Due to the lingering effects of the pandemic and the skyrocketing number of employees working from home, in many markets there are great opportunities for businesses seeking to renew current office leases or to enter new leases. Tenants may be able to secure free rent, reduced rent, remodeling funds, and other concessions that would have been unthinkable only a few years ago.
Despite those favorable conditions, finding space to lease is still a time-consuming process, and leases are often lengthy and detailed agreements with pitfalls for the unwary. Overlooking important details can result in unpleasant surprises down the road in the form of unexpected costs, burdensome maintenance obligations, or inability to use the space in the desired manner. Listed below are some factors tenants may wish to consider:
- Read the Lease: Though it’s a no-brainer, you would be surprised at just how many tenants breeze through the paperwork without thoroughly reviewing it. Many landlords supply their “form” lease for review, but inadvertently fail to insert the negotiated terms or include terms applicable to another tenant. Moreover, some of the form leases commonly used in Georgia have provisions that favor landlords (and are unreasonably burdensome to tenants) and should typically be modified. Reading the lease is the best way to ensure it accurately reflects the business deal you struck with the landlord and provides protection from getting stuck with unreasonable costs.
- Seek Landlord Concessions: As mentioned, many markets are currently favorable for tenants, so you want to request meaningful concessions. One of the most common concessions is free rent, which can either be front-loaded at the outset of the lease term, or spaced throughout (i.e., one free month per year). Another common concession is for the landlord to supply an improvement budget to remodel or build out the space, which allows tenants to reinvest those expenditures for core business activities. For certain tenants, having the right to be the only tenant selling a particular product or offering a particular service can be valuable, and landlords may be willing to offer these exclusive use provisions.
- Understand Your Costs: Most leases require tenants to pay amounts other than just base rent. For example, triple net leases typically require tenants to pay their share of landlord’s expenses for property taxes, insurance utilities, and common area maintenance. Tenants need to have a good understanding of exactly what these costs consist of, what the current dollar amount of such costs is (usually expressed on a per square foot basis), and if there is a limit on the rate of increase of such costs. Negotiating a cap on the annual increase in such costs can prove particularly valuable for tenants, especially for leases with lengthy terms.
- Understand your Repair and Maintenance Obligations: Repair obligations can vary greatly and need to be read extremely carefully to ensure you aren’t responsible for replacing an HVAC unit, paying for a new roof, replacing defective plumbing, or taking on some other responsibility that is typically the responsibility of the landlord.
- Ask for First Right of Refusal: With an eye to the future and potential growth for your business, it is desirable to have a first right of refusal should adjacent space become available. In our experience, landlords will often be willing to agree to these provisions, though they typically will require tenants to make a fairly quick decision on picking up the option for additional space when it becomes available.
- Don’t Forget Parking and Signage: Particularly in urban areas, parking may be limited. Tenants need to ensure not only that the lease provides for sufficient parking, but also that it cannot be relocated in a manner that would hurt the business. When tenants are sharing parking with others, they need to visit the property to ensure there is ample parking for all tenants and visitors. Tenants seeking signage visibility should review provisions addressing their signage rights (including who will pay for it), as well as local laws to verify their desired signage is permitted.
- Ask for an SNDA: Typically, a lease is subordinate to mortgage indebtedness of the landlord, which means that if the landlord has financial trouble and the mortgage lender forecloses, the lease can be terminated. Many leases, particularly for larger spaces, have a requirement that the landlord, tenant, and mortgage lender will enter into a subordination, nondisturbance and attornment agreement simultaneous with lease execution. Referred to as an SNDA, these agreements prevent the mortgage lender from evicting the tenant if they foreclose on the property. This is particularly relevant given office loan defaults are now approaching historic levels.
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