Top Considerations for a Tenant Leasing a Commercial Space
Retail and commercial leasing present unique business issues for tenants and business owners to consider. The last few years have changed the way many business operate day-to-day, and the shift to remote and hybrid working has only further emphasized the importance of careful consideration, analysis and negotiation for any business looking to lease space. The space a business rents is the backbone of a company’s operations, so it’s critical to fully understand and negotiate the commercial lease so that your company has the flexibility and certainty to do business without interruption or unnecessary risks. Commercial leases in Colorado are often long, complicated legal documents, heavily sided in favor of the landlord. Commercial leases often lack pro-tenant rights and protections typically found in residential leases Whether a business is looking for a face for its operation or simply for working, functional space, a business tenant has a lot to consider before agreeing to any commercial lease terms.
In the list below, we explore some of the top considerations before entering into a lease agreement.
Term and Description of the Leased Premises
Depending on the nature of a store’s operations, a tenant’s use of retail or commercial space may require unique tenant build-outs, special use considerations, ADA compliance, and the reliance on other neighboring tenants to generate business. Because of the up-front costs, retail leases often last between three to seven years, and even up to 10 years. The result is a game of risk and cost shifting between the landlord and the tenant. For tenants, the terms of their lease can affect the profit margins, growth potential, and overall success of their storefront and possibly even their brand. For these reasons, retail leases should be carefully and thoughtfully negotiated with the landlord.
The condition of the premises (i.e. the space) prior to commencement of the lease will largely determine the amount of tenant build-out (construction) required to get the space ready for the store. In addition to the tenant build-out, the tenant and landlord will need to determine what representations and warranties are going to be made regarding the space’s condition.
- Who is going to pay for the tenant build-out? Will the landlord give the tenant an allowance?
- What happens to the improvements/build-out at the end of the lease?
- Can the tenant leave them in place or does it need to remove everything and/or pay for demo work?
- Has the tenant ensured that it can remove its trade fixtures at the end of the lease?
- Who are the other tenants are in the center/shopping area/strip mall?
- Who is next door?
- Who are the (other) anchor tenants?
- Will the landlord divulge how much time is remaining on their leases? Keep in mind, many stores rely on the foot traffic of their neighbors to generate additional business.
- Any Landlord representations and warranties?
- What happens upon the total or partial destruction, casualty or condemnation of the leased premises, building, and/or common areas and how is such destruction, casualty or condemnation defined?
Use of the Space
Has your use of the space been accurately defined in the lease? Are there any specific limitations on your use? Do you want to negotiate an exclusivity provision into the lease? For example, do you want to make sure your business is the only one of its kind in the center/shopping area/strip mall? Double check the hours of operation that the landlord is requiring and make sure these align with your intended use. What are the hours of operation of the neighboring businesses?
What are the common areas associated with your space? Meaning, what other areas in the building do you have the right to use and share with the other tenants? This often includes restrooms, parking, hallways, entrances, security, etc.
- What are your limitations on the use of these spaces?
- When are they opened and closed?
- How are you being charged for the common areas? This is often called CAM, which stands for common area maintenance.
- Are you able to review the landlord’s records related to the CAM charges?
- What items are included and what items are specifically excluded?
- How are these expenses are calculated?
- What are your audit rights of the same?
Term, Commencement Date, Rent Rate, Renewal Options and Remedies for Default either By Tenant or Landlord Under the Lease.
When the term of the lease actually starts and when the obligation to start paying rent begins should be tied in with the construction and completion of the tenant’s improvements. Often it depends on whether or not the landlord or the tenant is responsible for finishing the tenant’s improvements, as that party has more direct control over when the premises are actually available for use. The parties may determine a fixed date, or it may start on the day the tenant commences its retail operations in the space. There might be penalties for delays. If the landlord is constructing the tenant improvements and significant delays occur, does the tenant have the right to terminate the lease or to seek damages?
Retail leases often have terms between 3 to 7 years, and in some cases up to 10 years. For landlords, because significant cost may be put into the space prior to the lease which is often unique to the tenant, a longer term helps to recapture some of the upfront costs. For tenants, the main concerns are often its location and a space that suits the store in the present and near future. If that location works, the tenant will want a longer term and lease extensions to lock it in. When things are going well, both parties will want the lease to continue, but considerations should be put in place regarding not only the initial term but also renewals and extensions.
- Are lease renewals included in the lease?
- How will rent be determined for the renewal periods?
- Do you as the tenant have any rights to get out of the lease?
- Can you assign it?
- Can you sublet?
Rent – How is it Calculated and What’s Included?
What is the minimum rent? Is this a percentage rent? Meaning, is the landlord charging a base rent and then taking a portion of store’s actual sales/revenue? If so, be careful to read through how revenues, sales, profits, and other similar terms are calculated.
- Have you included provisions to cover for returns?
- Gift card sales?
- Bad checks?
- Transfers of merchandise to other store locations?
Parking: location, space, and adequacy for both customers and employees
Parking is often overlooked in retail leases, but it can be vital to the tenant’s business success. If customers can’t find parking, they might go somewhere else. However, it’s not just the parking for the store’s customers that needs to be considered but also parking for the tenant’s employees.
- How much parking is available?
- Does the store want/need reserved spaces?
- Does the landlord want to require that the tenant’s employees park off site?
- What is the expected use of the parking lot by other tenants likely to be?
- When will the parking lot(s) be most and least busy?
- Security issues: are there parking attendants, lights, guards?
Does the landlord have the ability to relocate the store to another location in the center/strip mall? Try to avoid this if at all possible. If it’s unavoidable, then who has to pay for the move? Will the landlord cover related marketing costs (like changes to websites, stationary, directories, business cards, etc.)? Will the landlord provide the same upgrades to the new space? How much notice does the landlord have to give prior to the relocation?
Insurance and Indemnification Requirements
Find out now what insurance policies and amounts the landlord is requiring. Speak with your insurance agent to figure out what these costs are likely to look like.
These are just a few of the business items a tenant should consider when entering into a commercial or retail lease. Keep in mind there are other equally important legal terms that should be negotiated, like casualty provisions, eminent domain, termination rights and remedies, default provisions, and the always overlooked “boilerplate”, to name a few. Ambiguities in leases lead to disputes, and disputes can lead to lawsuits. A standard, off-the-shelf form likely won’t address the particular needs and concerns of the retail owner. It’s worthwhile for the retail owner to spend extra time upfront negotiating lease terms and putting the details in writing.
(Mallon Lonnquist Morris & Watrous, PLLC, is a business, employment, real estate, and litigation law firm in Denver, Colorado. The attorneys at MLMW regularly represent clients on both sides of commerical leases. )