Be Bold During Commercial Lease Negotiations
By: Valerie
Marciano, Esq.
A depressed commercial
marketplace has resulted in a tenant's market. There is an
oversupply of newly constructed commercial buildings which may
never have had a tenant, coupled with low occupancy rates due to
the economic downturn. Tenants, feel your power.
Previously, with the exception of nationally known companies
that had corporate attorneys to negotiate favorable lease terms for
them, landlords have held the upper hand. The landlord
may have dictated lease provisions that were favorable to them and
put commercial tenants at a disadvantage.
On a drive around the Valley
of the Sun, it becomes abundantly clear that nationally known
companies may fill the big box locations and major shopping malls;
they are not the majority of commercial tenants. Rather, "Mom
& Pop" operations support the local traffic and line many
streets with businesses that provide the local economy
posi-traction. Ironically, those same "Mom & Pop" operations
are the ones most likely to have appalling lease terms.
Frequently, these terms are spelled out in the lease's boilerplate
provisions. Recently we have seen unreasonable terms that are
forcing tenants to pay unexpected costs. These are relating
to when construction defects are found in the landlord's
improvements or when a landlord inherits leasehold improvements
made by or for a former tenant.
In 2006 and 2007, land was
acquired and shells of buildings were erected. Some of those
buildings are just now beginning to get their initial tenants and
have remained just an empty shell for more than five years.
Tenants are expected to build out the space for their particular
use and lease the space on a "triple net" basis, which, in laymen's
terms, means that all expenses relating to the property are borne
by the tenant. In addition to triple net lease terms, the
landlord would include in the lease draft, lease terms that, at
best, appeared to address circumstances that are far-fetched or
unlikely. Logically, it would seem impossible that a roof
could collapse and the tenant would be responsible for it. However,
some lease terms would hold the tenant accountable for the roof
repair. Other terms might include a scenario where the
building's sewer system backs up or fails completely and the
landlord is not being required to fix it. Consider a newly
constructed parking lot that floods excessively, leaving the
tenants with the sole remedy of filing suit against the landlord's
contractor and, that contractor could no longer be in business. The
building may have reverted back to the original lender who had no
contracts with the construction companies. With buildings
remaining vacant for long periods of time, latent construction
defects may not have surfaced in a timely manner and the buildings
may have suffered some retrograde damage due to long periods of
non-occupancy. Mechanical, plumbing and HVAC systems are
vulnerable if they have not been used or properly protected from
extreme heat.
Many developers/landlords
banked on selling their buildings after their completion and then
lease-out to tenants. In other words, many
developer/landlords were not expecting to be long term landlords.
Boilerplate lease provisions that were ignored at the
execution of the lease as improbable now may be a reality.
For example, the lease provision that leaves the "latent and
patent" defects to the tenant to shoulder may give the landlord
room to argue that the tenant must bear the cost and responsibility
to repair a broken supporting beam, a failed sewer system or a HVAC
system.
While time-consuming, the
best approach for the tenant is to ask themselves, after reviewing
every provision in the lease, "What if…this occurs?" Consider
various scenarios and determine who - the landlord or tenant - is
in the best position. Ask the landlord to make changes to the
lease term to equalize the risks between the landlord and the
tenant that are associated with leasing and owning real
property. Do not leave it to someone else to read the
proposed lease and then summarize it for you. The proposed
tenant is the party who needs to fully understand what each
provision may, and can, mean in its practical application to the
lease.
If you are a prospective
tenant, you may expect landlord concessions in this market.
Research the property. Read and negotiate the terms of the
commercial lease, include hiring a legal professional if
warranted.
About the author: Valerie
L. Marciano is an attorney at the Phoenix law firm of Jaburg Wilk. She assists
clients with real
estate, foreclosure,
bankruptcy
and litigation
issues. Val frequently writes on Arizona's foreclosure and
anti-deficiency statues and is a board member of AZCREW - Arizona's
premier commercial real estate professional association for
women. Val can be reached at 602-248-1025 or vlm@jaburgwilk.com.
This article is not intended to provide legal advice and
only relates to Arizona law. It does not consider the scope of laws
in states other than Arizona. Always consult an attorney for
legal advice for your particular situation. This
policy is written based on Arizona law for Arizona
employers.
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