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5 Things to Know When Negotiating a Lease

Written by Zana Tomich on March 16, 2015 Category: Business Law & Transactions

Last week, with much fan-fare, the John Varvatos retail store opened its first location in Michigan in the historic Wright-Kay building, on storied Woodward Avenue, in Detroit. The excitement of new retailers, large and small, continues to attract Tenants to Detroit that previously had not considered it an option. Yet, as new retailers begin to fill vacant storefronts and buildings throughout downtown Detroit, our firm is often approached to assist in the Lease negotiations on behalf of Landlords and Tenants alike.

Besides the basics, such as the lease rate, term, and square footage, there many terms that should be examined closely and negotiated thoroughly. Here are five things to consider when entering into a new lease:

1. Build Out Costs and Terms. Typically, build out cost is borne by the Landlord, or built in to the Tenants lease rate over time. Questions to address, and protect against in the Lease are defining who will manage the construction project, what are the consequences if the project is delayed; who is responsible if the Contractor disappears or is not paid; who addresses liens placed on the building; what are consequences if the project runs over budget. Each of these scenarios are a possibility, and should be addressed up front.

2. CAM charges and Utilities. No one likes surprises. CAM charges, or Common Area Maintenance charges, are typically part of a lease. What proportion the tenant pays and the base year measuring the cost in years to come are points that can and should be negotiated. Responsibility for utilities should be outlined in great detail. A Tenant is advised to request the average utility costs to budget for the term of the lease.

3. Remedies. Anticipating a problem is not often on the mind of Tenants beginning a new lease, but the remedy section will dictate how these problems are resolved, should they occur. The remedy section is often heavily skewed in favor of the Landlord. Tenant should look out for what constitutes or triggers an event of default, and cure provisions in the event of default, and provide some remedies of its own in the event Landlord breaches the Lease, or the character of the building changes. Landlord will want to make sure the right to terminate the lease is secure, and eviction provisions are well stated. Landlord will likely want to make sure they are awarded attorney fees are consented to in the event of a breach. All provisions can be negotiated to provide fair treatment to Tenant, and still protect the Landlord. Landlord will also want to ensure that remedies are cumulative and post-eviction damages may be recouped.

4. Subordination Clause, Estoppel Certificates, and Mortgage Subordination. The Landlord’s ability to leverage the property and mortgage the property is imperative. These clauses of a lease typically provide no room for negotiation; but are important for a Tenant to understand. If the Mortgagee is requesting documentation from the Landlord, or Tenant, the Landlord will be sure to provide it.

5. Guaranties. In consideration of entering into a new lease, a Landlord may require the Tenant to provide a corporate or personal guaranty, to guaranty tenant’s obligations under the Lease, including rent. Guaranties, especially when by an individual with stake in the Tenant’s business, creates a self-interest aligned with the Landlord and can ensure compliance of the Tenant. Guaranties are enforceable under law, but are also negotiable. They can be limited in duration, scope of liability, or even be phased out after certain milestones. Landlords should be sure to obtain addresses and social security number of the Guarantors.

These are just a few considerations of many when negotiating a lease. The attorneys of Dalton & Tomich, PLC have extensive experience in this regard on behalf of both Landlords and Tenants. Please contact us should you have any questions in this regard.

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The business and employment attorneys of Dalton & Tomich take your business just as seriously as you do. Lead attorney Zana Tomich is trusted by closely held family businesses and others across Michigan as an invaluable partner and counselor. We guarantee all your calls and emails will be returned within one business day so you can focus on what you do best: running your business.