Commercial Leases Need More Attention in a Tightening Market
Jay Hollander, Esq. is the principal of Hollander and Company LLC, www.hollanderco.com, a New York City law firm concentrating its efforts in the protection and development of property interests relating to real property, intellectual property and commercial interests, as well as related litigation.
The content of this article is intended to provide general information relating to its subject matter. Providing it does not establish any attorney-client relationship and does not constitute legal advice. Personal advice in the context of a mutually agreed attorney-client relationship should be sought about your specific circumstances.
If you look around many “commercial” neighborhoods in Manhattan these days, you ‘ll notice something striking. In many cases, they’re becoming less commercial.
Yes, unless you’ve been hiding under a rock, it can’t have escaped your attention that many commercial office and industrial buildings are going condo all throughout Manhattan, from Downtown to Midtown. Whether you think this is a good or bad thing, it does promise one thing in the short term – less available and less affordable office space in the foreseeable future.
In this environment, more than ever, tenants who either have to move, or those just thinking about it, must pay closer attention to the provisions of their leases since misunderstanding them may risk greater liability and exposure as rents climb higher. Why? Because tighter supply means harder terms and less negotiation by landlords.
And we’re not just talking about rent. We’re talking about personal guaranties, free rent, landlord installations, and other areas where a weaker rental market used to mean softer landlords. So, what to do?
First, do not try to negotiate a new lease or an extension without the help of an experienced attorney, knowledgeable about commercial leasing issues.
Second, pay close attention to your longer term needs and how the lease commitment you may be undertaking will affect that. For instance, let’s say you anticipate your company growing steadily over the next five to ten years, coincidentally, the typical term of a commercial lease for small businesses. If you outgrew that space in three years rather than five to ten, would it matter if the lease didn’t allow you to transfer it to someone else without the Landlord’s consent, which could be withheld for any reason or no reason? Of course it would.
Yet, many leases have outdated versions of what are referred to as “assignment” clauses, the clauses that govern transferring your lease to someone else and can hamstring an otherwise booming business.
The opposite can also be true. Let’s say you want to lease extra space to allow for future expansion that hasn’t happened yet and that seems like it might take longer than first anticipated. In that case, you will need to have an experienced attorney review the sublease clause, governing whether – and how – you can allow others to use parts of your space to help pay the rent and stabilize cash flow.
If you’re a retail tenant, similar considerations apply. Retail is always risky but onerous personal guaranties can make it hard to leave one of and arguably the biggest obligations of a retail business, namely, the lease. Good legal review and advice can be critical in a situation like that to help open an escape hatch for a retail business owner.
Another important consideration has to do with the legally permissible use of the space in any given location. Did you know that, if you sign a commercial lease without the review of a knowledgeable commercial leasing attorney, you might find yourself locked into a space in a building whose certificate of occupancy doesn’t allow for your intended use.
Even if the certificate of occupancy, the municipal form describing the permitted uses in a building, is capable of being amended to allow the use, guess who will be paying for the work needed to change it? That’s right, the tenant. And the work doesn’t only refer to legal work. Architects ,expediters and other professionals may need to be brought in to assist at hefty prices.
Then, there’s the construction process itself. In my practice over the years, I’ve seen a number of leases that severely restrict the hours and conditions under which tenants can do their initial fit up work to open, often delaying an already awkward process for months, even while tenants are required to pay rent for space they’re not able to fully occupy or use.
In an age of terrorism, insurance clauses require careful attention since badly drafted ones can simultaneously impose large costs on you as a tenant, and leave you exposed to calamities that can cripple your business in the event of terror attack, blackout or other natural disaster.
Care must also be taken to examine the landlord’s leverage in the building, from a mortgage point of view. In recent years, the booming real estate market has translated into office buildings fetching astronomical prices, forcing a huge spike in rents. Should the economy slip into recession, you need to make sure that, if your landlord’s mortgage go into default, you won’t be evicted by your landlord’s lender. This is accomplished through something called a non-disturbance clause and must be requested by any tenant entering into a long term commercial lease.
These examples are just a few of the many issues that need to be explored, strategized and negotiated by savvy tenants in today’s commercial leasing environment. Together with architects and accountants, an attorney experienced in commercial leasing work can prove to be an invaluable asset in navigating dangerous lease waters.
Copyright © Jay Hollander, 2006. All Rights Reserved.