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Seven Key Commercial Lease Terms to Examine Before Signing

When negotiating a commercial lease, every clause in the agreement must be examined to see how it defines your rights and responsibilities as a tenant, and the rights and responsibilities of the landlord. Here are some of the many common lease terms you should look for that corporate real estate tenants need to negotiate:

Clearly Defined Premises

Many leases do not clearly describe what you are renting. Your lease should clearly define your space, its size, and whether the size is on a rentable or usable basis. If your lease refers only to your usable space, get an explanation regarding the difference and include that language in the contract.

Reasonable Insurance Requirements

Most leases will require tenants to carry sufficient insurance to protect landlord and tenant against unforeseen occurrences. This is reasonable, but how much coverage is the landlord demanding? Review the insurance terms in the lease carefully and see if you need to negotiate what a reasonable level of insurance would be.

Option Terms & Notification Periods

Renewal options can vary, and you need to align these terms with your anticipated business growth plan. Preferably, your options should be under your control. That is, you should have to notify your landlord of your intention to renew your lease, not have it automatically renew unless you request otherwise. Also, the execution dates for exercise of the options must be laid out clearly to eliminate future disagreements.

Subletting & Assignment Clauses

Landlords prefer that the tenants with whom they initially contracted remain as tenants. As time goes by, however, your business space needs may change. You may need to vacate a space early because you no longer need such a big space (possible in an era of virtual workforces) or because you outgrow it. Negotiate the ability to either sublease your space or assign your lease to another tenant so that landlord’s consent shall not be unreasonably withheld.

Indemnity Provisions

A lease agreement is a business transaction between landlord and tenant. Your landlord will typically include lease terms that indemnify them against actions you take on the premises for which they could be held liable. Sometimes, however, the indemnity sought by the landlord is overbroad and unreasonable.

Early Termination

Including early termination clauses in your lease that specify when you or your landlord can terminate the lease can be reasonable. Watch out for termination clauses that could be harmful to your interests. Negotiate out of the agreement a “Termination for Convenience” provision, for instance, that could allow them to move your business out of their building under circumstances not caused by you.

Lease Holdovers

When you stay in your space beyond your lease’s termination date, you are considered a “holdover tenant”. Negotiate this possibility ahead of signing your initial lease. If you need to stay in your space for a time after you have terminated the lease, you want to be able to anticipate what the rent will be during that holdover period. Otherwise the landlord is free to make you an offer that is advantageous to their interests, which could reflect currently available rent in that neighborhood and class of office space. Work with your landlord upfront to insert holdover language that both of you find acceptable.

Work with a Real Estate Attorney when negotiating leases

Poniatowski Leding Parikh Law Corporation is an established firm with over 60 years of combined experience in business and real estate matters, including landlord rights, tenant-landlord conflict resolutions, commercial property contracts and agreements, negotiations and litigation, creditors’ rights/bankruptcy law, trusts and estates, and family law. We represent business and commercial real property clients of all sizes throughout California.