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Negotiating a Commercial Lease Includes Asking the Right Questions
Asking good questions can prevent unfair advantages, avoid legal action, and help produce a lease that is fair to both sides. by David A. Fitzgibbons III
s our local economy builds steam, leasing transactions between commercial landlords and tenants are on the rise. Landlords are filling up space that was formerly occupied by VACANT signs, and many new and growing businesses are becoming commercial tenants for the first time. This article explores some basic lease terms that you may assume you know, but, by focusing on the right questions, may take on new meaning and importance.
In his recentbook, Good Leaders Ask Great Questions, best-selling author John Maxwell explores the risks of thinking we know the answers to questions (when we don’t) and of refraining from asking a question for fear of looking uninformed or silly. In short, asking good questions opens doors to information that would otherwise remain closed to you. For parties negotiating a commercial lease, good questions can prevent unfair advantages, avoid legal action, and produce a lease that is fair to both sides.
Parties. In a lease, the parties are usually described as “Landlord” and “Tenant,” or “Lessor” and “Lessee.” Simple, right? Not necessarily. The significance of those terms can go far beyond simple terminology. Consider: If a party is a corporation, should just the operating corporation be listed as the party? Or should the parent corporation be listed, also? For newly formed corporations or LLCs, when does it make sense to list their owners? If you can add individual shareholders or members, can they be required to guarantee payment and performance under the lease? In light of these considerations, asking who should be listed as the landlord or tenant should no longer seem like an uninformed or silly question. Property. The“property” is usually defined as the space to be leased. If an entire building is subject to the lease, the mailing address and tax parcel number should be sufficient to identify the leased property. But if the leased space is only a portion of the building or parcel, then the parties need to describe precisely what is being leased. Interior space? Roof? Interior and exterior walls? A full suite? Specific parking spaces? Are there common areas – such as sidewalks, conference rooms, kitchen facilities, landscaped areas, parking – for which the tenant will be charged? It is critical to ask questions, so that both parties understand and are in agreement on what “property” the lease covers, and what does and does not go with it. Rent. In a commercial setting,
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“rent” may simply be a specific dollar amount per month. Or it might include a percent of the tenant’s income or revenues, or some of the landlord’s operating costs, such as landscaping, exterior maintenance and utilities. A commercial lease’s rent provisions might also include annual increases. Are such terms part of your pending agreement? Or how about these: Can a tenant offset its rent obligation by making improvements to its space? How is the tenant’s rent affected by vacant space? These are all important issues that should be part of the negotiations. Term. The “term” of the lease seems obvious:from the beginning to the end. But when does the lease begin? When the lease is signed? When the space is ready for occupancy? When the tenant opens its doors for business? When does a tenant have an insurable interest in the proper-
ty – when it signs the lease or when it begins to occupy it? Who has the right to extend the term of the lease, and for how long? Each of these questions should be thoroughly discussed between the parties before they agree to a final lease term.
It’s been said that “the future belongs to the curious.” Before signing a lease, be curious; think about your business goals and needs, ask good questions, and negotiate a lease that is fair to both parties and will help you achieve a profitable future.
Business and real estate attorney David Fitzgibbons serves the community as vice chairman of Banner Casa Grande Medical Center, president of the Casa Grande Industrial Development Authority, chairman of the Casa Grande Regional Medical Center Foundation, and president of the Casa Grande Art Museum.
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