Tenant Negotiations for a Shopping Center Lease
Leases are what holds the commercial real estate world together. From the perspective of tenants, landlords can craft commercial leases that works to the landlord’s advantage without it being obvious at first. As a tenant, it’s wise to have a skilled attorney experienced with commercial real estate to look over your lease and ensure you know exactly what you are signing and its implications. A good attorney can negotiate and revise the lease to ensure that it best serves your needs as a tenant of a commercial building.
Negotiating power varies based upon the circumstances of the tenant. A large franchise or national retailer will likely have greater leverage to negotiate than a local or regional tenant will, especially if the landlord is a large commercial real estate company and not a locally owned property. Generally, when the parties are matched more closely, the negotiations are more successful. Even then, negotiations often tend to favor the party with the most options.
For example, in a situation where there is a shortage of desirable space and multiple businesses are vying for limited spaces, a tenant will likely have much less negotiating power. But in a situation where there are numerous available and desirable spaces, a potential tenant with good credit becomes a desirable tenant and is therefore in a good negotiating position. A skilled real estate attorney can help you determine just how strong your negotiating leverage is so that you can enter into negotiation with confidence of where you stand.
When it comes to negotiating a lease, allow yourself enough time since negotiations can and likely will go back and forth on numerous occasions. If you feel pressured, you may sign a lease and accept terms you might not accept if you did not fear running out of time.
Our attorneys at Manfred Sternberg are constantly aware of the commercial leasing climate in the Houston area, which means we know how likely a landlord may be to negotiate a lease. Let us save you time and money by using our skills to ensure you receive the lease you want and not just the first lease offered to you.
Key Lease Provisions
Once you sign a lease, it will require you to keep specific hours and days of operations. This can complicate negotiations at times. For example, if there are multiple retail stores in one shopping center, they are all expected to be open at the same time. But if your business is not a traditional retail business, you may not want or be able to keep these hours—however, that does not mean you can’t pay your bills. You simply may receive the income you need without needing the hours of your competitors.
“Going dark” means that the tenant can close operations temporarily for certain conditions (like a holiday or a remodel). But if the “go dark” option is not in your lease, even not being open on these unusual days can cause you to be in default if you have not met all business times required by your lease. This is why you need to ensure that common exclusions are present in your lease, such as closing for holidays, extreme weather that would endanger employees, or repairs and remodeling.
A co-tenancy clause protects you as a tenant from experiencing a decrease in revenue due to a decline in customer traffic because of lack of business in anchor tenants, or in a certain percentage of businesses in the shopping center you share. If this is the case, a co-tenancy clause can provide remedies that include the ability to go dark, receive rent concessions, or even terminate the lease.
Another area that can greatly limit tenants is the permitted use of the premises. If the permitted use is too narrow, it could keep your business from growing. For example, if your permitted use is for the retail sale of men’s shoes, you would be in default if you add women’s or children’s shoes to your store. The broader your permitted use, the more options you will have as a tenant.
It may seem obvious that you would not want your landlord to lease a space in your shopping center to one of your competitors, but you must express this precisely in your lease. You also have to be aware that any lease that had an exclusivity provision it before yours was signed will have priority. Make sure to investigate if the existing tenants in your center have exclusivity provisions that could affect your activities and success in your leased space. Also make sure your lease expressly state the remedies for any breach of an exclusivity provision (examples are monetary damages, termination of the lease, or even injunction against the landlord).
Common Area Maintenance Costs (CAM), Insurance, and Taxes
A commercial lease will generally require that the tenant pay the proportionate share of common area maintenance (CAM) costs. These costs usually include grounds care, trash service, parking lot lights and floodlights, and other utilities, and the costs must be specifically identified in the lease. Usually CAM costs are determined by the tenant’s leased square footage divided by the total leasable area in the property. Each tenant then pays the share for their share at the rate determined by the lease. Some leases provide base year costs with additional provision for annual increases, but others have a cap on the increase of CAM, either by limited by percentage or by dollar cap. Other leases may have fixed rates for CAM costs. As a tenant, make sure you thoroughly understand your CAM cost provisions and agree to them before signing the lease.
Tenants often pay, in addition CAM costs, a proportionate share of the taxes and insurance for the common areas. This could be an agreement to pay a portion of the landlord’s federal or state income taxes, as well as state franchise or property taxes, or it could be an agreement to only reimburse the landlord for property taxes. In any instance, the lease must specify what will be paid.
Assignment and Subleasing
In general leases prohibit assignment or subleasing without the consent of the landlord. In negotiation the tenant can request permission from the landlord to transfer to franchisors, successors, or affiliates in the event of a buyout or merger. Such transfers must be specifically allowed in the lease. And if the lease does permit these transfers, this does not mean that the tenant or guarantor will be released from liability under the lease unless the lease specifies otherwise. If a release from liability is not stated in the lease, a later assignee or subtenant could fail to pay rent, and the original tenant and guarantor can be held liable.
Term of Lease
While a residential lease is typically for 12 months, a commercial landlord often wants the original term of the lease to be for multiple years, and sometimes for decades. But a commercial lease term length is usually negotiable. Some leases have automatic renewal terms, which is desirable if the tenant is seeking a stable location.
Additional Space Options
Some tenants may anticipate needing more space in future months or years. In this case, the tenant will want a right of first refusal provision in the lease. This means that if a space is open, the tenant has the right to match the terms of a third party’s proposed transaction, which will require the landlord to lease the space to the tenant instead of the third party. A right of first offer is similar: this means that the landlord must offer available adjacent space to the tenant before marketing the space to other parties.
If a customer or guest is injured in a tenant’s store, the lease will likely include provisions for the indemnification of the landlord. This means if the injured party files a personal injury claim or property damage claim, the landlord will be protected.
However, if the lease doesn’t include indemnity of the tenant by the landlord, it is important that the tenant negotiates for such indemnity. The tenant needs protection against claims of liability for injury due to the negligence of the landlord. Make sure you are protected in every possible way in your lease.
A landlord may default on a lease by:
- breaching an express covenant in the lease
- breaching an implied covenant in the lease
- breaching a legal duty to the tenant.
Make sure that the lease specifies the remedies for the tenant if the landlord defaults on the lease (common remedies are termination of the lease, monetary damages, or a specific performance by the landlord).
A tenant can also default on the lease by:
- Monetary fault: When rent or CAM charges are not paid or are not paid in a timely manner.
- Non-permitted transfer: The tenant cannot transfer space if the lease does not provide for such a transfer.
- Breach in the lease agreement: If the tenant breaks any agreement in the lease, the landlord could accelerate the rent, or could require the entire amount for the remaining term of the lease.
Texas has a statutory law that a landlord of a commercial space can lock a tenant out of the space if the tenant has not paid rent. In order to receive access to the building and any items inside, the tenant will have to pay the back rent ant any related charges in full.
Not paying rent is considered a monetary breach. A nonmonetary breach is when the action does not have to do with money directly, but rather with carrying out a prohibited business in the space, or by not performing a requirement stated in the lease.
Any breach in the lease by the tenant can give the landlord the right to repossession of the leased premises.
A lien is a landlord’s right to keep the property of a tenant who owes money to the landlord until the tenant pays the debt. The state law or the lease itself can provide the landlord a lien on the tenant’s personal property, but the tenant could have financing that prohibits this. Yet without an express lien on the lease, the landlord can still have a statutory lien based on state law. However, a lender’s lien generally has priority over a landlord’s statutory lien.
Subordination to Landlord's Lender
In an SNDA (subordination, non-disturbance and attornment agreement), the tenant agrees to subordinate the lease to the lender’s mortgage. This agreement is usually between the landlord, the tenant, and the landlord’s leader. In the case of a mortgage foreclosure, the tenant agrees to recognize the lender as the new landlord if the lender complies with the terms of the lease. The lender agrees that, in the case of foreclosure on the landlord, the tenant’s rights remain intact under the lease. The landlord also agrees that, if they have defaulted, the landlord cannot make any claim for the rent from the tenant because the lender now has the right of collecting the tenant’s rent.
Casualties occur, and the lease should provide for them. In the event of a fire or a flood, or a condemnation of the premises, the lease should state which party can terminate the lease. Often the tenant has the ability to terminate the lease with no penalty in such a case. If the premises will not be ready for occupancy, the property owner then has a set amount of time to rebuild, repair, and restore the damage after a casualty before the tenant has the option of terminating the lease.
Contact a Commercial Lease Attorney Today
Commercial leases can be daunting at first, but under the eyes of experienced and skilled legal counsel, you will be able to enter into a lease with confidence that you, your rights, and your business is protected. Email or call Manfred Sternberg & Associates today to make an appointment with one of our Texas real estate attorneys for a consultation concerning your commercial lease.