Livonia, Northville, and Plymouth’s Commercial Lease Attorney
Commercial Lease Drafting and Negotiation
The parties to a commercial lease are accorded broad latitude in defining their rights and obligations. Unlike residential leases, Michigan law imposes few limitations on drafting commercial leases. The lack of controls can lead to very one-sided leases drafted by sophisticated and experienced landlords with little recourse for the tenant after the signing of the agreement. Commercial leases are also several pages long, very complex, and written in an archaic language. For these reasons it is important to involve a real-estate attorney early in the process.
Common Landlord Friendly Clauses Tenant Should Negotiate
In almost all cases, a commercial tenant should retain an experienced real-estate attorney prior to the creation of the letter of intent. While most brokers and tenants focus on the base rent per square foot and tenant improve allowances, and consider the rest to be boiler plate, as often is the case the devil is in the details. Some of the common landlord friendly provisions that Matt Devitt Law, PLC will help negotiate to better allocate risk include.
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Aggressive Tenant Default Clauses: In commercial leases, landlords do not have a general duty to mitigate rent/damages and more importantly can accelerate the rent payments for the balance of the lease. Imagine that you are a day or two late on a rent payment, and you find that you have been evicted and owe seven years of rent immediately. While this sounds impossible, many boilerplate commercial landlord default leases are written exactly this way.
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Triple Net Leases with Broad Definition of Common Area Maintenance (“CAM”) Charges: Most commercial leases have both a base rent and a variable CAM rent. Landlords will often try to include capital expenses (i.e. replacing a roof) or general overhead (salary for owners) in CAM expenses. This can lead to high dollar fluctuations and also defeats the purpose of CAM which is to share only operating expenses to manage the common areas of the facility.
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Personal Guarantees: Entrepreneurs believe that when they create a corporation or limited liability company that they have protected their personal assets from the businesses liability. While this is true, many commercial leases will have a personal guarantee which allows the landlord to collect directly from personal assets. Also, many personal guarantees allow for the guarantor to be the first priority. Imagine the tenant default mentioned above with the obligations being yours personally.
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Clauses that Allow for Landlord to Make Arbitrary Decisions: Many clauses in a commercial lease will state that the tenant must receive written consent from the landlord (e.g. assignment and subletting). While this sounds fair, the reality is the landlords decision could be completely arbitrary, meaning they could not like the shoes you are wearing and therefore not allowing you to sublease where another tenant may. Simply adding the words; which will not be unreasonably withheld, conditioned, or delayed to the request of written consent takes the arbitrariness out of the equation.
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Not Including a Right to Quiet Enjoyment Clause: While many tenants assume that they are protected from being disposed by a landlord if they are not in default, and that a landlord cannot interfere with the commercial tenants declared use of the premises, this is not always the case. A Michigan Supreme Court case Walker & Co v Davis held that no covenant shall be implied in any conveyance of real-estate. It is always a good idea to put a basic Right to Quiet Enjoyment in any commercial lease.
Different Types of Rent in Commercial Leases
While no two commercial leases are the same, there are three general constructs for how rent is calculated. Understanding the differences can save you a lot of rent and future surprises.
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Gross Lease: This is the simplest when it comes to determining rent. In a gross lease, the rent is a specific amount and no other payments are generally expected. The landlord retains the obligation to pay real estate taxes and to obtain whatever insurance it desires.
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Net Lease: This is the preferred lease for landlords in southeast Michigan. In a net lease the tenant pays some or all of the landlord’s expenses; often referred to as triple net (Real Estate Taxes / Operating Expenses / Insurance / Utilities) in addition to the fixed rent. This is preferred as it helps to allocate the risk of variable expense from the landlord to the tenant. When properly drafted, triple net leases can work well for both parties.
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Percent Rent Leases: Lease that ties all or a portion of the rent to a percentage of the tenant’s gross sales. Percentage rent leases while not as common are typically found in a retail context and are more common for shopping centers.
When to Retain a Real-Estate Attorney to Negotiate on Your Behalf
The short answer is as soon as practicable. This generally means before the Letter of Intent has been drafted. The letter of intent while typically not binding does set forth the direction of the negotiations and if a tenant gives away too much early, it could be difficult to retrieve during the lease negotiation.
It is also important to discuss how to remain in a power position from a negotiating standpoint. Similar to home buying, it is important to keep an open mind and to negotiate multiple sites at the same time. Landlords are given broad latitude to allocate the risk of the lease and may be more likely to move from their position of they know they are just one of many sites you are considering.
While entrepreneurs are less adverse to risk than most, it is still a good step to retain an experienced real-estate attorney who will review every clause in detail and make sure that the agreement provides clear definitions of rights and obligations, as well as, fairly allocating risks between all parties to the lease.