Negotiating a New Lease: What's Really Important?
By: MARY S. RANUM
Fall 1999
In a lease negotiation, any experienced real estate lawyer can spot more issues than the budget and schedule of a routine transaction can bear.
Thus, it is necessary to prioritize. Top priorities fall into two categories:
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areas likely to become the subject of disagreement in an ordinary landlord/tenant relationship; and
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situations that are unlikely to occur but, if they do, have the potential for disaster.
A tenant entering into a lease negotiation will be presented with the landlord's form of lease. The tenant often will attempt to negotiate the lease back to a middle ground position. The most important negotiating priorities for a tenant include:
Leasehold Improvements
The goals for a tenant are top quality space, timely completion and, above all, cost control. A tenant seeks to have the leased space completed and ready for occupancy at the right time, with improvements constructed in accordance with plans approved by the tenant for a specified cost. A tenant should try to structure the lease so the risk of cost overruns is borne by the landlord or contractor.
Maintenance
The most common source of lease disputes is differences of opinion regarding maintenance. Disputes relate to which party is responsible for a particular item and the standard required. Particular attention needs to be paid to specifying responsibility for maintenance and repairs to leasehold improvements, including HVAC, electrical, plumbing and telephone wiring systems. A critical priority for a tenant is a right to a self-help remedy to promptly correct a maintenance problem rather than being forced to wait for the conclusion of a dispute before the problem can be addressed.
Assignment and Subleasing
The ability of a tenant to assign the lease or sublease is vitally important in certain situations, many will not be foreseeable when the lease is signed. The usual compromises in lease negotiations include:
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the permitted uses are not so narrowly described as to unduly restrict the pool of potential transferees;
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the landlord agrees not to unreasonably withhold, delay or condition its consent to an assignment or sublease; and
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the landlord agrees to allow assignments or subleases to affiliates without consent.
Landlord's Services
A landlord in a multi-tenant building will often provide janitorial service, common area maintenance and other essential services. Defining standards for the landlord's obligations to provide these services and a meaningful remedy if the landlord fails to provide the services is critical to the tenant.
Operating Expenses
Operating expense reimbursements are a very significant cost to tenants. Lease negotiations usually involve a discussion of appropriate landlord expenses to be included in or excluded from operating expenses. Important exclusions from the tenant's perspective are:
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capital improvements and many capital maintenance expenditures;
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excessive management fees;
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costs of transactions with affiliates of landlord at rates in excess of fair market rates;
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costs of the landlord "doing business," including overhead and costs related to advertising, leasing and tenant disputes;
Waiver of Claims
Both parties should agree to recover losses to their property through their own insurance coverage. This provision is absolutely critical for the tenant, who generally has more at stake because a tenant can potentially cause the destruction of an entire building and be subject to liability far in excess of its liability insurance limits.
Signage/Parking
Tenant signage and availability of parking for the tenant's employees or customers are often critical issues to be addressed in the lease.
When these priority issues have been resolved to the satisfaction of both parties, an analysis must be made of specific issues unique to the particular lease transaction. A tenant should work with its legal counsel to assure that the lease agreement documents all of the specific business understandings with the landlord. As in any transaction, the business issues need to come first and may overshadow the drafting priorities discussed above.