Several recent lease reviews and negotiations (as well as a number of cases where a tenant either signed a lease after simply confirming that the stated rent, term, and security deposit were accurate, or else decided to “play lawyer” and “save” legal fees) reflect how the “penny-wise and pound foolish” principle followed by many small companies unfortunately often results in the loss of many more pounds indeed than a small business owner thought imaginable. Avoiding low four-digit legal costs of perhaps as little as $1500, which should have been pencilled in as necessary start-up costs, can easily result in mid-five figure losses of perhaps $15,000-$50,000.
The surprises and issues not addressed were well beyond what the mere economic terms reflected in the broker’s term sheet or the letter of intent signed with the landlord (owner), although, astonishingly, sometimes those base economic terms likewise are not reflected properly in the lease. In one, involving a beauty salon, a simple reading of the interplay between “effective dates”, commencement of term date, free rent period, and rental commencement date (all terms often found in the same lease document), against the letter of intent caused a small change in the lease to result in an $8,000 rent swing in favor of the tenant, well more than the legal cost of review and modification of dozens of other similarly tenant-detrimental provisions.
Some of those others, all worthy of being given equal weight in terms of savings on the occurrence of a bad event, include assuring that the tenant’s security deposit will not be lost on a sale by the owner (which can easily happen), and removing from the owner’s tool kit the many arbitrary rights written into the owner’s lease form on the ground it is “his or her’s” center, with the result, for example, that the tenant’s business can be interrupted or shut down for substantial periods of time without any compensation. And then there can be the obligation of the tenant with respect to the HVAC. What a surprise it would be to learn that under the terms of the lease the breakdown of the cooling units means the tenant had to pay the cost of new ones! Or that the method used to calculate the tenant’s common area percentage had the tenant paying the CAM and real estate tax share for the spaces the owner could not lease out!
In another lease, the landlord loaded up on its tenants objectionable “pass-through” charges, many of which it would back off from if only an attorney had had a chance to point out to the owner’s attorney that these were not merely objectionable but not customary in the DFW area. Additionally, the lease failed to note the exclusion of various charges as pass-throughs which likewise could have been easily negotiated.
Convenience store leases present the same issues as in other leases, but have their own particular problems needing to be addressed, including matters re inventory, possible renewals, rights to purchase and rights of first refusal (both of which are usually poorly addressed so as to create no clear rights), and often critical accounting issues where the owner’s rent is partially, directly, or indirectly based on the operations of the business. Also in play is the fact that this industry’s use of attorneys is haphazard and more in a “last-resort” mode.
In a lease involving a dry cleaner, the tenants failed (too late) to make clear the limitations on the personal guarantees of the principals which the tenant intended and which the landlord, at the initial stage of interest might well have been inclined to accept. In almost all cases of unrepresented tenants, no protection is given to the tenant against the possibility of being forced out of the premises in case the owner runs into problems with its lender, even though this could easily be obtained without cost in a negotiated lease.
In yet another case, a style center negotiated for space through its broker with a national shopping center owner of small well-located strip centers. Because the shopping center owner dealt mostly with small business people, it had over the years created a form of over-the-top lease which warranted more than 100 changes, most of which were readily conceded by the landlord, whose representative acknowledged the provisions were used to create leverage against, or to allow an eviction of, any tenant whom the landlord for whatever or no reason no longer considered desirable. But these provisions were deleted or revised to being acceptable as soon as a light was shone on them. Examples included in this lease but found also in others were the owner’s right to demolish the premises and terminate the lease (in order to put the property to a higher use); the owner’s right to unilaterally relocate the tenant (without providing 100% compensation and assurances that the business’ operations would not be interrupted); requiring the tenant to hire a pest control company to take care of not only the tenant’s space but the spaces on both sides of the tenant’s premises; the retained right of the landlord to grant other tenants exclusive parking rights in front of the client’s premises; and in general the Owner’s right to make arbitrary determinations whenever in a hundred cases under the lease such a decision or determination is required.
In almost all cases of unreviewed leases, the simplest matter of assuring that the tenant receives notice and has a chance to correct claimed defaults is not handled, or if in the rare case even addressed, is not done fairly. Likewise, commercial leases are often drafted in ways that prevent a tenant from selling its business (and assigning the lease as a necessary part of the sale) unless the landlord, acting on its arbitrary rights given to it in the lease feels like it is OK.
There are no “standard leases”, although there may be forms in common use. But in matching up the tenant’s needs and the terms of the lease to meet the terms of the economic deal and the tenant’s understanding, there is no “”form” lease, although a landlord will often tell the tenant just that in an attempt to avoid having the lease reviewed. (And amazingly there are many tenants who swallow that whole.) It is a given that even negotiated leases must preserve the owner’s rights to reasonably control its own property. The point of having an attorney review, inform his or her client, and then address issues with the owner is not to make a lease “pro-tenant” but rather to make it reasonable and fair.
Failing to plug in lease review as a start-up cost is not in fact like buying a house and failing to obtain homeowner’s insurance. Because without insurance, the foolish homeowner nevertheless has a likely 99%+ chance each year of having saved the money and gotten by unscathed. Signing the lease after checking that the rent and a few other economic terms seem to be correct runs more than a 50-50 chance of getting bitten during the term, with the extent of the bite being the only uncertainty.
The process of review is straight-forward. First, we talk with the client about the terms of the lease deal as she or he understands it to be. This takes no more than 10-15 minutes. We then review the lease, based on decades of experience in handing lease transactions, or better yet the “term sheet” or letter of intent which preceded the preparation of the lease. There will ordinarily be dozens of questions and issues which deserve the client’s attention. We explain the significance of all the lease provisions, what the consequences might be, the ways (often several possibilities) the issue is customarily handled and what reasonable landlords do in response to objections. After setting the priorities, as established by the client, we then proceed in getting the lease into a form which resents no unfair threat to our client’s financial health.