Negotiating Leases As A Commercial Tenant

As a commercial tenant, you are held to a higher standard than a residential tenant – there are minimal statutory protections, and the legal policy landscape presumes you are sophisticated, capable of reading and understanding the lease agreement, and represented by competent counsel. The following is a list of items to keep in mind as you are negotiating your Lease.

1. Letter of Intent. The Letter of Intent/Request for Proposal (“LOI”) contains all key terms of the Lease, including square footage, term, renewal options, base rent, operating expenses, early access rights, and tenant improvement allowance provisions. A robust and well-drafted LOI will save you substantial legal fees, as it is far more efficient to negotiate terms via a 5-10 page document than via a 40-100 page document. Consider bringing counsel in to help negotiate the letter of intent, instead of only hiring a lawyer after the letter of intent has been signed.
2. Net or Gross? Your rent will either be (a) Full Service (Gross), meaning that Tenant pays a fixed monthly rate and Landlord pays all utilities, taxes, and other operating expenses (collectively, “Operating Expenses”); (b) Triple Net (NNN), where Tenant pays base rent plus its proportional share of Operating Expenses; or (c) Modified Gross, where Tenant pays base rent and both Tenant and Landlord split Operating Expenses. Get clarity on financials early on, including estimated Operating Expenses, so you’re not surprised by the extent of these costs in the middle of negotiations—or worse, after you've signed your Lease.
3. Tenant Improvements; Allowance. Before signing an LOI for a site, determine how much construction work you’ll need to make the premises suitable for your business (“Tenant Improvements”). You can elect to perform the Tenant Improvements yourself, in which case Landlord will typically provide a certain amount of reimbursement commensurate with the rental rate and term of the Lease, and you’ll want to negotiate services provided during construction, parking, and early access rights. Alternatively, Landlord can perform the Tenant Improvements on your behalf. If you choose the latter option, pay attention to the total cost of Tenant Improvements, and whether Landlord intends to charge you for any overages.
4. Permitted Use and Access. Ensure your permitted use covers all uses you intend for the premises, both main and ancillary. For example, will you sell retail products ancillary to your main use? Similarly, ensure you have access rights during all times when you (or your clients, invitees, or visitors) will need access to the premises. If possible, the LOI (and Lease) should provide that Landlord cannot relocate you without your consent. Finally, ensure that your permitted use complies with applicable laws, including zoning restrictions.
5. Assignment and Transfer Rights. If your company has affiliated entities, consider including assignment rights that are not subject to a heightened Landlord consent requirement.
6. Subordination. If your Landlord has a mortgage on the building, ask for subordination and attornment protections – ideally, you will only have to attorn to your Landlord’s lender upon their default if the lender also agrees to honor your rights under the lease in the event of a foreclosure.
7. Guaranties. Landlords typically require guaranties for smaller tenants, especially those with limited operating history. While Landlords will request an absolute guaranty of all the tenant’s lease obligations, guaranties can be negotiated to be reduced over time or limited to certain dollar amounts. Certain jurisdictions, such as the City of Seattle, have also codified caps on personal guaranties (see Seattle Municipal Code Ch. 6.104; Ordinance 126982, effective January 29, 2024).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.