About the author: Daniel Gershburg, Esq., is a real estate attorney with offices in Tribeca and southern Brooklyn. He blogs for his own website, DanielGershburg.
Leave me alone on the title. It was better than “50 Shades of Grey…Pages in a Commercial Lease.”
As I’ve been working with a number of clients who have decided to open up a business (many in Tribeca), I thought it important to discuss what you should look out for when you’re signing a commercial lease. And by “you,” I mean you and your lawyer. There are things that attorneys don’t necessarily need to help you out with—things you can do on your own (cue the LegalZoom commercial)—but negotiating a commercial lease is not one of them. Just because that’s self-serving doesn’t mean it’s not true.
Now, let’s discuss the two main provisions you want to make sure are in your commercial lease. I call them “the Sword and the Shield.” Absolutely no one else does.
Option to Extend
This one is overlooked by many first-time commercial renters. Language should always be inserted in a commercial lease giving the tenant the option to extend the lease after the expiration of the initial period. For example, a commercial lease will state, for a term five years, tenant will pay $2,000 a month the first year and it will increase by 3% each year thereafter. Inserting an option to extend allows you to do that for three, five, ten, or whatever number of years thereafter with an explicit agreement on how much the rent is going to be. In other words, you know what you’ll be paying and there will be certainty in your fixed costs when it comes to rent. Plus, you get to keep the space for more than five years if you want to.
What happens if you sign a lease without that option? As an example, let’s look at Kaffe 1668, my favorite place in New York City to get tea (judge away on the “tea”). They appear to be doing amazingly well—in fact, they opened a second location. Say their lease is for five years, which typically is what landlords will use. And let’s say at the end of the fifth year, they’re all, “We making it rain with this Ecuadorian coffee!!!” and want to stay in that location (let me just explicitly state that I am not Kaffe 1668′s attorney, know nothing about their leases, and cannot imagine any of those good people saying, “We making it rain!!!”). Without an option period in the lease, they are at the mercy of the landlord when the lease is up. The landlord can—and almost inevitably will—come in at year four, month eight, and say, “We’d love to renew your lease for five more years. We’re going to bump your rent up by a mere 33% per year.” It happens time and time again, and no one thinks it will happen to them. You can either bank on the fact that your landlord doesn’t want to make much more money than he/she is making now (everyone is laughing), or you can get an option to extend in the lease.
Good Guy Clause
Another crucial (and perhaps the most important) clause to have in your commercial lease is something called a good guy clause. In its simplest form, the clause allows the tenant to not be held responsible for the lease, beyond the time you leave—even if it’s before the lease is up—provided everything up to that point has been paid and you’re not in default under the terms of the lease. Essentially, you give the landlord about 90 days’ notice that you’re going to be leaving because [insert reason], and you’ll only be responsible for rent and other charges associated with the lease until the time you hand in your keys. This clause typically is fought over because the landlord doesn’t want to find a new tenant and pay during the time he/she is doing so, and the tenant wants it because they would like to, you know, have money for food and stuff when they leave. But more times than not, you can get this negotiated into the lease.
If I wanted to open up an Italian restaurant at the corner of Franklin and W. Broadway, for instance, and things didn’t go according the plan—which shouldn’t be hard to imagine at this point—the good guy clause would literally save my financial behind. The language that’s crafted must be very specific, which is why a lawyer comes in handy here. The difference between having the good guy clause and not having the good guy clause could mean the difference between paying a few thousand dollars or tens of thousands of dollars.
Having said the above, have I seen people negotiate leases with their landlords without a lawyer? Yes. Have landlords ever complained that they don’t want to deal with lawyers because lawyers will mess things up and it takes too long and yada, yada? You bet. Do I think it’s a good idea to plunk down tens of thousands of dollars (if not more) on a place without having someone who does this for a living take a look at the lease? I believe you know the answer.
As always, I’m here for any questions.
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This blog post doesn’t establish an attorney/client relationship. This is general legal advice and should in no way be used as specific legal advice for your specific legal situation.