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NEW YORK CITY—Tenants often view commercial leases as meritingless scrutiny than other commercial real estate transactions.However, commercial leases are usually negotiated on the landlord'sform, necessitating careful review since such forms tend to beheavily favorable to landlords. Further, leases are typicallylong-term agreements that can have a substantial impact on atenant's profitability. While tenants tend to focus on the obvious(e.g., fixed rent), there are other provisions that can also proveto be significant. What follows are some important issues thatshould be carefully considered in commercial leases.

  1. Premises. Tenants should do their duediligence and consider their needs when evaluating space for rent.Is it suitable for tenant's intended use? Is the electricalcapacity sufficient? Is the size adequate? One way to provide forflexibility with respect to size would be to negotiate, ifpossible, an expansion option.
  2. Use. After nonpayment of rent, a common reasonfor a tenant default. Tenants should check that the space is zonedfor its intended use, since typically landlords will not warrantthat a space is suitable for a particular use.
  3. Delivery. The premises should be delivered incompliance with all laws and with all building systems in goodworking order and repair. The lease should clearly delineate thework being done by each party to prepare the space for occupancyand any deadlines for completing such work. Will there be a tenantimprovement allowance and how does the payout work?
  4. Fixed Rent (a/k/a Base Rent). The most commonreason for a tenant default. Is it consistent with the market? Whendoes it begin and how is it structured? Are there escalations andare they fixed or tied to an index? Will there be a free rentperiod? An experienced broker can assist in ensuring that the fixedrent being charged is appropriate.
  5. Operating Expenses and Real Estate Taxes.Building operating expenses (also known as common area maintenanceexpenses) are unpredictable and, if passed on to tenants, oftencostly for tenants. If there is no cap on operating expenses, as isgenerally the case in New York City, tenants should include a listof standard carve-outs. Tenants should also be sure that theirshare of expenses is proportionate to the amount of space they aretaking, and request an audit right. As to real estate taxes, thereis typically a reconciliation process at the end of each tax year –tenants should always ask for copies of the tax bills, and includein the lease standard carve outs to real estate taxes.
  6. Maintenance and Repairs. The lease shouldclearly delineate who is responsible for what. Except in certaincircumstances (e.g., where a tenant leases an entire building),landlords should typically be responsible for maintaining thebuilding common areas, roof, structural elements, buildingenvelope, and building systems servicing more than one tenant. Thelease should also clearly address who is responsible if anenvironmental condition is discovered at the premises—generally,the landlord should be responsible for remediating conditionsexisting prior to the commencement date or introduced thereafter bythe landlord. A common scenario involves a tenant taking possessionof a space only to discover that it requires expensive remediationof an environmental condition that was not apparent on a visualinspection.
  7. Default. Tenants should request cure periodsand no acceleration of rent, unless over fair market value.Landlords should also be required to mitigate damages.
  8. Assignment and Subleasing. Landlord's consentshould be reasonable. Tenants should also attempt to include carveouts to the consent requirement (i.e., for restructuring, M&A,IPOs, etc.) – the last thing a tenant wants in a corporatetransaction is for the landlord to be the “tail that wags thedog”!
  9. Security. Tenants should consider how muchsecurity they are willing to give. If the deposit is substantial,tenants can try for a reduction after a set period of time forbeing a good citizen. Tenants should also, if they have sufficientleverage, avoid giving a parent guaranty. Otherwise, they shouldattempt to limit the guaranty.
  10. Term. How many years is the term? Does tenanthave a right to extend and how is fixed rent in the renewal termdetermined? Tenants should give considerable thought to thesequestions and not assume, in the absence of an express renewaloption, that their landlord will be willing to negotiate with themfor a lease extension at the end of the term.

The foregoing list is by no means exhaustive—there are manyother provisions in commercial leases which merit negotiation,including subordination and non-disturbance clauses andindemnities. Also, certain types of leases (i.e., retail leases)will have additional issues specific to such leases. Consequently,it is always recommended that tenants consult legal counsel priorto signing a lease.

Vasiliki Yiannoulis is an associate at law firm WithersBergman. She may be contacted at [email protected].The views expressed here are the author's own.

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