A client recently asked me to review a lease and after I sent him my notes on the landlord’s initial draft of the lease, he called to thank me and exclaimed, “This was just a blank check for the landlord!”

Exactly.

While landlords take different approaches when drafting the initial versions of their leases for the tenant’s review, a typical landlord draft will undoubtedly lean heavily towards the landlord’s interests, often packed with onerous clauses, hidden fees, and little flexibility.

That’s where the tenant’s lawyer comes in.

A commercial lease is often a serious financial commitment for a company and will govern a very important relationship for many, many years.  While some businesspeople subscribe to the belief that the cost of a legal review of a lease is not justified, there are many ways that an effective tenant’s counsel can save his or her clients money through a well-reviewed and negotiated lease.  Here are three of them.

The Lease Must Accurately Reflect the Agreed Upon Deal Terms

Prior to the landlord’s counsel drafting the initial version of the lease, it is typical for the brokers to prepare a term sheet (or letter of intent) reflecting the agreed upon business terms to be incorporated into the lease, for example, the length of the term, rent, additional rent, condition of the premises and necessary work to ready the premises for occupancy, and options for extending the term or rights of first offer or refusal on expansion space.

The first goal of the tenant’s review of the lease draft is to see that the agreed upon terms are accurately reflected in the lease and that no mistakes or omissions occurred in preparing the draft.

On a recent lease transaction for a large warehouse, the term sheet indicated that the landlord would be responsible for repairs to the “structure, roof structure, exterior pavement and floor”.  A review of the lease revealed that some of these items were missing from the landlord’s repair obligations, leaving them as the tenant’s responsibility.  Similarly, with respect to the tenant’s renewal right, the term sheet provided that the rent for the renewal term would be determined based on the fair market value of the premises at the time of the renewal, but instead, the lease draft stated that the rent for the renewal term would be the rent that the landlord was then charging for comparable space at the building.  That puts much more control in the landlord’s hands for determining the rent at the renewal stage and does not reflect the agreement that the parties made in the lease negotiations.

By reviewing the lease, tenant’s counsel can help the tenant avoid inaccuracies that can present costly issues for the tenant after lease execution.

Protect Against Unnecessary Fees and Expenses

Fixed rent is typically not the only financial burden contained in a commercial lease.  The tenant could also be responsible for its share of the building’s operating costs and real estate taxes, insurance, electricity, janitorial, overtime services, late charges, default interest, and review fees.  These costs are often buried deep within the lease and can be a surprise when the tenant gets its rental invoices.

The provisions requiring tenants to pay for operating costs are fraught with danger and present an opportunity for landlords to create revenue streams for themselves at the tenant’s expense.  On a recent transaction, the landlord tried to include "administrative fees" and "inspection fees" into the definition of Operating Expenses.  When challenged, the landlord could not explain what these categories were meant to cover and agreed to remove them.  If these categories had remained in the lease, who knows what expenses the landlord would have been able to pass through to the tenant.

Some building expenses should not properly be paid by a tenant, such as landlord’s brokerage fees, litigation costs, and sale or refinancing expenses.

Landlords may also try to hold tenants responsible for expensive repairs to the building structure or upgrades to the building systems, which could expose the tenant to significant costs and expenses.

It is vital to properly negotiate these provisions to avoid incurring significant unexpected costs.

Adding Flexibility to Address Future Needs

A typical commercial lease runs for five to ten years, and it would be unusual for a business’s needs to remain consistent over that period of time.  No one has a crystal ball, but there are ways an attorney can help make some options more useful for the tenant.  

The assignment and sublease section is a vital method for a tenant to remain flexible with respect to its space requirements, providing the ability to transfer the lease in order to move into bigger space or to sublease a portion of its space in order to contract into the remaining portion.  Leases invariably require landlord's consent before assigning or subleasing, but landlords don’t always address the timing of the consent process.  Without a specified timeline, the landlord can delay in responding to an assignment or sublease request, which can jeopardize a deal with a potential assignee or subtenant, costing the client time and money.  Landlords may also try to restrict the requirements for its consent to justify withholding consent.  For example, the right to assign or sublease should not be limited to a user operating the same type of business as the original tenant.  An effective tenant’s counsel can push back on these restrictions in order to broaden the tenant’s rights and provide the most flexibility to the tenant.

Some added flexibility can also be negotiated into the “holdover” clause, which addresses what happens when a tenant overstays its welcome beyond the expiration date of the lease.  As they say, stuff happens, and your next space may not be ready before your current lease expires.  When a tenant stays beyond the expiration date of its lease (or “holds over”), it usually must pay a holdover charge which is often set at two to three times the then current rent.  A well-negotiated lease will provide for no holdover charge for the first 30 days of the holdover with increasing charges thereafter.

As illustrated above, a well-negotiated lease can avoid costly mistakes and unnecessary expenses, create flexibility, and save you money, as well as provide a smoother ride through the term without expensive surprises.