“It’s just ordinary lease stuff,” Frank said. After a short pause, he continued, “At least, I think it is.” Frank had just been given a document entitled “Standard Commercial Lease – Net.” He wasn’t an unsophisticated businessman—his business had grown from him and his wife just a few years earlier to a staff of ten. He knew his business inside and out and was pretty good with numbers. But, as he said, “legalese makes my eyes glaze over.”

The situation is a typical one. Start-up companies are negotiating their first lease, or a company that is a bit more established is given a new lease for a second location or as a renewal of their first location. The owners usually have some idea of what they want: a) square footage; b) rent; c) security deposit; d) the term; e) options; f) improvements to the premises in accordance with tenant plans; and g) tenant monetary allowance to pay for those improvements. The trouble is that the basics of these terms can fit onto the first page (and sometimes do), while the other 20, 30 (or more!) pages are filled with nearly illegible small type. Surely those terms say something, don’t they? With a lease being one of the bigger investments a company makes, shouldn’t you know what those terms are, and even more importantly, what they mean?

Commercial leases do have “the ordinary lease stuff”—that is, in addition to the basic business terms, they all contain provisions addressing common area maintenance, if any, assignment and subletting, maintenance responsibilities, subordination, insurance, indemnification, casualty, condemnation, environmental, and events of default (and remedies), along with any number of other specialized provisions that the landlord had requested based on past experience or the specific form it used. While those sections are all “ordinary lease stuff,” the content of those sections varies dramatically from lease to lease, and virtually all landlords are willing to negotiate on some, or all, of those provisions. Although every word in a lease is significant, there are some provisions that get negotiated in almost every lease:

Maintenance and CAM. In addition to base rent, almost all commercial leases contain additional monetary obligations on the tenant, including maintenance and/or additional rent in the form of common area maintenance (CAM). Many commercial leases are called “Triple Net Leases” (also sometimes referred to as a “net-net-net lease,” an “NNN lease” or a “hell or high water lease.”). In a true Triple Net Lease, all costs of maintaining the building and the premises, including real estate taxes, insurance and the CAM charges, are passed on, directly or indirectly, to the Tenant. Although the term “triple net” is used, the actual content of these fees varies dramatically from lease to lease. In some leases, the costs of these elements are absolute, meaning that whatever those costs are to the landlord in the year incurred, the tenant will pay its pro-rata share. A way to mitigate these costs is to require a base year, so that a tenant only pays for the increase in these costs over the base year. However, if the landlord’s cost structure for base rent does not include these costs, the ability of the landlord to provide a first-class property can be compromised, which ultimately affects the tenant as much as the landlord.

Another problem that arises in the calculation of CAM is when a building or shopping center is only partially leased and parts of the project remain vacant. Are the common area maintenance costs split between the existing tenants or is it split based on the tenant’s proportion of all rentable area in the building or shopping center? Minor changes in the calculation of CAM can have a significant impact on the CAM charges and a business’s bottom line. Obviously, having a clear understanding as to how the overall costs are apportioned is critical to the tenant’s understanding of its occupancy costs and to the landlord in making certain that the cost of owning and operating the office building or shopping center is adequately funded.

Some landlords include management fees, rental of personal property equipment for the property (without any requirement that the equipment be used exclusively in the maintenance of the property and not used elsewhere), an additional percentage for “overhead,” and capital improvements without an extended depreciation schedule. The problems arise when tenants are paying for owners of the building or shopping center to be owners (e.g., paying someone to manage a property while owners just review financial statements), when landlords are charging for the same equipment at multiple locations or charging a single location but using the equipment at sister properties without credit back to the charged property’s tenants, or the landlord is requiring tenants to underwrite the cost of the landlord’s business by paying for “overhead” expenses, or paying for capital improvements over a shorter useful life, and therefore at a higher rate, than tax laws would otherwise allow.

The end result can be a significant increase in a tenant’s occupancy cost, and business owners need to either understand these issues and attempt to lessen the burden or build the cost into their budget. You can negotiate many of these issues, but the time to do so is before signing a lease, not after. Bargaining position is everything, and suffice it to say that until a prospective tenant signs on the dotted line, the landlord will try to do everything reasonably possible to get a tenant to sign. Afterwards, not so much.

Indemnification. One of the most important sections that is hardest to understand is indemnification. Indemnification, in a sense, apportions liability and risk in the leased premises by making the tenant pay the landlord (or vice-versa) if the landlord gets sued for certain injuries to third parties. What if one of your customers trips and falls in the parking lot? What if the landlord’s contractor gets injured while repairing electricity in your unit? In both instances both you and the landlord may get sued. Most leases are drafted solely to protect the landlord, but tenants can typically negotiate terms that are less one-sided and provide even-handed terms.

Casualty. What happens if the building in which your leased premises are located burns down? What happens if the nearby premises burn, and there is smoke or water damage in yours? Does rent abate, and if so, by how much? Do CAM fees, insurance and taxes abate, or just base rent? What if the landlord takes a year to repair the premises, during which time your business is losing money and might go out of business? Can you terminate the lease? Can the landlord? Each lease will have its own set of terms that may be able to be negotiated on these points.

Events of Default. Everyone hopes for a cooperative relationship with their landlord, and no one imagines defaulting when they enter into their lease. In general, most landlords are willing to let a lot slide if the rent check arrives on time and a tenant isn’t interfering with other tenants or creating a nuisance. Still, conflicts do arise, and most leases are drafted heavily in favor of the landlord. Some commercial leases permit a landlord to declare a default if a rent check isn’t received on the first of the month (even if it is, in fact, “in the mail”). The landlord may then be able to terminate the lease, impose a lien on all property in the premises, and demand the rest of the rent under the lease. While there’s no way to draft a lease that lets a tenant out of its obligation to pay rent, grace periods, written notices, and other reasonable terms can be negotiated to minimize abuses and ensure that the landlord will act in good faith.

Security Deposits and Guaranties. Most landlords want to have security that they won’t lose their investment because of defaulting tenants. Landlords may protect themselves with rent prepayments, security deposits or personal guaranties. The prepayments may be the first and last months’ rent upon lease signing, together with a month’s rent (or more) as security deposit. Landlords who have placed considerable tenant improvements into the premises at the tenant’s request or direction have a justifiable concern that if a tenant that is a corporation or limited liability company defaults, the individual owners will be able to walk away from the lease, and the landlord will be unable to be made whole through a lawsuit against the insolvent tenant. For that reason, landlords will typically want a personal guaranty, requiring the individual business owners to guaranty payments of rent and other conditions of the lease. By contrast, sophisticated business owners want all the limited liability benefits of their corporate or LLC form and never want to be on the hook personally for the obligations of their corporation or LLC. Usually, through tough negotiation, a compromise can be had that satisfies both landlord and tenant – including, perhaps, a personal guaranty that lapses after the initial few years.

As with all lease terms, negotiating a fair and reasonable arrangement can go far in achieving both the landlord’s and the tenant’s goals. We have used pledges of securities as a substitute of a guaranty, provided for decreasing guaranties both as to amount and time period, and apportionment of guaranties across multiple owners of the tenant so as to not impose all the liability on the deepest pocket in the ownership group.

As with our hypothetical friend Frank at the beginning of this article, after talking through the lease and understanding its terms, a tenant can go back to the landlord with a laundry list of requested changes. Lease negotiations do not result in either landlord or tenant getting everything that they generally want, but instead results in the tenant and landlord giving, getting and modifying on the various lease terms in order to get the deal done. But just as important to the changes a tenant is able to obtain in their lease is the ability to understand the rights and responsibilities and build a better budget and business plan.

We closely with landlords and tenants in negotiating and documenting real property leases. These instruments are complex documents that can have far-reaching impact beyond the square footage and the amount of rent. Contemplating and drafting terms to address those issues are critically important, and we take lease analysis as serious due diligence prior to a tenant or landlord making a substantial investment