If you’ve been following our series for the last couple of months, you’ve seen us talk about leases from the standpoint of both the tenant and landlord. We’re wrapping up that series today with part two on what landlords need to know about leases.
We talked about permitted uses in the article for tenants but it is also important to cover uses from the standpoint of a building owner. Before you begin any lease negotiations, you will want to decide what uses you are comfortable with for the space that you are leasing.
Additionally, if you have other tenants in the building, you will need to make sure that new tenants’ permitted uses do not result in a violation of existing leases. Once you begin negotiations with your new tenant, watch the wording of the lease carefully. Violations of this sort can be very expensive!
Sophisticated tenants will word things specifically to allow for potential future business endeavors. An example may be a coffee shop that currently only sells coffee and light snacks but may want to expand into a full restaurant or an entertainment venue in the future.
Leases that allow for this may be worded thus: “tenant may use the premises for the sale of coffee and other light refreshments, as well as any other lawful use.” It is especially important to have discussions with your future tenants or add clauses if you are concerned that they will pursue a liquor license or sell products or conduct activities that you would not want to have in your building. Remember, you are making a deal now that must stand for 5, 10 or even 30 years. Think carefully about the future!
Primarily, options benefit only the tenant, though they can also be useful for landlords in some rare situations. Leases have a finite term, whether that be three years, five years, or longer. Options allow tenants the unilateral right to decide that they will stay for longer without any further negotiations.
An example of an option in a lease may look like this: “We’ll lease for 5 years but during the last x months of the lease, we can opt to extend for another 5 years.” Whether it makes sense as a landlord to accept the request / demand for lease options or not depends on the size of the dog in the fight, and how important it is for you, the landlord, to make this deal.
As with everything else in the lease, options are a negotiating point. If the tenant is going to invest $100,000 in fixing up your space, giving that tenant the right to extend for another five years may well be worth it.
Looking at the Lease as a Whole
The most important thing that a commercial real estate agent and a landlord can do is review the lease as a whole rather than piecemeal. A productive lease negotiations will involve trade-offs, and if one party or the other feels that the trade-offs aren’t worthwhile, you won’t end up with a signed document!
Always review a lease with a professional commercial real estate agent to prevent problems in the future. If you have questions about a commercial lease, reach out to Art Putzel today – (443) 921-9326.