Commercial Leasing: Remedies for Avoiding Tenant-Landlord Disputes

By: Stephen A. Cross, CCIM

CROSS Commercial Realty Advisors, LLC

For most healthcare professionals, real estate is their second-largest overhead expense (after employee salaries and benefits). Businesses routinely, and unknowingly, spend significantly more money on their physical work environment than they should—particularly when it comes to leasing space.

This is primarily due to the complex nature of the lease agreement itself. In addition, tenants are often well meaning but largely uninformed, so they fail to negotiate protections for unforeseen issues that can eventually escalate into tenant-landlord disputes.

The smartest and least expensive way to resolve potential disputes is to anticipate issues that may occur and incorporate remedies within the original agreement. Remember, your greatest negotiating leverage exists before the lease is signed.

Here are some common tenant-landlord issues and how they can be preemptively addressed:

Maintenance and Repair: For those in healthcare, where patient comfort is of paramount importance, identify maximum and minimum ambient temperatures. Depending on the season and your locale, incorporate language such as: “the premises shall be neither warmer than 72 degrees nor colder than 68 degrees.

If it is the landlord’s responsibility to maintain the parking lot, roof or HVAC (heating, ventilation and air conditioning) systems, be certain to negotiate appropriate remedies in case the landlord ignores his duties. For example, you may negotiate the right to initiate repair of the HVAC system if repairs are not completed within 24 hours of written notification to the landlord, as well as to reduce your rent by the costs of such repairs.

Speak to your attorney before withholding rental payments in an attempt to force the landlord to perform his obligations. To do so may place you in breach or default of your lease.

Early Termination: Healthcare professionals, whose health and well being are crucial to the viability of a practice, should negotiate a death and/or disability clause that provides for the automatic termination of the lease if the principal should become incapacitated or die. Your legal advisor should draft language specific to your needs.

Additionally, you should negotiate “blanket” early termination penalties that allow you to buy out of the remaining lease obligation for any reason and at a predetermined amount. If you have no early termination rights and ultimately need to vacate the premises, begin discussions with your landlord at the earliest possible time. Ask that the premises be shown and advertised to others and that all offers be disclosed to you. Be certain to make this request both orally and in writing.

Right-Sizing: If you find your practice needs either more or less space, contact the landlord to discuss the situation; the landlord may have space suitable to your needs. If you have too much space, the landlord may agree to take back your excess space and lease it to others. Or, your landlord may know of another tenant who can lease the entire space and will therefore agree to cancel your lease.

“NNN” and Excess Operating Expenses: The Net Net Net (NNN) Lease is the type of lease where the tenant generally pays for all operating expenses. It may even include responsibility for roof and structural repair or replacement. Whenever possible, “NNN” expenses should be initially fixed, or if this is not practical, both parties can agree to a not-to-exceed number. Thereafter, increases in these operating expenses should be capped at a nominal percentage (3-5% per year). Likewise, in full-service leases, increases in excess operating expenses over a base year should be capped at 3-5% annually. Also, don’t forget to advance the base year when you renew or extend your full-service lease.

Parking: Negotiate the number of parking spaces your practice will likely require, including spaces for employees, patients and visitors. Note in the lease document the number of spaces, where they will be located and whether they will be provided at no charge or for a predetermined price. Negotiate a financial remedy in the event the spaces are not regularly made available, such as $20 per space per day, as an offset to rental amounts otherwise due. This may dissuade the landlord from over-parking the property by leasing to tenants who consume an inordinate number of parking spaces. If your patients are elderly or have difficulty walking, ask for marked spaces as close as possible to your entrance door.

Personal Guarantees: Generally, a CPA and legal counsel will advise you to incorporate your business for tax and liability reasons. However, most landlords require new or small to medium-sized practices to personally guarantee the lease obligation. If your landlord insists on this requirement, negotiate a fixed guarantee period (say, one or two years), after which your personal liability will automatically extinguish (providing you are not in monetary default).

Subleasing and Assignments: Make certain the landlord cannot unreasonably withhold his consent to your subleasing the space or assigning your leasehold interest to another party. This is especially important if you wish to sell your practice and want to make certain any renewal options are not personal to you, and can be conveyed to the buyer. Negotiate any transfer fees to the lowest amount possible ($500 or less).

Holding Over: A holdover occurs when the tenant remains in a space after the lease term expires. To discourage this, many leases impose a stiff monetary penalty that increases the rental rate from 150% to 200% of the last-paid amount. Modify the language so that if you remain in the space with the landlord’s full knowledge and consent there is no penalty and the lease continues as a month-to-month tenancy at the last-paid rental amount. Also, require each party to give the other 30 to 60 days’ written notice of their intent to terminate your tenancy during the holdover period.

Estoppel Certificates: When a property is refinanced or sold, tenants will be asked to sign an Estoppel Certificate, which confirms various economic terms and conditions of the lease agreement. Generally, leases contain a provision requiring tenants to sign a bona fide Estoppel Certificate within a specific number of days. Be certain the certificate does not go beyond the scope of the original lease document by providing for either the lender or new buyer to modify any of your rights under the lease.

TIP: When it comes to preserving one’s rights to a leasehold interest in real estate, every promise, understanding and warranty that exists between the parties should be contained within the original lease agreement. Anything subsequently discussed that could affect the rights or obligations of either party should be put in writing (create a paper trail) and mailed or delivered to the other party in a timely fashion.

Stephen A. Cross, CCIM, is an advocate for the rights of tenants and buyers. Since 1984, he has advised hundreds of businesses on ways to acquire real estate at the lowest costs and most favorable terms. He can be reached at 480.998.7998, [email protected] or www.crossrealty.com.