40 WAYS TO REDUCE OCCUPANCY COST/ RISK IN 2009 (Negotiating Tips for Commercial Tenants and their Brokers and Attorneys)

1. Eliminate Personal Guaranty - The landlord can only look to the tenant entity in case of default.

2. Eliminate Spouse from Guaranty - The landlord can look only to the individual guarantor, and may not be able to attach assets which are owned jointly between spouses.

3. Limit Personal Guaranty to a fixed time period - The guaranty expires after said period.

4. Limit Personal Guaranty to a fixed dollar amount - This creates a maximum cap for which the guarantor is liable.

5. Obtain a “kick-out” clause, giving the tenant the right to terminate the lease prior to the end of the term, by paying a penalty. While most landlords will be reluctant to grant “kick-out” clauses, they are more likely to be granted for triggering events which are detrimental to a tenant’s occupancy such as the loss of an anchor tenant or the reduction of parking areas.

6. Assignability. - Assigning the lease to a partner or purchaser should always be permitted, although the tenant may have to remain liable on the lease. Assigning or subletting the lease to another tenant, if it is no longer feasible for the original tenant to lease the premises should also be provided, but the tenant should expect (i) to need the landlord’s permission (and there should be provision in the lease for the landlord to not unreasonably deny permission for same) and (ii) the tenant should expect to remain liable on the lease.

7. Increase broadness of Use Clause. - Allows the tenant flexibility in how it operates its business, and its ability to add or delete products and services. A broad use clause will also allow greater flexibility for the tenant to assign or sublet the lease.

8. Use less lease length and more option periods. - Shortens the length of tenant liability while still giving the tenant the option to remain and operate tenant’s business.

9. Get as many options as possible with the longest terms possible. - Gives tenant more control over the space, and protects against increasing rents.

10. Re: Common Area Maintenance (C.A.M.) - Prepare a list of exclusions from the definition of CAM, which list should include: “salaries of executive personnel”, “capital expenditures” and “advertising expenses”.

11. Cap Common Area Maintenance, Taxes and Insurance increases. - Limits tenant’s costs.

12. Eliminate Space Substitution (relocation) Clause. - Relocating tenant will almost always, adversely affect tenant’s business during the relocation. If the clause cannot be negotiated out of the lease, the tenant should ensure that the relocation is at the landlord’s expense (including dismantling and re-attaching all equipment and trade fixtures) and the new space is completed prior to tenant having to vacate the old space.

13. Pay CAM % based on total rent only, without off-set for anchor tenants or vacant space. - Ensures tenant pays only tenant’s fair share (pro-rata) of operating expenses.

14. Eliminate administrative fees from CAM. - Reduces CAM and protects tenant from overcharges by landlord.

15. Cap management fees in CAM. (4%-6% is typical). - Reduces CAM and protects tenant from overcharges by landlord.

16. Obtain the right to audit CAM charges. - Protects tenant against landlord overcharges.

17. Increase Grace Period for late rents. - Gives tenant additional time prior to default and penalties.

18. Decrease Late Payment Penalty. - Lowers tenant’s potential costs.

19. Reduce Events of Default. - Lowers tenant’s risk of defaulting on Lease.

20. Increase time allowed to cure defaults. - Gives tenant more flexibility before landlord can enforce its remedies.

21. Define “Default” so that tenant is not deemed in default of lease until after the expiration of notice and cure periods. – Allows tenant to assign the lease and exercise options that are typically not permitted if tenant is “in default”.

22. Reduce landlord remedies upon default of tenant and subject landlord’s remedies to landlord’s obligation to mitigate damages. - Limits landlord’s options/reduces tenant’s damages.

23. Decrease required Insurance amount. - Lowers tenant’s cost.

24. Limit landlord’s ability to lease adjacent spaces to parking intensive neighbors, and/or demand a minimum number of exclusive parking spaces. - Prevents tenant from facing a parking problem.

25. Obtain a broad exclusivity clause. - Reduces tenant’s competition potential.

26. Retain ownership rights to interior furniture, trade fixtures and equipment (clearly defining such assets). - Allows tenant to retain more of its assets.

27. Shorten landlord rebuilding period after a casualty. - Forces landlord to put tenant’s space back in operable condition sooner.

28. Obtain tenant right to rebuild after a casualty. - Gives tenant the option to do its own repairs if landlord is too slow, and charge back expenses for same to the landlord.

29. Obtain right to make repairs if landlord defaults in its maintenance/repair obligations and offset rents against such tenant repairs. - Allows tenant to do repairs when needed, and offset the cost (often, lower than what landlord would have charged) against rental payments.

30. Obtain right of first refusal to lease adjacent space. - Allows tenant to expand into adjacent space.

31. Obtain option or first right of refusal to buy. - More relevant to smaller properties, this gives tenant the option to purchase the property, or the right to purchase the property at the same price and terms that a third party offers.

32. Make joining a Merchant’s Association an option, not mandatory. - Reduces tenant’s expenses.

33. Have landlord guarantee HVAC, electrical, plumbing, etc. for an initial time period, or commit to paying a threshold amount. - Will reduce tenant’s overall expenses.

34. No percentage rent (or establish a “break-point” before percentage rent accrues). - Reduces tenant’s expenses.

35. Detail permitted signage. - Assures tenant can obtain the signage it requires.

36. Make sure the property’s rules and regulations cover potential problems such as neighboring businesses who use too much parking, make too much noise, create obnoxious fumes, operate non-synergistic businesses (pawn shops, bingo parlors, strip joints). - Makes tenant’s occupancy more trouble-free. However, also make sure such rules and regulations are not too overbroad, restricting tenant’s use of the premises.

Prior to signing a lease:

1. Use a good mapping system to determine the demographics and competition in the surrounding area. - Insures that tenant is selecting the right site, and there will be plenty of business. Also, check applicable zoning to ensure that tenant’s use is allowed by the municipality the premises is located in.

2. Talk to existing tenants about sales activity, parking, crime, management practices etc. - Makes sure tenant is not getting into a bad situation.

3. Research the rental market for information on past and current deals. Makes sure tenant is getting a fair rental rate and terms.

4. Check with State Fire Marshall, Ohio EPA and US EPA databases for any environmental history at the site or surrounding area. Especially for industrial leases, consider a “tenant environmental audit” – Identifies problem sites and establishes an environmental baseline which helps ensure that tenant won’t be held responsible for prior problems.
----------------------------------------------------------------------------------------------
This information was provided compliments of The Schenk Company, Inc - Greg Schenk SIOR (614)-496-2715- www.irepthetenat.com -greg@irepthetenant.com and supplemented/edited by Stephen Richman, Esq, of Kohrman, Jackson & Krantz, PLL- sdr@kjk.com

No comments: