What are main portions of the Commercial Lease?
As an attorney for almost 15 years, I've seen just about every type of lease you can imagine. In general, many leases are fair to both tenants and landlords. In the residential setting, the Washington Landlord Tenant Act provides a lot of protection for Tenants, but in a commercial setting, most tenants (especially small business) owners end up with terms less than ideal as they either don't try to negotiate or don't negotiate well enough. Below are some key points of a commercial lease worthy of focus in your business discussion.
Rent: This sounds obvious, but the commercial brokers of the world have created their own language that takes time to adapt to. For instance, why call it $2000/ month when we can call it $20/ SF? What does that even mean?! Why no transparency?
Rent is absolutely a negotiable thing in most leases. A .50 decrease in price/ SF can make a huge difference over the course of a lease. Use close comps and DON'T be afraid to negotiate at lease renewal if market conditions have changed.
What is CAM?
Common Area Maintenance charges, or CAM for short, are one of the net charges billed to tenants in a commercial triple net (NNN) lease, and are paid by tenants to the landlord of a commercial property. A CAM charge is an additional rent, charged on top of base rent, and is mainly composed of maintenance fees for work performed on the common area of a property. Bluntly, CAM is not really negotiable if the property has multiple tenants. That said, you should seek historic CAM charges to get a sense of what can be expected in the future.
Ability to Sublease?
Most Commercial leases provide the ability to sublease your right to a premises. The key is the standard by which the landlord may approve? Do they have the subjective right to deny the sublease at their discretion or must they allow a commercially reasonable tenant?
Parking/ Signage/ Hours of Operation:
Some of the most overlooked portions of a commercial lease are parking, signage, and hours. I had a restaurant that wanted to stop lunch service because it just wasn't profitable. The Landlord forced them to stay open and lose money because the lease said they needed to be open from 11-9. They wouldn't allow them to open later for liquor sales, but forced the lunch opening. In the end, the business struggled until we were able to renegotiate their lease to reflect their business needs.
Negotiating the Personal Guarantee:
For most small businesses, negotiating the Personal Guarantee is crucical. If the business fails, this can be the difference between huge financial loss and just moving on. If you can get away without a personal guarantee, that is obviously the ideal situation, but frankly very rare with most leases. Some alternatives we like to suggest to landlords are as follows:
Rolling PG: This allows for a PG for a period of time (6 months/ 1 year) past default for the Tenant to be responsible. This will help mitigate the loss for the business owner in the event of a breach of a longer lease.
Set period of Time: I really like this because it protects both the LL and the T. An example here is that we had a client sign a 10 year lease for a start up business. We were able to cap the personal guarantee to 4 years. Once that four year mark was met, the Tenant was able to celebrate that even in the most case scenario of business decline, they would be able to move on without a crushing financial blow.
There are many other items worthy of discussing, but I will focus on those in future Washington Commercial Real Estate blog posts.
For more information on Negotiating a Washington Commercial Lease, consider contacting a Kirkland Commercial Real Estate broker.
My Contact information:
Designated Broker/ Attorney
Rylee Park Properties
C: (206) 306-4034