Leasing Space

There are a number of different models for obtaining space to hold classes: own the space, lease the space, find a host location to hold classes (think YMCA or gym that you neither rent nor own).  The WTSDA has many affiliated schools in each of those categories.  But, commercial locations seem to lease space more often than the other two options.  I say this because looking at a lease is one of the things that I get asked to do most often.  Many prospective school owners believe they have no (or at least very little) choice in the terms of the lease presented to them by the future landlord.  However, that is not always the case.  While it is true that it is very unlikely you can get everything you ask for, sometimes it just takes a little bit of time to discuss and negotiate.  After all, most of the time, it doesn’t hurt to just ask.  What should you be asking for then?  Here are a few of the things you should be thinking about when reading that lease you were just handed.

1.  The lease will (virtually always) significantly favor the landlord.  The landlord wrote it after all – or their lawyers did.  So, they are obviously looking out for the interests of the landlord.  You need to keep that in mind.  If you read something and think that it doesn’t seem fair for you to be required to do something, it might not be and it might be intended to be that way.  Make a note and see if you can change the item.  If you read something and you aren’t crystal clear on an item, you also need to ask.  While there is a theory in contract law called “contra proferentem”that is latin for “against the offeror” where an ambiguity will be interpreted against the person who drafted the document – do you really want it to come to that?

2.  The term and termination.  Often, a commercial lease will automatically renew unless you provide affirmative notice (at least a certain amount of time ahead) that you don’t want it to renew.  And, renewal for a length of time equal to the original term is common.  But what if you are ok with a first term of 5-years but are planning for growth and then don’t want to be stuck for an additional 5-year term?  If you want additional terms to be one or two years, you should ask.  This is where people often have leverage.  Although it may come at a price.  I will talk more about rent increases, but keep in mind that it is common to have the landlord have the right to increase rent with every renewal term.  A shorter second (or subsequent) term might be easy to negotiate if you are willing to discuss the impact on price increases.  Termination is often only upon certain events and many times requires the payment of a fee based on the reminder of the term, even if a replacement tenant is found.  You can ask to reduce the payments by the amount of rent paid by any future tenant.

You should also consider options for expansion.  If you are lucky enough to need a bigger space, can the landlord accommodate?  And if they can, what is the impact on the lease?  Sometimes you can work a clause into the lease that permits you to move to another property the landlord owns that can accommodate your needs, without penalty on the existing lease.

3. Price.  What’s included?  Insurance, property taxes, maintenance?  Are utilities included? Price may or may not be listed in one section of the lease. Typically, it is easy to find “rent”.  But often, things like your pass -through share of property taxes is listed in another section of the lease.  In order to have an understanding of the total cost, you need to look carefully for other fees that may or may not pass-through to you, including “CAMs”.  That’s a term that you may not be familiar with.  Common area maintenance charges.  These are typical in a “triple net lease”.

A triple net lease is one where the landlord passes through all expenses to the tenants on a pro-rata basis. CAMs charges are included in that.  They typically are added to the “base rent” as “additional rent”.    It is not uncommon for CAMs to include administrative fees, maintenance fees, costs for repair and replacement of roofs, lighting, plumbing, electrical wiring, HVAC, snow removal (think walkway and parking lots – they need to have the snow cleared and you typically pay for it as part of CAMs) etc., for the common areas.

You can try to negotiate a cap on some or all of the CAMs.  Sometimes you can get a fixed fee (although for folks in snowy climates, snow removal is often excepted out of any fixed cost) and you can attempt negotiate exclusions to items that passed through to you (for example, exclude costs due to the landlord’s or another tenant’s negligence).  You should also ask for the right to obtain an accounting of the charges and the right to audit the landlord’s books to ensure that these amounts are properly calculated.

It is also important to understand who space is calculated and allocated so that you can ensure the CAMs charges are correctly apportioned to each tenant.

Increases are typical, at a minimum, at the beginning of each new term.  Sometimes they are for set amounts and other times they are tied to inflation (CPI, etc.).  It is often a good idea to set out any potential increases right in the lease.  Especially if the increases occur during the initial term.  Don’t be afraid to include a chart in the document (or as an exhibit) which makes it crystal clear what the rent is during any given month.  If the increases aren’t set amounts, one thing to look for is if the amount is capped.  If the increase is tied to something that is a moving target, like the CPI, I would ask for something like “the lesser of $X or the CPI”.  If the landlord has the right to merely notify you of an increase prior to renewal, make sure you get that notice 15/30/60 days before the notice period for termination.  You don’t want to not notify that you will terminate and then get told rent will double and have it be too late to do anything about it!

Landlords often also “give away” a free month (or more) at the start of a brand new lease.  Make sure this is properly reflected.

5. Improvements (and repairs – wear and tear, force majeure).  This one can be tricky.  Some improvements, to be fair, should probably be your responsibility.  But, if you make improvements in many jurisdictions those improvements become fixtures and you can not “unimprove” or remove before moving out.  What state is the premises in at move in?  Do you need to ensure it is in the same or better when you leave (almost 100% of the time or it will cost you)?  If your use of the facility causes damage, you should probably be responsible.  But, if the water heater that was there when you moved in is 20 years old, should you have to be the one to replace it?  If a tree falls down and breaks the front window, who is responsible – you, your insurance, the landlord, the landlord’s insurance?  If there is a flood or major storm and you can no longer occupy the premises, what are your options?  How fast does the landlord need to repair the premises?  Or, can you merely terminate without penalty?

6. Sub-leasing and assignment.  Many commercial leases prohibit the assignment or sub-letting of the space.  So, it is important that you understand what this means.  You can ask to sub-let or assign, with permission (such permission not to be unreasonably conditioned, withheld or delayed).

7. Signage.  Can you display a sign?  Is there a marquee and can you be listed on it?  Are neon lights prohibited?  Are there local ordinances that apply (e.g., some towns require permits and approval of signs before they are placed).  The landlord will not want to be responsible for your compliance with the law, but they are the ones with the property and you can ask if they are aware of any requirements before putting any signs up.  You should also ask about your remedy in the event any required approval (be it by the landlord or the local government) is not granted.

8. Permitted Usage (martial arts activities; marketing to fellow tenants of shopping center; birthday parties; after school programs; parking of a school vehicle overnight).

9 . Use.  It is crucial that you ensure your planned use is permitted.  You also need to make sure that the use provision is broad enough to cover any of the activities that you have planned for the future.  Think hard about the future and what you want from your dojang – you need to make sure that all potential uses will be permitted (and if there are requirements around any particular uses).

10.  Exclusivity.  I have seen a few commercial leases where there is an exclusivity clause – that it, it states that no other tenant can engage in the same business and sometimes (just sometimes) you can also get the landlord to cover a geographic area covering all properties they own.  For example, I saw a commercial lease where the landlord agreed to not rent any property to a business classified as a competitor of the tenant within a 10 mile radius of another tenant.  Here is where it does not hurt to ask!    But if you ask, be careful how the competitor is defined – the exact wording can make a difference (is an MMA studio a competitor?  Definitions are important here).

11. Personal Guarantee.  These are becoming more and more common.  This is a tricky item – you should consider it carefully.  There are options, however.  Consider:  (1) a time limit for the guarantee; (2) a letter of credit in lieu of the guarantee; (3) guarantee the rent for a set time frame after early termination; (4) offer a larger security deposit; (5) build in waivers for certain events (e.g., sale of the business); or (6) cap or limit the amount of the guarantee.   There may be other options as well – if you are using a broker you should discuss this with them.

12.  Remedy.  Now we are starting to talk about items which are more “legal” and less “business”.  Suing the landlord for damages is the first thing most people think of when considering remedies.  And this is a good option – what that means is that I would not want to give up my right to sue the landlord (if I had to, it would be in very specific and limited cases; I would try to avoid arbitration or mediation; I would not agree to a waiver and hold harmless that is a blanket exculpatory clause).  Remedies are something that your lawyer should review carefully and work with to negotiate specific terms.  In some cases, you might want the right to terminate the lease, abandon the premises – without penalty.  You should have provisions for temporary loss or use of the premises (see #5 above for examples of when).

13. Default.  Any breach should require certain notice and an opportunity to cure.  Termination or forfeiture of a commercial lease is legally justified in certain situations (breach of a material covenant or condition or a violation of applicable law) and there are two categories of grounds for termination (monetary and non-monetary).   Knowing that, any tenant should want all the details and options for curing a breach or terminating the contract as a result of a breach (timing, penalty, etc.) to be clear so that the tenant can understand their rights an options.

14.   Warranty disclaimers and indemnities (and other rights).  These are going to be in the lease and may very well be IN ALL CAPS (AND SOMETIMES BOLDED TOO). They are written this way to draw your attention to them (some jurisdictions require the emphasis in certain circumstances) so that you can’t claim you weren’t aware of what rights you are giving up.   However, the exact rights you have, and the rights you may be giving up, are jurisdiction specific.  In some places, courts have recognized an implied warranty of fitness or suitability, so you do not want to let the landlord explicitly disclaim these.  In other jurisdictions, you must have language in the lease addressing such issues so that you can sue for breach.   You should also be careful what you agree to indemnify the landlord for.  Typically, commercial lease indemnities are included to cover third-party suits.  But, any indemnity provided should not alleviate the landlord from its responsibility in the event of the landlord’s gross negligence, willful misconduct, reckless disregard or fraud.  You also may be asked to limit the time frame for raising an issue with the landlord, whether the limit relates to an informal notice for a small repair or to file a suit against the landlord.

15.  Relocation, demolition, insolvency.  Those three words are a mouthful.  And they are frightening situations because they are things that are outside of your control (I am assuming this is landlord insolvency).  Relocation provisions are designed to permit the landlord to relocate you.  Believe it or not, sometimes you are expected to pay the cost if the landlord wants to move you.  And if they move you, unless you have the right language requiring the landlord relocate you to comparable space (and the definition of comparable can be key) you may loose all your foot traffic and walk-in business.  Not to mention the disruption to your class schedule.  Although relocation may be minor compared to the demolition clause – if that kicks in and the landlord has the right to demolish the space, what then?  You need to understand the landlord’s rights, and your rights in these cases.   If the landlord files for bankruptcy, you should also know your rights.  A purchaser may assume the obligations under the lease or they may look to make changes.  If you negotiate these clauses well, you may have rights (e.g., termination) if these situations arise.

This list isn’t all inclusive, if you can believe that.  These are just some of the issues you should be thinking about when you get the lease, and you should be prepared to discuss with your attorney before executing a lease.

Some helpful terms that are often used by landlords:

  • build outs – improvements and/or modifications when new space is being finished to a tenant’s specifications
  • CAMs – common area maintenance charges
  • estoppel certificate – an “instrument” which prevents the signor from asserting facts different than what is contained in the document.  This is often required and it will contain certain facts relating to the lease
  • common areas  – places such as hallways, rest rooms, and elevators
  • demised area – the walled off and secured area of a leased space
  • gross lease – when the rent a tenant pays includes things such as insurance, property taxes, and maintenance costs
  • holdover – how much the landlord can charge if you overstay the termination of the lease
  • length of lease – this is the term; options for renewal and extensions included
  • net lease – when the rent a tenant pays does not include things such as insurance, property taxes, and maintenance costs and the tenant gets charged for such items separately
    • double net lease – taxes and insurance are included
    • triple net lease – taxes, insurance and maintenance costs are included
  • rent, including allowable increases or escalations – the amount you will pay
  • rentable square footage – combines usable square footage plus a portion of the common area
  • turn-key – space that is ready to occupy
  • usable square footage – the square footage rented and used exclusively by the tenant

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