Stop! Do not Pass Go and collect $200. Many commercial tenants think the negotiation phase is complete once they have settled on a rent price and a term with their landlord. They are quick to “Pass Go” by signing the lease once they see the negotiated rent price is reflected accurately. In doing so, these tenants could be waiving rights, taking on additional costs, and locking their business into a long-term unfavorable commitment. Here are five things to pay close attention to and continue negotiating in a commercial lease:
Simply put, subrogation allows one party to stand in the shoes of another in order to recoup the first party’s rights and benefits. For example, if a tenant files a claim under their renter’s insurance for flooding in their unit, the insurance company will stand in the shoes of their tenant-customer (after paying the tenant-customer under the policy) seeking reimbursement from the landlord (or the landlord’s insurance company) for the costs of repair to the unit. Commercial leases often contain provisions where a tenant agrees to waive their insurance carrier’s rights to go after the landlord. A tenant needs permission from its insurance carrier to agree to this waiver. Conversely, a tenant should negotiate a similar waiver from the landlord and/or landlord’s insurance company. This will limit a tenant’s reimbursement liability in the event the flooding was the tenant’s fault or negligence.
Let’s say that the Landlord files for bankruptcy and its tenant is two years into a 10-year lease. The lease has the following language: Tenant waives all rights to terminate this lease as a result of Landlord’s default, and Tenant’s remedies shall be limited to an injunction. This default and the terms of the lease leaves a tenant in a bit of a pickle with little recourse. So, before signing the lease, negotiate multiple options in the event of landlord default. These options include the ability to leave the premises altogether, enter into a new lease agreement, or keep the existing lease and rental rate as-is for the remainder of the lease term. This flexibility allows the tenant to choose the path that is in their best interest.
The landlord may have one or more provisions in the lease attempting to limit or all together negate any liability in the lease. For example, Tenant hereby agrees that Landlord shall not be liable for injury to Tenant’s business, any loss of income, any damage to Tenant’s fixtures, merchandise, and/or property, Tenant’s employees, or Tenant’s guests and invitees regardless of whether the injury arises from the negligence or intentional acts of Landlord. Tenant assumes all risk of injury and waives all claims against Landlord. Accepting this language not only reduces a tenant’s remedies should the landlord’s actions or inactions cause an injury, but also makes the tenant responsible for paying for and correcting these injuries. Imagine the landlord has neglected to clear the storm drain outside a first-floor unit. It’s the rainy season and that drain not only clogs, but also floods the unit with two inches of standing water damaging the office furniture. With the language above, the tenant is solely on the hook for replacing the furniture, the carpeting, and the baseboards. A tenant can prevent this added expense by negotiating that the landlord will be liable, at least, for its own gross negligence and intentional acts.
California real estate laws permit commercial landlords to pass on their operational costs to tenants, which often include property taxes, insurance premiums, repairs, ongoing maintenance, and utility expenses. Landlords apportion their total operational costs across all tenants and tenant spaces. These fees and the methodology for apportioning fees are referred to in the lease as the Common Area Expenses, Additional Rent, Maintenance and Repairs and/or Operational Expenses. Commercial tenants are responsible under their leases for these additional costs above and beyond the rent. It is critical that a tenant reviews and understands the methodology for apportioning these additional fees, and that the payment schedule for these fees is clearly defined.
Many commercial landlords manage multiple properties each with multiple tenants. Translation: landlords are busy. One way landlords discourage subletting is to charge administrative fees for the time they spend evaluating the subtenant. The fees assessed should be reasonable. What’s reasonable? Attorneys fees and out of pocket costs are reasonable. A $2,000 fee on top of the landlord’s legal expenses is perhaps not so reasonable.
Bonus: When selling a business, a tenant must be sure to obtain landlord consent before subletting or assigning that lease to the buying party if the lease so requires.
If your lease is up for renewal soon, or if you are expanding to new locations with a landlord you have never done business with, have your attorney review your lease. Be sure he or she is familiar with your business so that the advice you receive is customized and tailored for your needs and bottom line. We at Garcia & Gurney are happy to assist you and can be reached at (925) 468-0400. You can also contact our firm online.
Disclaimer: The contents of this article should not be construed as legal advice. This article is not an exhaustive list of issues that may arise in a commercial lease. Commercial tenants should seek the assistance of a real estate broker and an attorney, both of whom will analyze multiple factors unique to each kind and size of business. The five topics addressed in this article are specific to the San Francisco Bay Area alone.