Strategizing a New Business Location
There are many types of lease forms used by the landlord community. Some are relatively short, ranging from 10-30 pages, while others can be up to 80-90 pages. Lease forms are typically described as triple net, modified gross and gross. The interpretation of how the leases are described is not always consistent within the industry and is often confusing for tenants. It important for the tenant to understand the varying lease terminology as discussed between the parties in a transaction and used in the lease itself to avoid any surprises or misunderstandings once the lease is signed. For a full glossary of terminology, visit www.theleasedoctor .com.
One type of form used by many landlords is the AIR (American Industrial Real Estate Association) form, which is typically more tenant friendly than the many custom leases I have seen. These forms will typically require fewer comments than custom leases since the leases have a few built in comments that are reciprocal between landlord and tenant. These leases are identified with the AIR logo on the front page of the document. The majority of leases I have seen used are the custom versions that are written for landlords by their attorneys, to give the landlord every advantage possible in multiple ways, spread out innocuously throughout the lengthy document. A landlord already knows in advance that the tenant does not possess the experience or the resources to sufficiently cover themselves in a leasing transaction, this especially holds true to the small business owner. Most business owners sign the lease without reading it or having an understanding of all the financial and other obligations that they will be responsible for. Unfortunately, when the lease is ready to be signed, the tenant is always feeling anxious and pressured to sign while the landlord’s agent always claims to have someone else who looking at the space, creating artificial competition for it. This creates urgency for the tenant who is faced with the ultimate decision, “do I just sign it now and hope it’s going to be okay” or “do I give the lease to an attorney to review”. Though the second option is generally preferred, most business owners know that a lease review can be open ended and cost thousands of dollars, moreover the deal could fall apart over the lease comments, and now the tenant is out all the legal fees and has to start over.
Back in the day leases were much shorter and contained simpler language. Today, landlords have been finding additional ways they can cover themselves from anything that can happen during the lease term including ADA upgrades and mandatory capital improvements. Moreover landlords like to find alternative ways to receive additional income from leases without the tenant knowing, by shifting a greater burden of responsibility over to the tenants. In most cases, lease language changes and comments are open for negotiations, however landlords and their agents do not encourage it, as it makes the lease closing process more protracted which is contradictory to the goal of the leasing agent as they work on a straight commission basis only. Our experience has shown us that most landlords will be flexible when it comes modifying their lease to be less onerous for the tenant as they do not want to lose a deal over lease language. It is important to explain to the landlord or their representative the reasons for changing or eliminating particular lease language as it will then reveal the one-sided nature of the lease provision and therefore can be reasoned for a modification to the document. Landlords do not want to appear to be unreasonable during this process as they do not yet have a signed lease from a tenant, so the key is to identify the lease provisions upfront that are most likely to have an adverse impact during the lease term and modify them accordingly. It is important to cover the business language as well as the legalese, which can save the tenant substantial money and stress as well as limiting their exposure to surprises that may happen in the future.
It is paramount to either read the lease or have a professional do it. A business lease is considered to be one of the largest financial obligations a business person could ever sign for, often exceeding their mortgage obligation on a home. It is common for landlords to ask for personal guarantees on all leases involving small business making it incumbent on the tenant to make sure they protect themselves from the unknown.
Todd Dorn is president of Dorn and Company-Commercial Lease Advisors & The Lease Doctor, which specializes in lease negotiations and tenant representation. You can reach Mr. Dorn at 888-413-7699 or at tdorn@theleasedoctor.com
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