Negotiating Options, Renewals, and Subleasing: Strategies for Commercial Tenants and Landlords
A commercial lease will be an important part of any business, and most landlords do not expect people to immediately sign the first draft of a proposed lease as negotiations are expected in these situations. The commercial lease agreement a company is originally presented with will certainly favor a landlord, so there will often need to be certain modifications.
The bottom line remains that negotiating an effective commercial lease will be important because many companies focus only on rent without paying attention to many other hidden costs that can be quite significant in some cases. When you are in the process of negotiating a commercial lease, make sure you have an experienced Los Angeles small business attorney on your side.
Understand Subleasing and Assignments
Many commercial landlords had been reluctant to let tenants sublease their spaces or transfer leases to a third party, and several commercial leases restricted people’s subleasing and assignment rights even when it was allowed. The COVID-19 pandemic drastically changed exit strategies for many companies who either had to downsize, went bankrupt, or suffered major revenue losses.
There is now a greater emphasis on exit provisions in commercial leases for companies that have concerns about fulfilling their lease obligations. Subleasing any space to another company can be one way for a company to recoup some costs of rent.
With a sublease arrangement, a primary tenant will take over many of the same responsibilities as a landlord with respect to a subleased space, including collecting rent and fielding complaints. The primary tenant will also be responsible for ensuring that a subtenant satisfies their lease obligations.
An assignment of a lease to a new tenant can be another option. With an assignment, a new tenant replaces an original tenant and will assume all of the rights and obligations of a lease.
The difference between subleasing and an assignment is that an original tenant retains a contractual relationship with both a subtenant and landlord under a sublease, while there will be no contractual relationship between a subtenant and a landlord. With an assignment, a replacement tenant’s only contractual relationship is with a landlord and the original tenant will have no further property rights or obligations although the original tenant could still be sued by a landlord if the replacement tenant breaches any terms of a lease.
Subleasing and assignment both allow original tenants to reduce their rent burdens and give landlords consistent payment of rent. Assignment will only make sense for an original tenant when the space is no longer useful to them and they do not plan to return.
Termination Options
Tenants should consider negotiating for early termination rights in case their businesses are affected by future downturns or other ordeals. An early termination right will allow a tenant to end a lease before the agreed lease term expires.
For many office leases, the termination right will often be structured such that a tenant can terminate the lease on a set date, such as a tenant being able to end a five-year lease term after the second year. Retail leases could involve tenants having termination rights when agreed gross sales targets are not satisfied.
Landlords typically ask tenants to pay fees to exercise early termination options. A termination fee could be several months’ rent.
Many landlords will spend money to prepare a space for a tenant and spread the costs over an agreed lease term. Should a tenant exercise an early termination right, they may have to reimburse the landlord for the unamortized portion of the costs.
When a landlord refuses to allow any early termination option, a tenant could achieve a similar result by getting creative with their lease term. This will mean that instead of agreeing to a longer-term lease, a tenant could ask for a shorter term with multiple renewal options that allows the tenant opportunities to decide whether continuing with a lease will make sense.
Force Majeure Clauses
A force majeure is a kind of clause included in contracts to remove liability for unforeseeable and unavoidable events that interrupt an expected course of events and prevent people from fulfilling their obligations. Such clauses often cover natural disasters (or acts of God) and other human actions.
COVID-19 again made many companies evaluate these clauses because many courts have not concluded that force majeure provisions were intended to apply to COVID-19 circumstances. These concerns stress the importance of people including much more specific language as it relates to their force majeure clause.
Other Concerns
Commercial leases should also contain specific provisions relating to heating, ventilation and air conditioning (HVAC) systems and whether a building will have proper air filtration. A company may also want to make sure that there are certain entrance requirements relating to their business.
A company will want to know whether a space will be large enough to accommodate certain protocols relating to social-distancing. It will also be beneficial to know whether a company can retrofit workspaces or design them to help limit the amount of personal contact.
Contact Our Los Angeles Small Business Attorney
If you are currently in the process of seeking a commercial lease anywhere in California, you do not want to be handling things on your own. Steinberg Law will be able to guide you through the entire process and can help you negotiate the commercial lease that will be most favorable to you.
Our firm has served countless companies conducting business statewide, nationally, or globally. You can call (818) 855-1103 or contact our Los Angeles small business attorney online to schedule a free consultation.
