4 Clauses Tenants Should Look Out for When Reviewing a Commercial Lease
When it comes to negotiating commercial lease agreements, landlords often have the upper hand because they deal with drafting and negotiating leases on a regular basis. Meanwhile, tenants don’t always consider the various factors involved with clauses within leases and subleases.
At Bedrock, we strive to provide tenants with the information they need to gain an upper hand when negotiating commercial leases. In this article, we will take a look at six of the most common restrictive clauses tenants should look out for, their major possible pitfalls and some options on how to negotiate these pitfalls.
1. Sublease Clause A:
“… the Tenant shall not be permitted to assign or sublease its Premises to an existing tenant or subtenant in the Building or the Landlord’s real estate portfolio.”[/vc_column_text][/vc_column_inner][vc_column_inner width=”1/3″][vc_column_text]
[/vc_column_text][/vc_column_inner][/vc_row_inner][vc_column_text]Pitfall: Limited Target Market. This clause is potentially very limiting as the most apparent target market for subletting your space is often tenants in a neighbouring space (e.g. they are looking to move spaces or expand their space). So, this clause basically prohibits the tenant from subletting to the most likely target market available to them. The target market is even more greatly reduced if the landlord is an owner of multiple properties, or in addition to its own assets, manages properties for other landlords, as in some clauses these properties can be also be included within this clause.
How to Negotiate: If you plan on possibly subleasing your space, we highly advise having this removed from your lease. Alternatively, if the landlord will not negotiate to have this clause removed, request to see the landlord’s entire portfolio of buildings it owns or manages so you are fully aware of the possible limitations of the clause.
2. Sublease Clause B:
“… the Landlord shall have up to thirty (30) days to review the offer to sublease or assignment of lease and to either provide consent or terminate the Tenant’s lease.”
Pitfall: Lengthy consent period. Prospective subtenants are usually on a rigid timeline, and may not be able to accommodate such a long time in limbo waiting for the tenant to gain consent from the landlord. This may result in you losing potential subtenants.
How to Negotiate: Request a much shorter timeline for the landlord to have to review and respond to the sublease or lease assignment. Usually 3 – 5 business days is an adequate amount of time for the landlord and the potential subtenant.
3. Sublease Clause C:
“… the Tenant shall not sublease the Premises at a rental rate below the current market rates in the Building as quoted by the Landlord.”
Pitfall: Sublease space is usually discounted. Accepting a clause like this is not reasonable because the market will not normally absorb a sublease space at the same rate or higher than a headlease space. Sublease tenants are taking more risk, have limited rights (in terms of expansion, renewal, etc.), and have shorter terms. Thus, to attract sub-tenants, sublease space is usually discounted from headlease space in order to attract interest.
How to Negotiate: Request to have this clause removed from the lease, citing the usual discounts on sublease space.
4. Sublease Clause D:
“… the Landlord can unreasonably withhold consent to the sublease or assignment of lease.”
Pitfall: Being able to unreasonably withhold consent is unreasonable. Tenants should review their lease carefully to ensure that the landlord is required to act diligently, reasonably, and with good faith. A clause giving the landlord the right to unreasonably withhold consent could leave the tenant with no recourse if they choose to try and sublease and are denied in the future.
How to Negotiate: Request to have this clause removed from the lease, as it is unreasonable.
5. Landlord’s Consent Document
“…if at any time prior to the expiration of the term of the Sublease the Lease shall expire or be terminated for any reason, the Subtenant agrees, at the election of the Landlord, and not otherwise, that it shall be deemed to have attorned to the Landlord and entered in a new lease for the remainder of the term of the sublease. The new lease shall be on all of the same terms and conditions as the headlease…”
Pitfall: Too much risk for the subtenant. Having a restrictive clause in the landlord’s consent document may turn away a new prospective subtenant as they may see this being too arduous and they may seek out sublease space elsewhere.
How to Negotiate: Request to have this clause removed from the lease or otherwise revised to make it less arduous for the subtenant.
A tenant has a right to review all lease negotiations and request changes to the landlord’s standard form of lease and the landlord’s consent to sublease document. Tenants should seek the advice of a legal counsel, professional real estate agent, or both before finalizing any form of lease.
What’s important to remember is, knowing what can be negotiated can save you tens of thousands of dollars or more on any negotiation. Using a broker you trust, with the required technical and negotiating skills, provides the knowledge necessary to create information leverage and ultimately save you money.