The Legal Way Episode 5 | Leasing Lessons (Part 2): Exploring Lease Provisions for Tenants

Welcome back to The Legal Way! In this much-anticipated second part of our leasing provisions series, we shift our focus to tenant lease provisions. Join Friedman Schuman real estate attorney, Peter Friedman, as we unravel the critical clauses and terms that tenants need to be aware of when signing a lease agreement. Whether you’re a renter looking to protect your rights or a landlord interested in understanding the tenant’s perspective, this episode provides essential insights into crafting fair and balanced lease agreements that benefit both parties. Missed the first part? Be sure to check out our previous episode on landlord lease provisions to get the full picture!

EPISODE TRANSCRIPT:

Alyson: Hi everyone and welcome back to the Legal Way Podcast. My name is Alyson Layser and I am your host. I am also the director of marketing here at Friedman Schuman. Today is part two of a mini-series that we are doing about important provisions in a commercial lease. Last time we chatted a little bit about important provisions in a commercial lease for landlords and today we’re going to flip-flop, and we are going to be talking about important provisions for tenants to be aware of. So, we brought back Peter Friedman and Lee Mogavero to discuss this. And I’m so excited to be diving into this topic once again and talking a little bit more about the tenant side of things. So, before we dive into it, I’m going to let Lee and Peter introduce themselves and then they will take it away. So, Lee and Peter, if you guys could please just share a little bit about yourselves and introduce yourselves to listeners, that would be great.

Peter: Thank you, Alyson. I’m Peter Friedman. I’m chairman of the Friedman Schuman real estate group. I’ve been practicing law for quite some time. My practice includes commercial leasing, commercial purchases and sales, representing borrowers in loans, construction loans, permanent mortgage loans, etc. and anything else that kind of feels or tastes like real estate. Our firm, including myself, also represents people who are applying for zoning or subdivision relief, and I think that gives me a full perspective on the whole real estate world.

Alyson: Absolutely. Thanks so much for sharing. Lee, would you like to introduce yourself?

Lee: Sure. I’m Lee Mogavero. Although I primarily practice in financial services, bankruptcy and solvency, creditors’ rights, that practice has exposed me to a lot of commercial real estate issues, and I kind of consider that my minor, maybe not my major, but my minor, as I’ve done a lot of commercial real estate work, often in the context of a loan workout or in bankruptcy, but also on the front end as well.

Alyson: That’s awesome. So, similarly to part one, we have five of the top most important provisions in a commercial lease. So, let’s just dive into the very first one and that is fit out and condition of premise. So, would either of you want to dive into that a little bit deeper and explain how that can be broken down into like office, retail and industrial in the commercial lease space?

Peter: Sure. So, let’s start with office.

Alyson: Perfect.

Peter: Office fit out is generally done by the landlord.

Alyson: Okay.

Peter: In a lot of cases, a prior tenant had fit out done and a new tenant kind of just…kind of walk in and set up a job, that saves everybody a lot of money. However, if a tenant has some specific requirements, such as make the offices bigger or smaller or add—

Lee: Maybe some technical issues, some tech issues that a particular type of office might have.

Peter: Right.

Peter: So, they want to do all that tabling or fiber optics or whatever before the tenant takes possession.

Peter: Generally, the landlord takes on the responsibility for doing the fit-out. In a retail lease, it’s generally done by the tenant. And, Lee, why don’t you tell us about retail?

Lee: Yeah, I think— fit-out. Right. What happens with retail with fit-out is often there’s a lot of branding involved, a lot of aspects of the property that people identify with that particular tenant, especially if it’s a retail chain. Even if it’s a, you know, independent chain, people want to associate a certain look with their brand. So, therefore, that’s something, then, in all likelihood, the tenant is going to want to do itself, rather than just have something more generic that the landlord might do. So, the fit-out will then be the responsibility of the tenant, as opposed to the landlord. So, I’m negotiating for even, let’s say, a local restaurant. I’m gonna wanna say, look, I want XYZ in there. I want this particular kind of décor. I want these kinds of things in my kitchen. I want the kitchen set up a certain way. So, I’m gonna ask for that as opposed to just having a landlord do something that’s kind of a generic thing, not tailored to my needs. Makes sense. And the landlord may find the tenants’ up fit out or improvements to be of little value for the next tenant. So therefore, the landlord doesn’t want to spend money on something that may only be used for five or 10 years. So, landlord will push that off to the tenant’s column and tenant will generally handle it.

Alyson: Gotcha. And what about for an industrial building?

Peter: Industrial buildings, by virtue of their size and their roof and the free span or the clear span capabilities, a lot of times are fined to be leased the way they are. So, then you get involved in a situation as to changing the office. And that can be done by either the landlord or the tenant. So, if it’s a shorter term lease, the landlord might say, well, I’m not going to do anything real specific for you. If it’s basic, I will do something for the tenant. And the tenant might just have to fill in those pieces that the landlord will not undertake.

Alyson: Gotcha. That definitely makes sense. And it very interesting how with all of these different spaces that there are different ways that people approach that .

Lee: Right, so different needs. The tenant has different needs in a retail as opposed to an office as opposed to an industrial.

Alyson: Very true.

Lee: So, if you’re negotiating for your tenant, you’re gonna try to satisfy whatever needs they have and push as hard as you can to try to get those concessions from the landlord.

Alyson: Absolutely. So next let’s move on to the commencement date and rent commencement date. What all should tenants know about this, you know, when looking at their commercial lease?

Peter: So, a commencement date is typically the date on which either the space is turned over to the tenant, finished by the landlord, or the date that the tenant can start working in the space, start doing the tenant’s fit-out. Or it might be the date where the tenant gets the fit-out permits to do work.

Alyson: Okay.

Peter: So, it could be a number of different dates. And then what the tenant wants is the longest period possible between that date, that commencement date, and when the tenant needs to pay rent.

Alyson: Okay.

Peter: And why does the tenant want, you know, that long span?

Lee: Right. Think if you’re coming in there and you have to do, actually the reasons could be twofold. First, if you have to do tenant fit out and improvement, you’re not generating any income while you’re doing that. So, you don’t want to start having to pay rent. But you want the longest possible period in order to make those improvements. Even if you’re not making any particular tenant fit out type of improvements, you want some time that you’re in a property and you’re in a premise before you have to start paying rent in order to develop your following in that area have people notice your signage, whatever, so that you’re starting to cash flow, you’re trying to—you’re starting to make money, and then you can pay rent rather than early, like, day one, where no one knows who you are, no one’s paying you anything, so how are you going to pay the landlord some money?

Alyson: Absolutely. That makes a lot of sense, yeah.

Peter: So, Alyson, on this point, it’s actively debated and negotiated in commercial leases.

Alyson: OK.

Peter: Because the landlord wants to get that rent checked as soon as possible.

Lee: The landlord has to pay his bills. So, he may have a loan that he has to pay, so he’s got to pay his lender. He wants the tenant in there paying as soon as possible. He doesn’t want them in the property not paying him any money.

Alyson: Makes sense. Nobody would want that, especially not a landlord. That’s great. That’s really, really interesting and definitely something that’s great for landlords and tenants alike to know. So, as we move on, another one of the most important provisions that we discussed was renewal options. So, what exactly does that look like for a tenant?

Peter: Well, tenants want the most flexibility. So, a tenant would like, in renewal options, at least as many years as they’ve committed to in the primary term or more. So, for instance, if a tenant signs a lease for five years, the tenant wants one, at least one five-year option, maybe two five-year options. Okay. And that way they can control the space for a long amount of time. And if the tenant has to provide the funds for the tenant improvements, then they can advertise those improvements over a longer period. So, tenants, want options, options, options.

Alyson: That makes a lot of sense as well.

Lee: And they want to wait until the last possible minute to let the landlord know whether they’re exercising those options, because they want to be able to take the time to evaluate their situation, see what other possible opportunities are out there before they commit to exercising that renewal option. So, when we had the landlord podcast, we said, landlord wants certainty and the most dollars. So longest period of time, highest rent, lock the tenant in. If you’re the tenant, you wanna say, I want the greatest flexibility because I wanna be able to reevaluate in five years and say, do I wanna stay or not? But you want that option in case you do.

Alyson: And kind of like what we talked about in the last episode too, about that give and take. And I feel like this is probably a situation where that kind of comes up a lot, that give and take between landlords and tenants.

Lee: So, right.

Peter: So, speaking of options, let me pick up the next topic.

Alyson: Go for it. It’s also, it’s an option.

Peter: Tenants, in a lot of cases, are a little bit, perhaps, wary of, oh gee, how’s this business going to work out? And I’m going to give it a try, but I don’t want to be committed forever. So, they try to negotiate an early termination provision or a kickout provision. And what that means is that even though the tenant signed a five-year lease, things aren’t working out, they want to be able to give the landlord notice, let’s say, in year two or three or four that, hey, this isn’t working out, I want to terminate the lease. And the landlord might say, okay, but you’ve got to pay for that, right? And if you terminate in year two, it’s going to cost you 3X. If you’re going to terminate in year three, it’s going to cost you 2X. You terminate in year four, it’s going to cost you X. And you’ve got to give me so much notice that you’re going to do that, and you’ve got to pay not the balance of the lease, because that will be all that’s owed, but some portion of the balance of the lease, because you’ve got to be able to make it worthwhile for the landlord to agree to that provision and so that he’s not in there without a tenant for a long period of time and not being paid any money. In this market with all the issues, especially in the office lease context, I think, that’s going to be something that’s going to be very attractive to a tenant. Also, the ability to assign or sublet lease. I’m sure you’ve read a lot of the big law firms in Center City have been curtailing their space and subletting.

Alyson: Yes, I have seen that.

Lee: And because of all the work from home. Just one example. So, if you’re the tenant and you’ve got office space, for example, you don’t know, well, maybe I’m going to need an office for everyone, but maybe I’m not anymore. And so, I want the ability to sublet to another tenant if it turns out that I don’t need all that space that I would have typically needed in years before.

Alyson: Very interesting. Anything else that you want to add to that, Peter?

Peter: Well, Lee mentioned office space. She mentioned today’s market. We’re seeing that tenants want the ability to give back some space if they don’t need it. So, what would that look like? Tenant signs a lease for 5,000 feet, and at some point during the term, they would have the right to give back 2,000 feet.

Lee: So maybe not terminate the lease in its entirety, but give back a portion of the space.

Peter: The landlord might say, okay, it’s better than nothing. So, I will accept that. And the tenant might feel, well, I’m not even gonna enter into the lease unless I have that flexibility. So, I think generally when we’re representing tenants, flexibility, flexibility is what the tenants want.

Alyson: Gotcha, that seems to be the key word for tenants. That’s really interesting, really great information to know. So, as we move on, our last point would be parking visibility and signage as one of the most important provisions in a commercial lease for tenants. So, what are things that a tenant should know about these three things, parking visibility and signage, as they’re in the process of signing a commercial lease?

Peter: Let’s start with parking. Particularly in the suburban context, parking is critical for a tenant and its customers and its employees because they’re going to drive to either work, or they’re going to drive to the retail store, or they’re going to drive to the industrial building. So good parking, convenient parking is critical. When a tenant shares property with other tenants, the tenant we’re representing would want to know that, hey, I’m allowed to use either all the parking or a certain number of parking or a certain area of the parking.

Lee: Right. Do I have a designated area that’s my area for my customers or for my employees? And is that parking that only I can use? And then is there overflow parking somewhere else? And how is that? How is that all delineated? And you’d want that in the lease.

Peter: Right. And then with industrial tenants and with some retailers, loading is also an important issue.

Lee: Right. OK. Where the trucks come in.

Peter: It’s not nearly as important in the office setting. But –

Lee: Although sometimes I see that truck outside that’s delivering.

Peter: But it is important for the lease. Retailers to know, you know, how they’re going to be able to accept the goods. Um, some tenants or some townships don’t even allow what’s called front end loading, loading through the front door. That doesn’t look particularly good. Um, so that’s important. Parking is important. And what about signage, Lee?

Lee: Signage again, depending on the nature of your, it’s just, obviously, maybe if you’re an industrial property, you’re not as worried about your signage. But particularly, obviously, a retail situation. Yes. A store or a restaurant, something. That’s going to be really critical. Visibility and your signage. And typically, in a commercial lease, there will be a description of what’s permissible signage. The size, where it’s going to be located, how it’s going to be illuminated, any of that kind of stuff. And I think, correct me if I’m wrong, there may even be township restrictions on what type of signage is permissible. So, it’s not even just the negotiation with the landlord in that situation. It’s going to be what the township permits. And you’re not going to be able to put a 400-foot flashing light outsider that goes on 24 hours a day. There are going to be restrictions on that. So that is something that you’re going to want. Visibility, visibility may actually be part of the nature of the property itself, right, where it’s located. Is it in the back or the center? Is it in a corner or is it visible from the street, from the road, so that passerby can see?

Peter: Visibility, it might be just stuck with what’s there, but new construction, added visibility, you know, can be addressed through the improvements are going to be made and if it’s an existing building, signage is going to have to help with the visibility.

Alyson: Yeah. That, this is also interesting. I will tell you with the loading aspect of this, I had never even thought that would come up in a lease, but it makes absolute sense that that’s something that you would want to have in your lease and to be aware of and all of that. So, like I keep saying, I think I’ve said in almost every single podcast episode, I’m learning so much and this is so interesting. On the same topic though, but for somebody who is a new tenant, they’ve never signed a commercial lease before, they’ve never even maybe had a business before, what advice or tip would you give someone who’s brand new to this whole world? When it comes to the different provisions that they should be looking for or wanting, or even as they’re just reading through the lease to make sure that they have all of their bases covered. Is there any advice or any tips that you would give them?

Lee: Wanna go first?

Peter: I’ll start with that one. So, leases are typically tailored for landlords. The pre-printed forms are made for landlords, and a lot of landlords produce their own lease forms. So, it’s up to the tenant to tackle the lease, the lease form, and the language. And leases can be very, very long. And even if there’s some clarity on how much rent the tenant pays or how long the lease term is, there could be many other provisions that the tenant should address in the lease. One of them we just talked about was parking. A provision should be included in the lease as the parking availability for the tenant because if the tenant’s customers can’t park, they’re not going to go into the store or into the office. And it won’t work out for the tenant.

Alyson: Absolutely. That’s a great point. Lee –

Lee: My advice, can I say this? It sounds kind of self-serving, but get an attorney. Yes. Have someone negotiate these provisions upfront because it’s a lot better to do that when you’ve got some leverage than if there’s a situation where something has gone wrong. And then the attorney comes in and it’s like, well, gee, if I had the opportunity to negotiate these provisions upfront. The tenant hasn’t realized that something is significant that really is, and that should have been negotiated, and now the tenant is stuck with that provision. Again, as Peter said, voluminous, landlord-oriented. It helps to have somebody shepherd the tenant through that process. And even if the tenant is somebody who’s a sophisticated businessperson in their world, their world might not be commercial lease negotiation.

Alyson: Absolutely. As for real estate attorneys, that is what you are doing day in and day out. So, I think that’s a really, really great point. And like you said, whether inexperienced and new to the whole commercial real estate world or a seasoned business owner, it never hurts to have an attorney look over these types of things for you. So, anything else that you two would like to share on this topic before we wrap up?

Peter: I think we covered it.

Lee: We’re good.

Alyson: All right, guys. Well, thank you both so much for joining us today. I’m really glad that we were able to touch a little bit on landlords and tenants in this mini-series. And I’m excited to have you both back again very soon. Sounds good.

 

 

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