We are often asked by our newer clients what basic terms are included in the letters of Intent and the lease. We advise our clients every letter of intent and commercial lease should be in writing and at a minimum include the following:
- The lease term with specific beginning and ending dates and under what conditions the lease can be renewed.
- Rent increases. Escalations should be for specific dollar amounts or tied to a known method of calculation (i.e. 3% annual escalation).
- Rent defined and method of calculation. Often retailers have to pay “additional rent” expenses which include common area maintenance charges, real estate taxes, and building insurance.
- Any required deposit.
- A description of the space, square footage, available parking, and other amenities.
- A detailed listing of any improvements the landlord will make to the space. .
- How either the retailer or the landlord can terminate the lease and the financial consequences.
Other issues retailers should review with their broker include foot and vehicle traffic, average utility costs, zoning, radius restrictions to competitors, requirements to be compliance with Americans with Disabilities Act, kick out clauses, sub leasing, caps on common area maintenance charges and options to renew the lease. If the business fails or the location doesn’t meet sales projections, does the tenant have permission to terminate the lease early or sublet the space to another party? The tenant broker should negotiate with the landlord at a minimum the ability for the tenant to sublease and have the option to renew. Options give the retailer the right to stay by notifying the landlord in writing a certain number of days or months before the lease expires. Landlords may want a higher rent for the renewal period or “market rate” as well as an extra fee in exchange for the option. The broker should also attempt to cap controllable maintenance increases that are passed on to the tenant.
In summary, most commercial leases are issued by the landlord and often one sided in their favor. It’s the tenant’s responsibility to hire a lawyer to help negotiate the legal language to a more level playing field and a broker to negotiate the best business terms possible.