap to CAM, CAM increases, and reasonable administrative fees that are tied to the services your landlord provides.
Protect your personal assets by placing a limit on personal guarantees. Personal guarantees are required by most landlords for small tenants, but the scope of those guarantees is often negotiable. You can reduce your personal exposure by limiting the guarantee to a set number of years or by decreasing the extent of the guarantee by a percentage each year.
Put your financial interests first. Commercial leases often include a provision granting a landlord a first lien in all personal property located on the premises. Do not agree to such a provision, because if your landlord has a first lien on your assets, your bank cannot have a similar lien, thereby causing you trouble if you attempt to finance or refinance a project. If the landlord insists on such a provision, make sure your landlord’s lien is always subordinate to your lender’s, including for all refinancings.
Signing a commercial lease is one of the largest financial commitments many small businesses will make, so be sure you engage counsel to review these important provisions carefully and negotiate them on your behalf.
#leasenegotiation #protectyourinvestment #protectyourbusiness
Of note, Michael’s proven record helps clients resolve franchise, business, commercial real estate, and employment disputes in state and federal courts and through arbitration and mediation.
Michael is a frequent speaker on franchise law, participating in franchise programs with the American Bar Association’s Forum on Franchising and the Chicago Bar Association. He has a Martindale-Hubbell® AV® Preeminent™ peer review rating, and has been named to the 2022 Illinois Super Lawyers List.