It’s typical for a broker or agent to negotiate the business terms of a commercial lease with input from prospective tenants. But as commercial leases become lengthier and more complex, it’s important that real estate practitioners retain an attorney to review lease provisions before clients enter into an agreement.
As an attorney experienced in the areas of business and commercial law, Yasir Billoo can help you get a leg up on current trends in commercial leases. In this Broker to Broker Q&A, Billoo discusses potential ramifications from certain provisions, from personal guaranty to relocation.
During the recession, the market saw high vacancies, which gave brokers representing commercial tenants the upper hand in negotiations. What’s changed today?
Based on my experience with commercial tenants, it is clear landlords currently have leverage over most commercial tenants. Landlords are demanding higher rent, indefinite personal guaranties, and unilateral relocation and termination provisions. The larger, institutional landlords are most difficult to deal with because they have form leases from which they don’t want to deviate on the most objectionable issues. However, difficult does not mean impossible, and if prospective tenants don’t request a change to the lease, they will certainly not get it.
When representing a tenant client, why is it better to negotiate personal guaranty—which makes the business owner personally liable for debts and obligations—out of a lease in place of a larger security deposit or extra limitations?
People create corporate entities and obtain liability insurance to protect themselves from personal liability. But, after going to those lengths, they sign personal guaranties that bind them for the life of the lease, which in some cases spans 10 or more years. It is not only counterintuitive, it is counterproductive to all efforts small business owners put in place to otherwise protect themselves individually.
Why are relocation provisions popping up more and more in commercial leases?
Landlords want flexibility, plain and simple. They want the benefit of a long lease, but they also want to be able to move a tenant if they are offered higher rent payments. This is not only unfair, but it creates a terrible trend of overbidding by prospective tenants for prime space. National businesses, often referred to as anchor tenants, never agree to relocation provisions. The small businesses are hurt most by these provisions.
What is a reasonable exit strategy in a commercial lease?
The best exit strategies provide tenants with certainty for the worst-case scenarios. The best way to do that is to have a buyout provision written into the lease so that the tenant can terminate at any time, paying a specific amount of money for the option to terminate. For example, the tenant could offer to pay four months’ rent if he or she chooses to terminate the lease. Such a provision balances the scales where the landlord has termination and relocation provisions of its own.
When should a lease be renegotiated between an owner and long-term tenant?
Lease renegotiation is a highly case-specific issue. Generally, if the amount of rent exceeds the amount of net sales produced by the tenant company, that is a good indication that something has gone wrong and the business terms of the lease should be renegotiated. Obviously, if the tenant isn’t making money, but the landlord is profiting, the lease should be renegotiated. However, a tenant who takes the provision advice discussed above will have leverage to renegotiate. A landlord who knows the tenant can leave or is insulated from personal liability will be more amenable to listening.
Reprinted from realtormag.realtor.org, May 2015, with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright May 2015. All rights reserved. realtormag.realtor.org