One International Place

100 Oliver Steel, 8th Floor, Boston, MA 02110-2600

Phone : 617-951-3100

Commercial Lease Negotiation

Points For Lessees

• Whether first starting out or continuing a long tradition of family entrepreneurship, most businesses require a space to call home. Alternatively, maybe you have acquired an investment property recently and wish to lease it out. Entering into a commercial lease requires the parties to evaluate many considerations that could affect their rights with respect to the premises, exposure to liability, and potential for growth.

• The experienced attorneys at Pabian & Russell are able to assist lessors and lessees by navigating these issues through careful negotiation and drafting. Such concerns include the following:

1. Description of Leased Premises 

2. Lease Term

3. Costs of Ownership & Operation

4. Permitted Use

5. Assignment and Subletting

6. Lessee’s Default

7. Cross-Indemnity

Description of Leased Premises

• One of the most basic requirements of a lease is that it fully and accurately describes the premises. To avoid disputes, it is best to define the premises as completely as possible, including square footage, floor location, street address, etc. Likewise, while most leases provide for the premises to be delivered “as is”, a lessee should advocate for the building systems on the premises to be delivered in good working order, condition, or repair. 

• In addition to a legally sufficient description of the premises, the lease should also designate the lessee’s rights to other common areas of the real estate such as lobbies, loading docks, parking spaces, etc. 

Description of Leased Premises

• In certain circumstances, a lessee may consider asking the lessor to represent to its sufficiency of title (i.e. ownership) and compliance with zoning and permitting regulations, especially when investing greatly in altering the premises for lessee’s use. In certain circumstances, the lessee may also consider obtaining title insurance to protect its leasehold interest in the premises.

• A lessee should also consider the merits of a non-disturbance agreement, which is a document in which the landlord’s mortgage lender agrees that the tenant may remain in possession of the premises if the lender takes the property back in foreclosure. Without a non-disturbance agreement, the lender may be able to foreclose on the property and require the tenant to vacate the premises.

Lease Term

• If the lessee plans to substantially alter the space for its use, then the lessee should ensure that the lease provides for an adequate amount of time to complete the alterations prior to the commencement of the lease term and the obligation to pay rent. Alternatively, if the lessor will be performing the alterations, then the lessee should be careful to postpone the obligation to pay rent until the lessor delivers the premises in an agreed-upon condition. 

• Even when the premises are not being altered, consideration should be given to the fact that the lessor may be unable to deliver the premises at the commencement of the term due to a previous tenant who has not yet vacated or other circumstances. In this case, the lease should provide for adequate compensation to the lessee for failure to deliver and in some cases, the lessee should consider negotiating for the lessor to provide temporary space for the lessee. 

Costs of Ownership & Operation

• A well-drafted lease should allocate clearly the responsibility between the parties for paying real estate taxes, operating expenses (or common area costs), repairs, insurance, utilities, and other costs associated with the premises. 

• Provisions covering the lessee’s payments of operating expenses are particularly important to consider as these provisions can generate a significant amount of income to lessors and a significant expense to lessees. Lessors generally try to draft leases to cover as great a portion of the expenses of the leased premises as possible, which in some cases could include affiliated management fees. A lessee should look to limit its obligations and really understand what is included in the definition of “operating expenses”. Further, lessees should keep in mind that they can often exercise audit rights to the lessor’s books and records relating to operating expenses, thereby providing a check on the amount of expenses charged. 

Permitted Use

• A lessee should be aware of the permitted uses clause to ensure that its intended operations are permissible within the premises. A lessee should consider negotiating a lease that allows for a broad enough use to cover its current enterprise, its future areas of growth, and potential subtenants’ activities. Operating outside of the permitted use could allow a lessor to terminate the lease, obtain money damages, or prevent the lessee from using the premises in a manner outside the use provision. 

• If the lessee enjoys a superior bargaining position, the lessee may seek to include an exclusive use clause in the lease. This provision allows the lessee to stop the lessor from leasing to a competing business. 

Assignment and Subletting

• Lessors frequently negotiate for the right to approve an assignment or sublease. In Massachusetts, lessees should be careful to require that a lessor not unreasonably withhold its consent to requested assignments. Lessees should also look to define types of transferees that a lessor must accept or factors that would render the lessor’s withholding of consent unreasonable. 

• Furthermore, lessees should consider whether the lessor must consent to an assignment or sublease to the lessee’s affiliates, whether a sale of its stock or a change of control constitutes an assignment, whether a lessee may turn a profit on an assignment or sublease, and the circumstances under which the lessor may reenter the premises.

Lessee’s Default• Wherever possible, lessees should negotiate for a cure period for

any defaults under a lease, which may vary in length depending on the severity of the event of default. For instance, lessees should include a cure period for failure to pay rent and other non-automatic defaults. Certain events of default that involve deliberate violations of a lease provision within the lessee’s knowledge and control are considered “automatic defaults” and are rarely accompanied by a cure period. Lessees should attempt to limit the scope of automatic defaults.

• Upon automatic default or the lessee’s failure to cure, a lessor will be entitled to the remedies established in the lease, which typically include the right to terminate the lease, recover possession of the premises, or collect money damages. Lessors often define the amount of such damages as the accelerated rent – i.e. the full balance of the rent due through the end the term as one lump sum – which lessees should resist. Under Massachusetts law, a landlord must make reasonable efforts to relet the premises after a lease’s termination due to the lessee’s default, which the lessee should include explicitly in the lease.

Cross-Indemnity

• An indemnity provision in favor of a lessor protects the lessor from any third party claims against the lessor arising from the lessee’s use of the property, negligence, misconduct, or breach of the lease. Lessees should be wary of a broad indemnity provision that works only in favor of the lessor. Instead, the lessee should advocate for a cross-indemnity term in the lease that protects both parties from third party claims arising from acts of the other. The provision should not be limited to negligent acts and should survive the expiration of the lease term.

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One International Place

100 Oliver Steel, 8th Floor, Boston, MA 02110-2600

Phone : 617-951-3100