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  • Kevin Cleveland

True Confessions of a Landlord Counsel: What a Commercial Tenant Needs to Know When Negotiating a Le

Part I: The Premise: Commercial Tenants Do Not Negotiate Their Best Deal.

After over 30 years of negotiating leases representing both landlords and tenants you tend to notice a few things about the parties with whom you deal. One that stands out most is that most commercial tenants will leave a lot on the table if they do not have a seasoned leasing attorney guiding them through a 40-60 page document that the landlord typically prepares in its own favor. It is a landlord’s business to know what a lease is all about and a tenant’s business is usually anything else but that. Since most commercial tenants typically lease only one, maybe two, locations, they tend to look at their leases as a liability. The general exceptions to this rule include most retail tenants (excluding mom and pop retailers), and large regional and national office and industrial businesses, who have multiple locations and tend to look at theirs leases as assets.

Why an asset? This may seem more logical when applied to retail tenants who put value in the adage “location, location, location” as they want to position their stores where a large number of potential customers will see their wares. However, all these large companies, industrial and office alike, with experience in dealing with dozens if not hundreds of leases, have learned that it is their company’s net worth that brings value to the landlord’s property, both in the eyes of the landlord and perhaps more importantly in the eyes of the landlord’s lender. A financially strong tenant will give the landlord a more valued security for its lender, which may translate to a better interest rate on its loan (or getting a loan at all), and the sophisticated tenant will feel that it should share in this better deal, either by lower rent, or other concessions in the lease.

Icing on the cake for a landlord with a financially strong tenant is if that tenant also leases a large amount of space in, if not all of, the building. Here the economies of scale are also at hand. Typically, the landlord will prefer to deal with fewer, rather than many, tenants on its property that it manages. Among other things, there will be fewer leases to negotiate, less cost to divide its space into separate smaller premises, less remodeling with smaller tenants moving in and out of spaces, and fewer utility meters to install. Also, in the instance where the tenant leases the whole building, the landlord may be able to shift more, if not all, of the management, maintenance, and upkeep of the building on the tenant (who in turn may be able to do it at a cost less than what the landlord would charge).

This is not to say that a commercial tenant will obtain lease concessions only if it is a “Big Fish” renting out a lot of space. Any good company with healthy financials and a strong track record of performance that shows that it can handily afford to pay the rental due under the lease should be entitled to some lease concessions, if the tenant is smart enough to ask for them. The question then becomes knowing what to ask for. For that, the tenant will need the help of a good broker and a seasoned lease attorney.

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