Brooklyn, Manhattan, and Queens’ office and retail leasing markets are booming as rents continue to rise through the second quarter of 2015. The surge in leasing has gone hand in hand with strong employment growth with businesses of all sizes desiring to set up shop in New York City. Retail, industrial, and office tenants have flocked to capitalize on this surge in growth and opportunities. In addition, entrepreneurship, technology and creative firms are seeking more office and retail space for their growing businesses, especially in Brooklyn and Downtown Manhattan.
The following are a dozen quick and easy tips for office and retail tenants negotiating commercial leases in 2015.
- Working with a Broker. In most cases, a tenant will retain a broker to help find space. Ordinarily, the brokerage commissions are paid by the landlord and require the landlord’s broker to split the brokerage commission earned with the tenant's broker. The brokers will set forth the essential terms of the lease in the term sheet, which provides a general outline of what the lease draft should include. It is extremely important to confirm that all of the business and legal terms in the term sheet are accurate and properly reflected in the lease. One cannot stress how invaluable it is to work with a broker who understands the market and trends as well as the unique desires of its clients and is able to negotiate the best deal in an optimum location for its clients.
- Use. Prospective tenants should always ask the basic questions: what space is being rented, including common areas such as hallways, rest rooms, and elevators and what are they specifically paying for.
- Build-Out. The lease should specify who will pay for the build-out. The lease should also state who is doing the construction of tenant’s initial improvements and define substantial completion of tenant’s improvements. The more construction items are worked out (including tenant’s retention of an architect and contractor) and approved by the landlord before the lease is signed, the less construction surprises (and costs) for tenants.
- Term of the Lease. The lease should clearly state when the lease commences and ends. Additionally, if a tenant has an option to renew the lease, the lease should specifically state the time periods required for notice to the landlord and the basis for calculating the renewal rent. Some leases also contemplate early termination rights including a termination payment and notice requirements. Tenants should also attempt to negotiate a drop-dead date, which is the date by which, if the space is not delivered, the tenant has the right to terminate the lease before taking possession of the space.
- Responsibility for Maintaining/Repairing the Space. The lease should clearly detail what repairs the parties are responsible for. Landlord and tenant responsibilities for repairs and/or maintenance costs include the walls, roof, drainage systems, plumbing, water systems, floors, glass, fixtures, heating/cooling system, sidewalks, and driveways. Tenants should try to limit its responsibilities to non-structural maintenance and repairs within the space only.
- Common Area Maintenance (“CAM”) and 7. Real Estate Taxes. It is important for tenants to understand whether the lease is a: (i) gross lease (rent covers all costs); (ii) net lease (tenant is charged separately); or triple net lease (tenant covers all costs, which is most common in today’s market). Determining the base year for CAM and real estate taxes is also a question of how much of these expenses get passed through to tenants. Landlords usually will require tenants to accept the current fiscal tax year (July 1 – June 30) as the base year until it is completely over but this point should not be overlooked and negotiated. Finally, tenants should always have a right to audit landlord’s calculations of CAM and real estate taxes.
- Assignment/Subletting. The lease should contemplate the extent to which tenants may sublet or assign the space. If the lease is assigned, it should also contemplate tenants’ future liability.
- Right of First Offer (“ROFO”) and 10. Right of First Refusal (“ROFR”). As many businesses grow and expand, the lease should contemplate a ROFO and/or a ROFR. ROFO rights give growing tenants a first chance to lease an additional portion of space if the landlord decides to lease it. Unlike a ROFR, a landlord is not required to have a legitimate offer which the tenant can either match or refuse. If tenant refuses to make an offer or if the parties cannot agree on the parameters of a deal, the space can then be leased to a third party. A ROFR requires that in the event the landlord receives an offer to lease space from a third party that landlord is willing to accept, then a landlord must submit the offer to the tenant first, who then has the right to lease the space on the same terms and conditions as set forth in the third party offer.
- Material Breach and Default. The lease should state what conditions or violations of its terms constitute a material and non-material breach and default of the lease. Tenant should have a written notice and cure period before being considered to be in default as landlord’s remedies for default include termination of the lease and could also include the acceleration of future rents.
- Guaranty. Because many growing businesses do not have substantial assets to guaranty their lease obligations, a landlord may ask a tenant for a personal guaranty and/or corporate guaranty. A personal guaranty requires an individual to personally guaranty tenant’s lease obligations in the event of a default. Tenants should try to limit the scope of the personal guaranty and/or corporate guaranty to past due rents only (the so called, “good guy guaranty”) so that a tenant is not responsible for future rent obligations in the event of a default.
As the economy continues to expand and strengthen at its fastest pace since 1990, businesses are well-poised for future growth and opportunity. Understanding all of the nuances that go into a well thought out and properly negotiated lease allows businesses to improve efficiencies and create the ideal work environment for their employees to grow. And because we promised a baker’s dozen, please do not forget:
- Seek Legal Counsel. Tips like these help you know what questions to ask, but knowledgeable and experienced commercial leasing counsel lets you better assess, and then act on, the answers.