- Exclusivity
Almost every commercial lease has an exclusivity
clause. However, these clauses are rarely,
if ever, mutual. You move into a retail
shopping center. You operate a smoothie
business. There is a CVS drug store in
the center. You sign a covenant “Not to
compete with, sell, display, or sublease to any business selling or displaying
health, beauty, vitamins, dietary supplements, prescription drugs, or over the
counter drugs.” Sounds fair, right? The problem is that most exclusivity clauses
protect the “Anchor” tenant, but fail to give you protection.
An acquaintance recently ran into this problem. He agreed not to compete with any retail
business currently in place at the date of his lease agreement. However, the covenant was not mutual. The landlord never promised not to lease
space to another tenant competing with him.
A competing smoothie business moved in two doors down from him. Did he have any recourse? Probably not.
He may have a breach of good faith and fair dealing claim, but that’s
tenuous as best.
Make the feeling mutual.
Something like:
“Tenant, and any successor,
assignee, or sublessor covenants not to compete with any other business
occupying the premises, while Landlord covenants not to allow the operation of
any business that would compete with tenant, successor, assignee or sublessor
operating a _______ business.”
- Commencement Date
So many leases set commencement upon, “Substantial
completion of tenant improvements.” What
does that mean? What are
substantial? Which tenant
improvements? Avoid ambiguous language. Set guide-posts that are concrete and in your
control. Lease commences upon grant of
certificate of occupancy? Lease
commences upon clearance with Department of Health? Lease commences upon completion of flooring,
signage, and certificate of occupancy?
Give the commencement date clause something to hang a hat on. Make sure that you don’t pay rent until
improvements are complete—or that rent is reduced at a calculable rate.
- Operating Expenses
Most commercial leases require tenants to pay a percentage
of operating expenses. Many times this is
called “Additional Rent.” Review the
expenses that the landlord will pass on and make sure that they are reasonable
and directly related to the building’s operations. Certain costs should not be passed on to the
tenant. Determine whether the allocation
of expenses is based upon a fully occupied building or, if not, that they are
properly adjusted. You may want to
negotiate a cap on “Additional Rent/Operating Expenses.”
- Common Area Maintenance Charges
Yes, there is rent, additional rent, and now common area
maintenance fees. Sure you want to be a
tenant? Common area maintenance charges (CAM)
are similar to “Additional Rent” except it commonly covers items such as
security costs, painting, maintenance of common areas, etc. You need to review records to determine what CAM
charges are been historically and whether or not they are based on full
occupation or adjusted. If a number of
tenants move out, you don’t want to be stuck with the whole CAM bill. Similar to operating expenses, it’s advisable
to negotiate a cap on CAM charges.
- Attorney Fees
Almost any lease contract is going to mention attorney
fees. Don’t get too hung up on it. California Civil Code 1717 ensures that any
contract provision about attorney fees has to be reciprocal even if it doesn’t
say so. That’s great. However, lawyers have become savvy and write
clauses like, “Any attorney fees or costs incurred in collecting rent or
commissions are payable by the losing party.”
Uh oh. Even if § 1717 demands reciprocal
fees, the clause only applies to actions regarding the collection of rent or
commissions. Tenants are not going to be
collecting rent or commissions, landlords are.
So, although § 1717 demands that if a tenant sues the landlord in an
action regarding commissions, they can also get attorneys fees—the chances are
they would sue about something other than the collection of commissions or rent. Make sure that any attorney fee provision is as
broad or narrow as you want it to be.
Like, “Any costs or attorney fees that arise from this contract
or its enforcement are payable by the losing party.”
- Use Restrictions (and subleases)
Use restrictions are common and are another means of
creating exclusivity. That’s well and
good, but they may be extremely restrictive and prevent subleasing. Common use restrictions sound like, “the
premises may be used for the operation of a retail shoe store and for no other
purpose without the prior written consent of the landlord.” You may want to negotiate a broader clause
like, “the premises may only be used for operations of any lawful retail
business,” or “any lawful professional business practice.” The less restrictive, the greater chance you
will have of subleasing if you have to in the future.
- Recapture/Relocation
Most tenants have trouble understanding recapture. That’s because its economically
ludicrous. Here you have promised to pay
rent, completed improvements on the lease space, for some reason you inquire
about assignment or subleasing and the landlord comes and pulls the rug out
from underneath you, kicking you out.
Permitted? Yes, if there is a
recapture provision. Common recapture
provisions sound like:
“Landlord retains the right of
termination and recapture upon tenant’s inquiry into assignment or sublease or
any other event that gives Landlord reason to believe that due performance will
be impaired.”
The point is that they don’t want you subleasing for a rate
lower than the lease amount. Having a
below-par tenant brings down the value of the property or makes the
anchor-tenant nervous. That makes
sense. That’s why there is probably a
clause that requires any sublease to be commercially reasonable. But, holy cow. Under the language above, if you simply ask
whether or not you can assign the lease to an affiliate-- they can terminate
the lease. Make sure there is no
recapture provision.
- Exit Strategies: Vacancies, Retail Mix, and More
Have an exit strategy.
What happens when operating expenses and/or common area maintenance
charges exceed what is reasonable for your bottom line? What happens with the anchor-tenant leaves
and you are leasing space in a dead retail shopping center? We have all seen those shopping centers where
there is one lonely video rental store and ten empty units with weeds growing
in the parking lot. Have a clause that
allows termination electable by tenant upon certain events. It can sound something like the following:
“Landlord agrees that tenant and
any successors in interest may terminate this lease without penalty if any one of
the following events occur:
i.
Retail occupancy falls below 65%;
ii.
The Anchor-tenant Ralphs Supermarket terminates
or otherwise fails to occupy retail space within the complex;
iii.
Combined monthly Common Area Maintenance fees
and monthly Additional Rent equate more that 33% of monthly lease rental
payments;
iv.
Landlord fails to accept a commercially
reasonable assignment or sublease;
v.
Landlord leases space to another business who
competes with tenant named on this lease or any successor in interest in a
similar line of business.
vi.
The Retail Mix of the complex is significantly
altered from the Mix at the commencement of the lease. Significant alteration is defined as a change
of more than 25% in any given business category. At the date of this agreement, the Retail Mix
of the complex is 50% professional, 40% consumer retail, 10% industrial.”
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