Most new businesses are required to enter into a commercial lease of one form or another. The owners of the business are typically presented with thirty to forty page leases set out in fine print on legal size paper. These standard leases are comprehensive and contain provisions that inexperienced business owners usually don’t fully understand. With proper scrutiny and research it is possible for the inexperienced owner to sufficiently navigate their commercial lease. However, this type of scrutiny (in essence due diligence) takes significant time and effort. Ideally, new business owners will instead consult with an experienced commercial lease lawyer before moving forward. Whether or not legal counsel is sought, it is important for all new lessees to be aware of certain pitfalls. This articles summarizes on the most common areas of concern:
Common Area Maintenance (“CAM”) Expenses: In shopping centers and office buildings where numerous tenants share common space Landlords typically require their tenants to share the costs of maintaining these common areas. Shopping center leases are usually triple net (NNN) leases. Office leases are typically base leases. Either way, landlords are looking to pass on the costs of maintenance to tenants in one form or another. Common area expenses may include expenses associated with landscaping, sidewalks and parking lots, sprinklers, public address systems and music, bathrooms, signs, garbage collection, security and utilities for the common areas such as parking lots, hallways, food courts and any other areas where customers and clients gather or walk through. Most landlords also include an administrative and/or management fee. In addition to base rent, tenants will usually have a monthly CAM bill which represents a twelfth of the tenants pro rata share of the estimated CAM expenses for the year. At the end of the year, if the landlord underestimated the CAM expenses, the tenants are required to pay the difference to the landlord upon receipt of an invoice (the opposite is true if the landlord overestimated –tenants are refunded accordingly). It is vital that new tenants know precisely what these CAM expenses are, how they are calculated and the process for reconciliation of said expenses at the end of the year. Tenants should try and negotiate with the landlord towards ensuring that only legitimate expenses (expenses directly related to common area maintenance) are included. It is helpful to ask the landlord to provide CAM reconciliations for the last three years. This allows prospective tenants to better understand what these expenses are and how they grow over time. It’s also important to seek the right to audit annual reconciliations to ensure proper accounting. Finally, in some cases, tenants may be able to seek a cap on annual CAM expenses. The ability to negotiate for better terms of course depends on the parties’ relative bargaining positions.
Repair and Maintenance Obligations: It is not uncommon, particularly in retail leases, for landlords to require tenants to assume the obligations of all repairs and maintenance to the premises including repair and maintenance of plumbing systems, mechanical systems and equipment such as boilers and HVAC (Heating and Air Condition) systems. In a triple net lease, the entire obligation is shifted to tenants including sometimes full replacement of unrepairable equipment. The average business owner may first learn of this only after a major system breaks down and the landlord points them to the repair and maintenance provisions of the lease. An HVAC failure can have a devastating impact on a tenant’s business. The HVAC system must be repaired (or replaced) and the costs can be prohibitive. It’s important that tenants fully understand their repair and maintenance obligations before entering into a commercial lease. While it may not always be possible to negotiate better terms, it is important to at least try. If you fail, you at least have a better understanding of precisely what your obligations will be. For instance, it is not unreasonable to ask the landlord to warranty the premises mechanical systems and equipment for one or two years. It’s also not uncommon for landlords to agree to replace major equipment at its expense and to capitalize the expense over time so that the tenant pays only the annual capitalized portion of the total expense.