IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog has been provided by Robert Salier of the Pacific Northwest Law Group (www.pnwlg.com). We thought it was a timely subject because negotiations affiliated with two of the transactions (A 14,000 square foot gym in South Lake Union and a Hot Tub & Spa Dealership) we completed in June had their greatest stress points affiliated with the commercial leases (One related to personal guarantees & the other a purchase option).
Non-Financial Commercial Lease Negotiations
Most companies will, at one time or another, need a physical location for their business. In many cases, this means entering into a commercial lease agreement. While many business professionals are accustomed to negotiating a fair price, they are not always prepared to negotiate the other important issues in a commercial lease agreement. With that in mind, here are five issues to consider when negotiating a commercial lease agreement:
1. Improvements. Few businesses are able to move into a leased building without the need for some changes (“Improvements”) to the premises. Commercial tenants should carefully consider how the proposed lease agreement addresses improvements. Tenants should know whether they need landlord approval for any and all improvements and whether any restrictions on improvements could preclude them from running their business the way they want to. It is important for commercial tenants to determine what the procedure will be regarding improvements upon the termination or expiration of the lease. It is important to understand how improvements will be handled to avoid being stuck with unexpected and expensive removal costs at the end of the lease.
2. HVAC Units. While a tenant may be responsible for “repairing” the HVAC, even paying the maintenance inspection, the landlord should pay for the “replacement” of the HVAC! These units are expensive, often requiring a crane to hoist to the roof, and a commercial lease agreement should clearly state who is responsible for paying for the repair and/or replacement of these units. This is another issue that requires careful drafting and review of lease agreements to ensure commercial tenants are not caught holding an expensive replacement bill.
3. Ability to Terminate in the Case of Destruction of Premises. What happens if the rented premises are damaged by fire, water, or other natural (or manmade) disaster? A commercial lease agreement should specify how and when a lease can be terminated due to partial or complete destruction of the premises. Many commercial landlords draft agreements permitting the landlord a full six months to decide whether to repair the damages. After the six months have elapsed, should the landlord decide to proceed with repairs, the tenant would have to endure the repair process. Some landlords defend these long disruptions of business with reference to commercial tenant’s business interruption insurance. Unfortunately, many businesses do not have business interruption insurance, or if they do have the insurance, three months must elapse before they qualify for the insurance benefits. Needless to say, this can have disastrous impacts on the aggrieved business.
4. The Difference Between a Right of First Refusal and an Option to Purchase. While both of these provisions can protect a commercial tenant, one has an important advantage. A right of first refusal clause allows a business a chance to buy the leased premises before a third party can. This means that if during the term a third party makes an offer to purchase the property, the landlord would have to present the offer to the tenant and give the tenant the opportunity to meet or beat the offer (depending on the language of the lease agreement). The option to purchase, on the other hand, puts the tenant in the driver’s seat. It allows the tenant the option to purchase the premises at a certain price during the term of the option, regardless of a third party’s action. The price can be set by the parties in advance, or, more often, set by a market rate price (at the time the option is exercised) based on similar commercial property sales in the area.
5. Option to Extend. Stability is important for every business. This can be especially important in businesses that rely on customers coming to their premises on a regular basis. Changing locations can mean lost customers and in turn, lost revenue. On the other hand, a business may not want to be locked into an exceedingly long lease term that may prohibit growth or limit the company’s ability to innovate. One or more options to extend the lease agreement at the end of the term can be a good way to balance these competing concerns. It allows the commercial tenant to decide (usually six months prior to the expiration of a commercial lease) whether they would like to continue leasing the premises.
If you have questions related to any of the legal implications affiliated with entering into a commercial lease Bob Sailer would welcome the opportunity to discuss the situation with you. Mr. Sailer can be reached at (425) 867-0512 or Bob@pnwlg.com .