Your Permitted Use Clause-Not A Simple As You May Think!

Many tenants think that the permitted use clauses in their commercial real estate leases are simply loose descriptions of what the tenant intends to do in the premises. They will look at the clause and say to themselves “that is a pretty decent description of my business”, and they don’t think to further negotiate the language. However, in reality, the permitted use clause is a limitation on what you can do in the premises. If it doesn’t say it in your permitted use clause, then you probably can’t do it. For instance, if you have a permitted use clause that says the premises can be used for “an Italian restaurant specializing in pizza and pasta”, then you can’t simply open up a french restaurant or a hamburger restaurant if your Italian restaurant isn’t doing so well, or if you simply decide that another restaurant type might be a better business model for you. Without the landlord’s permission, you actually can’t open any type of business in the premises except for an Italian restaurant specializing in pizza and pasta. What’s worse is that, if you haven’t negotiated that the landlord’s consent to a change of use may not be unreasonably withheld, then the landlord doesn’t even have to be reasonable about disallowing your use change.

If your business isn’t making it, or you want to move or retire, the landlord doesn’t have to let you assign or sublease your premises to another tenant unless they are going to use it as an Italian restaurant specializing in pizza and pasta. Commercial real estate leases, especially retail leases, are fraught with issues like this. Make sure that you think about these clauses instead of making the mistake of assuming that they are just loosely descriptive in nature. For more tips on negotiating commercial real estate leases, see my blog at http://www.langertlaw.com.

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Don’t Negotiate Your Letter Of Intent Without An Attorney Review

Most of the time, tenants and their brokers negotiate and sign letters of intent for retail and office leases before they engage the services of a leasing attorney. That’s generally a bad idea…particularly if the landlord is a sophisticated landlord.

Read about many other commercial real estate leasing topics at my blog at http://www.langertlaw.com.
As both an experienced broker and an experienced leasing attorney, I sometimes fill both roles for my tenant clients. However, at other times, I serve as just the broker or just the leasing attorney. I sometimes deal with LOI’s that were done without attorney involvement by other brokers or tenants.

What larger, more sophisticated andlords sometimes do is to insert a lot of language into the LOI with respect to various provisions that are legal in nature and hurtful to the tenant’s positions. This is done on purpose. They know that the tenant’s leasing attorney would probably not accept that language. By inserting it into the LOI before the tenant’s leasing attorney gets involved in the process, however, they can sneak provisions and terms by unsuspecting brokers and tenants, and then argue that these concepts were already agreed to in the LOI and that the tenant (or its attorney) is being disingenuous by revisiting issues that both parties already agreed to.

It shouldn’t take a good leasing attorney more than an hour or two to review most LOI’s, and it is a good investment. I often see tenants stuck with provisions that could cost them tens or hundreds of thousands of dollars because they didn’t spend a few hundred extra dollars on having their attorney review the LOI.

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Watch Out For What ISN’T In Your Lease!

Watch Out For What ISN’T In Your Lease!.

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Watch Out For What ISN’T In Your Lease!

In the brokerage side of my practice, I sometimes get leasing clients that don’t want to hire an attorney. Usually, they are smart, successful people that have a high level of business acumen. They figure that they can read the lease and see if there’s anything they need to worry about. After all, it’s in English…right (well, sort of, anyway)? Unfortunately for them, leasing is a very specialized industry, and the clauses in your lease can have very specific meanings that can affect your wallet in a very meaningful way.

Here’s what I mean. As a leasing attorney and broker, I may be able to read a government contract for the purchase of computer software just fine. I may even be able to catch some clauses that don’t seem fair or right to me. However, since my knowledge of the computer software industry is limited, and since each industry has its own terminology and norms that are at least semi-foreign to the rest of society, I couldn’t do anywhere near as good of a job negotiating that contract as someone that knew the language, the industry customs, the prevalent rates and percentages, etc. of that industry. Likewise, nobody knows leases and leasing like a leasing broker and a leasing attorney. A general practice attorney (however brilliant they may be) generally can’t do a very good job negotiating a lease. You can imagine how poorly a layperson would do at it.

Anyway, sometimes a client will say “I read the lease, and it looks good to me”. I will generally ask them if there is a landlord’s default clause in the lease, and the answer is usually no. Then, I will ask them if there is an obligation for the landlord to insure the property. The answer is often no to that question as well. I have several more questions that I ask these folks, but I’m not going to get into them right now. Suffice it to say that those answers are also generally non. The point is that most landlord forms leave out valuable tenant protections. Generally, the shorter the landlord’s lease form, the more devoid they are of important protections for the tenant. After all, chances are that they didn’t leave out the protections that they want for themselves.

Recently, I saw a landlord lease form from a large regional developer. They spent three and one half legal-sized pages outlining what constitutes a tenant default and what the ramifications would be if the tenant defaulted. However, there wasn’t a single word in the lease about what constituted a default by the landlord. Obviously, default is an important topic, or they wouldn’t have spent more than three pages of the office lease defining tenant’s defaults. Most tenants that review their own leases would never have picked that up. Many non-leasing attorneys would never have picked that up. If you decide to review your own lease, at least try to look at what isn’t in there as well as what is in there.

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Gross Leasable Area Versus Net Rentable Area

Landlords usually quote the square footage of tenant spaces in office buildings based upon the “gross leasable area” of the space. Many tenants hear the square footage of the space, and assume that they are getting that amount of space in their premises. In reality, the gross leasable area of a space generally includes the tenant’s pro rata share of the building’s common areas, elevators, common bathrooms, stairwells, and other portions of the building that the tenant doesn’t actually occupy. The actual square footage of the tenant’s space is called the net rentable area of the space. The gross leasable area usually incorporates a “core factor” of 15-25 percent of more. So, that 5,000 sq. ft. office space that you are looking to lease probably isn’t really 5,000 sq. ft.. It’s more like 4,000, or 4,500, or 4,700 (it depends on the particular building and the amount of non-rentable space that is included in the figures).

I have had office clients do elaborate drawings of how their company was going to fit into a particular sized space. They are often surprised when I inform them that their 5,000 sq. ft. space is not really 5,000 sq. ft.. When you are budgeting for your new office space, be sure to take into account the difference between the gross leasable area of your space and the net rentable area.

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Don’t Sign A Lease For A Space That You Can’t Occupy!!!

It sounds simple enough. You need 10,000 sq. ft. of warehouse space to house your inventory, or you need 5.000 sq. ft. of retail space for your karate studio or gym or restaurant. You drive around the areas that you like, you look on the public databases, and you find a place that suits every one of your needs. So, you sign a lease, and you are ready to move in.

Just as the moving trucks have been scheduled, you find out that you can’t use the property for your intended purposes. Think it can’t happen? It can, and it does. Worst of all, most lease language puts the onus of finding out whether you can use the space on the tenant. So, as the tenant, you would remain responsible for payment of rent and other charges whether you can use the space or not.

Many cities have re-zoned entire portions of their towns for specific categories of uses that may not be consistent with existing uses. For example, an area with a lot of warehouse space may have been re-zoned to bio-tech. The businesses that are there already are generally fine, and some buildings are often “grandfathered in” for new users as long as there isn’t a gap in the occupancy of that building for a particular use category beyond a certain time period. So, in this example, you may lease or buy a warehouse in an area of similar warehouses with tenants just like you, but your particular use and/or your particular building or area may not be able to be used for your intended purposes.

When the dot.com boom occurred several years ago, high tech businesses in different parts of the country were eating up downtown retail locations. In an effort to maintain the character of their downtown areas, many cities enacted statutes requiring occupants of the downtown storefronts to be retail in nature. They often define “retail” as someone with a high percentage of their revenue derived from the sale of goods. If you are a karate or yoga studio, a tutoring facility (like a Sylvan learning center, for instance), you don’t qualify as retail. They primarily sell services (tutoring sessions, Classes, instruction, etc.).

Here’s a third example. Some cities have imposed moratoria on new restaurants in certain areas because of parking issues and/or because the zoning authorities decided that they have enough restaurants there already. If you find a space in an area with a lot of restaurants and sign your lease, only to find out that you can’t open your restaurant there because of a moratorium, then you are in a bad spot.
You have to pay rent and other charges for the space anyway.

Many tenants, especially mom and pop operations and franchisees that don’t have good representation, just drive around the area looking for spaces, or they find spaces on computer databases. They see a bunch of “for lease” signs, and they pick what they think is the perfect spot. However, any number of things can stop you from being able to occupy the premises and to operate your business there, including zoning laws, moratoria on certain uses, height and density restrictions, parking restrictions, and many other items.

It’s better to be safe than sorry. Before you sign your lease, make sure that you can actually occupy and use the space that you lease. It isn’t the slam dunk that it appears to be in some cases.

This blog is presented by Evan Keith Langert, a Maryland leasing attorney and a Maryland leasing broker with over twenty years experience. Mr. Langert has negotiated scores of office, retail, and industrial leases in over twenty different states.

Read about other leasing topics on my blog at www.thelangertgroup.com.

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Common Mistakes New Tenants Make In Site Selection

I frequently represent Maryland real estate leasing clients looking for retail spaces for their businesses.  Often, they start off with dreams of leasing the most prevalent space in the most popular shopping center in town.  There’s good reason for that, of course.  They want the traffic that such a great site will bring them, and the much greater shot at success that such a location brings.

Too often, when I begin to show them spaces, they eventually start to ask about secondary retail locations, and then they ultimately concentrate on those spaces exclusively.  As we continue the search, a number of them even begin to focus on the least expensive locations in town.  It’s easy to see the process that happens in their minds.  They start out very excited because they have a dream of opening this great, successful retail operation right in the middle of where everyone is shopping.  Then, as time goes by, the “reality” of the costs of doing business sets in, and they start to focus on the worst case scenario.  They end up asking themselves “what happens if this doesn’t work?”, and they look to save on every expense including rent.

Unfortunately, that is often a recipe for failure.  It is well understood that foot traffic and drive-by traffic are integral to the success of the vast majority of retail businesses.  That’s why drug store chains like to locate in shopping centers where large grocery store chains are.  Other retailers are then attracted to the traffic that those two uses will bring into a center, and on and on it goes. 

I’ve seen retailers ultimately elect to rent spaces that nobody can even see in order to save money.  For instance, I saw one business locate in the basement of a regional shopping mall.  The only things down there were their location and the mall management office.  For some reason, they thought that people would find them because they were in a prevalent regional mall.  The problem was that nobody knew they were there, and they did no business.  That’s an extreme example.  However, the point is that every tenant needs to strike a balance between occupancy costs and visibility/traffic.  It is an extreme rarity that a retail business does well in a location that people can’t see when they drive by, or that they can’t readily figure out how to get to.

Our job as brokers is to get them to balance their fear of failure with their sense of positive expectations of success.  The right space gets them exposure to a large number of the right customers for the least cost possible.  Once you start looking below that line, you are losing valuable customers and hence are really diminishing the probability of success.

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