Commercial tenants and commercial landlords don’t always agree. That fact may not come as any big surprise; however, disagreements can greatly damage a commercial leasing relationship, and it can be difficult—if not impossible—for a tenant to start things off or continue leasing with the same landlord on the right foot.
As The Lease Coach, we have heard about, seen first-hand, and resolved many such discrepancies to the tenant’s benefit. Here are several of the most common contentious issues and what you need to know.
Terminating a Lease Early
It can become a rocky road for commercial tenants wanting to terminate a lease early (no matter what the reason). Landlords, after all, are in business and prefer tenants to remain in the properties and continue to pay rent. Landlords are often far more willing to work with a tenant if they are not simply taking a vacancy back in their property. Finding a replacement tenant to assign the Lease Agreement to or even having the replacement tenant sign an entirely new lease may allow you to exit early from your lease. If the landlord does not allow you to terminate your existing lease, tenants may also want to explore relocating to a smaller unit in the property, if available, to lower their overheads and allow the landlord to retain some rent versus potentially losing a tenant completely (should they go out of business).
Commercial tenants must also understand that a landlord may be able to terminate their lease for several reasons having nothing to do with defaulting on rent. A landlord can often terminate your commercial lease because you refuse to relocate. A landlord may also have a right of termination for demolition or redevelopment—meaning that if they’re redeveloping the property, all lease deals are off. If your lease agreements include a landlord’s right to terminate, there should be ample notice and compensation for the tenant built into the clause.
As a tenant, you can also negotiate for early termination rights if you don’t achieve or maintain projected sales levels, vacancy rates are not maintained in the property, or if major anchor tenants leave the property. If the landlord (or their agent) is promising you that your business will do well in their property, then the ability to terminate under those circumstances—say after two years—is not unreasonable.
Wanting to Purchase or Sell a Business
This will include the assignment of a lease agreement. This paperwork transfers the leasing obligations from the seller to the buyer of the business but may not automatically release the seller from their obligations within the lease should the buyer default. Landlords must approve of the buyer but can drag their heels. They typically don’t like it when one tenant sells a business and assigns their lease agreement to another tenant. This often makes for a lateral move at best for the landlord. We’ve seen landlords stall for so long that the potential purchase deal falls through with the prospective buyer walking away in frustration.
Check the wording in the assignment clause, which should contain phrasing like “the landlord will not reasonably withhold their consent.” As the business seller, ideally you have carefully reviewed your lease assignment before signing the lease, but this may not have been top of mind. Be aware of clauses that allow the landlord to terminate your lease rather than granting the assignment as this may change your approach to the potential sale of your business. As a business purchaser, watch out for any other nasty surprises which may occur as part of the assignment; these can include the landlord raising your rent, asking for an increased deposit, or requiring you to sign a new lease altogether. The assignment process can require a lot of tactful discussion and negotiation as the motivations and benefits for all the parties involved may vary significantly.
Increasing Rental Amounts
Landlords often base these rental increases on the cost of living, the Consumer Price Index (CPI), or inflation. Landlords want to build annual increases into a tenant’s five- or 10-year lease term. This can be stated as rent per square foot (such as $25.00 per square foot the first year with a $1.00 per square foot increase each year thereafter). Alternatively, the annual rent increase may be calculated as a percentile factor. Fight like crazy on these annual base rent CPI and percentage increases. We have seen many landlords who are satisfied to receive a flat rent (no increases) for a full lease term. It’s all negotiable. Another point in your defence is your leasing history with the landlord. As a current tenant, you have been—presumably—paying your rent on time and in full. It is far better for a landlord to work with you rather than take a chance on a new tenant.