5 Must-Have Commercial Lease Provisions

This article by Lori Kilberg explains 5 must have commercial lease provisionsBy Lori Kilberg

With commercial leasing activity picking up across all major property sectors, landlords and tenants are increasingly eager to get deals done. In the heat of Atlanta’s rekindled real estate market, it’s important to remember that a lease is still a long-term commitment, and finding a good match is just the beginning.  A well-crafted commercial lease ensures that both parties go into the relationship informed and protected.

Although the relative size and credit worthiness of the landlord and tenant will dictate negotiating leverage, below are five important commercial lease provisions to consider in your negotiations:

Relocation Provision: This provision, often found in office and shopping center leases, requires a tenant to move to another space in the same building or complex to allow the landlord flexibility to accommodate a larger tenant or another user’s specific needs. While a tenant is likely to want such a provision to be eliminated entirely, landlords may insist on a relocation right. A prospective tenant may push instead for protective language identifying the type and/or location of potential new space, as well as compensation for all relocation expenses, including moving costs, stationery and business cards.

Audit Rights: These rights are important for both landlords and tenants. A prospective tenant very well may want the right to audit a landlord’s calculation and allocation of the operating expenses charged to a building’s tenants. These expenses can be significant, and having the ability to challenge them can be a major financial benefit to a tenant. In retail leases, the landlord wants the right to audit a tenant’s gross sales reports, especially if the rent is based on a percentage of gross sales from the premises.

Subordination, Non-Disturbance and Attornment Agreements (SNDAs): If a commercial building is subject to a mortgage (and most are), a tenant will want an SNDA from the lender to protect its lease from being terminated in the event of a foreclosure, sale or deed in lieu. Landlords and lenders may be resistant to these agreements, but prospective tenants often can persuade a landlord who is eager to boost occupancy to obtain an SNDA from their lender.

Co-Tenancies: In today’s retail environment, prospective shopping center tenants often are demanding co-tenancy clauses that, broadly speaking, specify other retailers (or types of retailers) that must be under lease at the center or require a certain percentage of a center’s gross leasable area to be leased. If those requirements are not fulfilled, the tenant is entitled to a greatly reduced rent, a lease termination, or both.

A shopping center can change dramatically over the course of a 10- to 20-year period, so landlords will want to make sure these provisions give them as much flexibility as possible — such as the ability to replace a named co-tenant with a suitable retailer. Not surprisingly, given the rocky retail real estate environment of the past half-decade, these clauses have become one of the most litigated of all commercial lease provisions.

Radius Restrictions: These restrictions protect a center against competition in its own backyard by prohibiting a retail tenant from directly or indirectly operating another store within a certain distance from the shopping center. This is especially important in specialty centers that depend on a unique tenant mix. They also protect the percentage rent obligations of a tenant by ensuring that the tenant maximizes sales and profits in the shopping center.

Depending on the type and strength of the shopping center, radius restrictions may be drawn to cover a narrow trade area of only a few miles in diameter or a much larger area extending out 60 miles. Landlords should craft a restriction that is narrow enough to defend as reasonable without being an impermissible restraint on trade. Tenants must insist on carve-outs for existing stores and eliminate broad references to affiliates in order to avoid future conflicts.

Lori Kilberg is the 2015 president of the CREW Network and a partner at the Hartman Simons & Wood commercial real estate law firm.

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Author: CREW Atlanta

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