There is no such thing as a standard commercial lease. The same is especially true when it comes to leases within a multi-tenant property.
Aside from the usual suspects you negotiate with a prospect tenant – rental rate, deposit and square footage – there are many other terms you should be familiar with as they can greatly impact your tenants’ terms and overall, your multi-tenant property when you go to sell it.
Here are some of the items to not skip over.
Insurance is often the one concept you never think about until the moment you need it. A similar concept, force majeure, or unforeseeable circumstances that prevent a party from fulfilling its obligations under a contract, is put in place to essentially insure no one may be held responsible for acts beyond their control. These clauses are often considered on a case-by-case basis and require fact-intensive analysis.
NOTE: Most force majeure clauses will specifically state that non-payment of rent is not subject to force majeure.
Tenant Improvement Allowance
Much like the commonly used clause of rent abatement or free rent, a TI allowance can also represent a negotiating tool to be used in lieu of reducing the rental rate. The amount of money per square foot a landlord will allot a tenant to custom build out their space should be negotiated and contingent upon the tenant’s credit, lease term length, rental rate, and market in which it’s located.
In emergency situations, such as an earthquake, hurricane or pandemic, unused TI allowance may even be creatively used to alleviate any missed rents if agreed upon by both parties.
Restrictive Uses/Exclusive Uses
Before jumping into signing a tenant to get your center filled, be sure to review any restrictive and exclusive uses specific to the tenant. For example, if a well-known retailer prohibits the leasing of a fitness user in the center due to parking concerns, this can greatly impact the traffic of your center and limit the possible future tenancy. Typically, only powerful, anchor tenants are granted exclusive use.
Think of the long-term consequences of accepting a tenant with a lengthy list of restrictive uses as it will narrow the user types the property owner may lease space to in the multi-tenant center. Other options to consider are prohibiting restrictions for every tenant or the restrictions “burn off” after 3 years of the term, for example.
Right to Sublease
In the event of an unfortunate circumstance or simply a change in business direction, a tenant may exercise the Right to Sublease all or part of their space. So, in this clause, ensure the language is precise and emphasizes the Lessee (the tenant) shall nevertheless remain liable for the performance of all the terms, covenants and conditions of this lease.
Some sample Right to Sublease clauses can be found here.
On the other hand, you may want to keep in mind that too many below-market rate sublease listings in the same center may create an unfair competition. A high sublease inventory may deflate the property’s overall rental rate.
This expression refers to the clause that grants the tenant the right to shut down operations without being in breach of the contract, as long as rent continues to be paid. In the past, this strategy has been prevalent among larger retailers and could be used to prevent direct competition from leasing the space while its other location was being opened within a short distance away.
Needless to say, this could be detrimental to a center as foot traffic could diminish depending on the size of the retailer. Landlord’s can either deny or alter as a go-dim clause that requires tenants to modify operations or hours to reduce costs instead. Another alternative to combat this situation is offering a recapture clause that allows the landlord to take the space back if tenants go dark.
Piggy-backing on the impact of going dark, co-tenancy clauses could allow the tenant to not only cease operations, but also reduce or even eliminate rent. This is because it has the ability to make a lease contingent with an anchor’s or other major tenant in the center.
For example, if an anchor grocery store leaves or never ends up opening, an in-line tenant has the contractual right to leave. This clause can make it highly difficult to get the center managed down the line.
BONUS: Tenant Financials
Aside from keeping a close eye on these items in the lease, you will of course need to obtain the tenant’s most recent financials, including unit level financials. Typically, landlords should review the last 2-3 years of the prospective tenant’s profit/loss statements, balance sheets, or tax returns.
Also, performing a credit check, even if it’s a well-known corporate-backed prospect, is imperative to your real estate investment’s future success because it’s not just about the steady income. Their creditworthiness can affect an owner’s ability to borrow against the property.
When it comes down to commercial leases, there is much more to consider in a lease than simply the base rent. Even the term itself may be not so straightforward unless you have specific-enough language.
For example, if the rent isn’t payable until the tenant moves in, are they still required to pay their portion of the maintenance charges starting at signing? These are just some tips of items to not overlook when signing a new tenant in your multi-tenant property.