December 9, 2004

Does your landlord have too much control?

  • Tenants need to know the four major lease risks that are often overlooked.
    Cirrus Tenant Lease Services

    For years the real estate adage "location, location, location" has been at the forefront of people's consciousness. Tenants would be better served if they thought more about their "lease, lease, lease."

    Four things to watch out for
    There are four key terms that are not sufficiently addressed in most commercial leases and often give landlords too much control.

    Use: Governs and defines the business you are permitted to conduct, and products/services you are able to provide in that particular location.

    Assignment/Subletting: Controls your ability to sell or transfer your business.

    Surrender responsibilities: Outlines what work/costs you are responsible for at the end of the term. Tenants may be required to restore or strip down their space back to the condition it was in prior to occupancy.

    Option to review: Clause in the lease that provides the tenant the right to continue occupancy of the premises beyond the original term. The option often establishes when the parties may engage in negotiation of the rental rates and what method is used to arrive at these rates.

    Having worked with many successful businesses, large and small across North America, it has become evident that even the most conscientious tenants need help in one vital area of their business operation — lease administration.

    Tenants frequently sign leases without fully understanding what they are agreeing to.

    Your lease document should be drafted to protect your interests, establish how you operate your business, and provide you with maximum flexibility so you can be in control of your own destiny.

    A "good location" — originally chosen for its access, visibility, amenities or tenant mix — is no longer a good location if it is governed by an inadequate lease.

    Uninformed tenants are at greater risk of exposing themselves to circumstances that could seriously sidetrack their businesses. Below are four very plausible scenarios, each with potentially grave consequences.

    Scenario 1

    After months of planning and significant marketing expense, your software company is offering your preferred clients systems training in your office on weeknights and weekends in an effort to bolster their productivity and reliance on your solutions.

    What's the problem? Your "use" clause dictates that you may only conduct business Monday to Friday from 7 a.m. to 5 p.m., and you are restricted from conducting any business deemed to be of a "training or educational nature" in the premises because a school in your building has a pre-existing exclusion with the landlord. You lose several of your clients who were put off by this turn of events.

    The fix: When negotiating the lease, make sure your use clause doesn't restrict you from offering any potential products or services associated with your particular business. It is wise to be aware of any other exclusions neighboring tenants have in place when you sign your lease.

    Scenario 2

    Your company is restructuring and although you have more than four years left in the lease you negotiated last year, you are instructed to sublet your premises as you and your staff will be relocating to the head office. You hire a broker to market your space and quickly find a subtenant.

    What's the problem? Your landlord refuses to consent to the sublet and the "assignment/subletting" clause in your lease even allows your landlord to terminate your lease for merely requesting a transfer. You are forced to remain in your space for the remainder of the term and your company is on the hook for the rent outlay.

    The fix: The assignment/subletting provision in your lease should be drafted in such a way that it enables you to transfer your lease when you decide it is the right time to do so. Your landlord should not be able to either withhold consent unreasonably or terminate your lease.

    Scenario 3

    You have operated a thriving dental practice in a shopping center for 15 years, and your lease is expiring at the end of the year. You have already notified your landlord that you won't be renewing and you look forward to opening a newer, larger practice in a regional center down the street where the more desirable demographics have shifted to.

    Ten months pass, and it's now a few weeks before you vacate the premises, you have 95 percent of the work done in your new location and are excited that the grand opening is just around the corner.

    Your current landlord informs you that you have to restore the premises back to the original condition it was in prior to occupancy — potentially to four bare walls. The restoration will cost you $75,000. This additional cost comes as a surprise, as you had thought your only obligation to the landlord at the end of term was to give the key back on the last day.

    What's the problem? Your "surrender responsibilities" clause in your 15-year-old lease clearly stated that you were responsible for restoring the premises to its original condition when your lease expired.

    The fix: When negotiating the lease, make sure your surrender clause is reasonable. In general, it is reasonable to require a tenant to remove trade fixtures, repair any damage that results from that process, and stipulate that all other improvements and alterations in the premises remain intact and become the landlord's sole property. A clause that requires a tenant to fully restore premises to its original condition can be extremely costly.

    Scenario 4

    You are the owner of a successful accounting firm. At the end of February, the property manager sends you a letter notifying you that your lease expires at the end of June and you have until April 30 to notify the landlord if you are going to renew or not.

    Many weeks later, you are headlong into tax season, by far your busiest time of the year. Your property manager sends you a reminder email and asks if you're going to renew, so you apologize for being so busy and failing to follow up and quickly reply that you are going to renew.

    At the beginning of July, the landlord sends you a new invoice: the rates have gone up 60 percent.

    What's the problem? If you had reviewed your "option to renew" clause carefully, it provided you with a window within which you could negotiate the rental rates with your landlord, failing which he would set the rates. Your reply email to the property manager constituted confirmation that you were renewing, but you did not engage the landlord in negotiation of the rates, and therefore he set them unilaterally.

    The fix: A fairly written option to renew should provide you with a reasonable period of time to notify the landlord of your intent to exercise the option as well as sufficient time to negotiate rates. It is paramount to have a mechanism in place that allows for resolution should negotiation with your landlord not be fruitful. If the parties can't agree on what current fair market rates are, a tenant should be able to turn to arbitration as a means of resolving the issue.

    Landlords often present tenants with their "standard form" lease, a document predictably drafted on behalf of landlords with their best interests in mind.

    Landlords ordinarily do not advise that these documents are negotiable in the hopes that tenants will simply sign off.

    Tenants must be aware that standard leases are rife with potential risks and inequities that provide landlords with an inordinate amount of control over their business and livelihood.

    Mark Redhill, a senior lease consultant with Cirrus Tenant Lease Services in Toronto.

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