Real Property Law

Before the Ink: Preparing for a Commercial Lease Review

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April 2024

By Corinne Wessel and Sam Beatty, Valence LLP

Commercial lease negotiations require a keen understanding of the local real estate market, legal implications, and the specific needs of clients. This article provides guidance on preliminary issues tenant-counsel should consider before commencing the markup of a commercial lease. By understanding the key players involved, conducting thorough due diligence, and aligning with the client’s business objectives, counsel can achieve a more favorable outcome for their clients.

Understanding the Key Players in Commercial Lease Negotiations

Before delving into the specifics of a commercial lease, it is crucial to identify and understand the roles of the key players involved in the negotiation process.

  • Brokers are instrumental in guiding tenants through the nuances of the market, including rent structures, deal points, and details about the premises. Brokers can also function as  strategic intermediaries to push for key business points that may be important to your client with the brokers/business people on Landlord’s side. Maintaining a positive relationship with brokers is beneficial, as they often play an important role in facilitating the transaction.
  • Clients are the ultimate decision-makers. As their representative, your role is to provide legal advice and to identify potential risk involved to ensure informed decision-making, not to make decisions on their behalf.  Effective counsel not only advise on potential risk, but will also propose strategies to mitigate or allocate those risks in the lease.  It is important to communicate effectively, tailoring your approach to the client’s level of experience and understanding of leasing, whether they are in-house counsel, a seasoned real estate director, a CFO, or new to the leasing process.
  • Opposing counsel should be approached with a collaborative mindset rather than an adversarial one. The leasing industry is relatively small, and building a professional relationship can pave the way for better outcomes in current and future transactions.  

Conducting Due Diligence Prior to Markup 

Before marking up the lease, a comprehensive due diligence process is essential. This includes:

  1. Understanding the Client’s Needs and Concerns:
    • Determine what is important to the client and their primary business objectives. 
    • Determine the scope of review they expect, whether detailed or limited to only big-ticket/red flag issues. Offer guidance on the most appropriate level of review based on the client’s specific needs, concerns, and budget.  Be sure that requests for limited reviews are properly documented.
    • Understand the purpose and use of the space. 
    • Business-related items, such as signage rights, pet policies, furniture layout, and initial alterations  are likely going to be more important to the client at the initial lease stage. Frequently, these terms do not make it into letters of intent, so it is important to identify these key business terms early on.
  2. Site and Party Evaluation:
    • Use a street view map or conduct a site visit to familiarize yourself with the building and its surroundings. This will avoid asking client’s unnecessary questions regarding signage locations, parking availability, etc.
    • Verify that the premises are zoned appropriately for the intended use.
    • Check the state secretary’s website to confirm that all parties are properly authorized to conduct business in the state where the premises are located.
    • Confirm the Landlord entity is the owner of the building.
    • Understand who the Landlord is. Is this a small family-owned building, or an institutional owner?
    • Conduct preliminary research on the Landlord to help determine their reputation in the market, including financial stability and credit risk.
    • Check to see when the building last sold.  This can help determine the exposure for potential tax increases in the event of a future sale.
    • Check EDGAR to see if there are published leases with the Landlord on the same lease form that you can use for purposes of your negotiation.
  3. Review of Preliminary Agreements:
    • Ensure that the terms of the lease are consistent with those outlined in the letter of intent (if applicable), including rent, deposit, and allowance calculations.
    • Confirm whether the parties have had previous business dealings.
    • If the Landlord requests financials, make sure confidentiality agreements are negotiated and executed.

By addressing these considerations, tenant representatives can better prepare for the lease negotiation process, ensuring that their client’s interests are protected and that the lease terms align with their business objectives.

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