Entering into a lease for a commercial space carries high stakes for all parties involved. As terms and conditions of a lease must be well negotiated and documented accurately, it is essential to have a real estate attorney involved to ensure that all steps throughout the leasing process are completed successfully and efficiently.
Here’s Ron Nelson, Senior Real Estate Counsel at DLC, sharing his tips on the leasing process.
What is the value of hiring a real estate attorney?
RN: Real estate is a specialized area of the law with a unique set of legal requirements for buying, selling or leasing of property. Most attorneys can provide some basic real estate support for their clients. However, commercial real estate deals can be complicated, expensive and involve a high amount of risk. Most attorneys are not involved in commercial real estate transactions on a regular basis, so hiring someone well versed in real estate law can help tenants avoid costly mistakes and save time. This is especially true when the relationship set by a lease may last 10 years, 20 years or even longer.
What can be expected from the leasing process?
RN: Most often, the first step for a prospective tenant is to meet with the landlord’s leasing representative to discuss his or her needs as a business owner and major business terms for the space as a tenant. Once a basic agreement is negotiated between the business and the landlord, a Letter of Intent (often with the guidance of the parties’ lawyers) is drafted and signed by the parties. At that point, the attorneys representing both parties negotiate additional deal terms and legal provisions in the lease. Once the parties agree to all of the lease provisions, the lease is signed and the space is prepared for the business to open to the public. We often work with first-time business owners and we try to support them throughout the process as much as possible. Helping our tenants be successful is one of the fundamental aspects of our success.
What things do tenants usually overlook during the commercial leasing process?
RN: Tenants tend to overlook the time period that they will need to obtain the permits required to build out their space and open for business. The process for getting permits can be difficult to navigate in some municipalities, and not giving yourself enough time to fully understand local zoning, building, and other requirements can be costly. Tenants should review these requirements on the municipality’s website and consult with professionals early in the process. They should also obtain any information the landlord may have that is relevant to the operation of the proposed business, such as any business operations or conduct that is not permitted in the shopping center.
How can you close on a leasing deal more efficiently?
RN: Tenants should decide early in the negotiation process their top 5 major legal issues based on their specific needs, and be prepared to be flexible on those issues that are not as important to the day-to-day operation of their business.
Are there strategies you can adopt to streamline the entire leasing process?
RN: First, identify the major issues in the Letter of Intent or term sheet. If an issue is a “must-have” for the tenant, it should be raised and resolved before the deal is in the “in lease” stage of the process when the attorneys negotiate the rest of the lease. Second, each party should understand the internal approval procedures of the other party, including any required documents and the potential for delays in the approval process. Last, but not least, tenants should perform their due diligence investigations (zoning, permitting, title search, use restrictions review, etc.) as early in the process as possible to identify any issues that could delay lease signing or construction of their space. An experienced real estate attorney can help with this due diligence.
Are there terms and conditions that tenants need to look out for nowadays?
If your business is medical/healthcare:
- Due to the federal HIPPA Privacy Rule requirements, security for patient information is a major issue. This should be reflected in restrictions within “Landlord Access” provisions.
- Existing leases and other agreements should be reviewed in case certain medical uses are prohibited.
If your business is food/beverages:
- Existing leases and other agreements should be reviewed in case certain cuisine or food type are prohibited.
- Assignment and subletting provisions should be negotiated to allow for the potential future sale of the business.
If you are a retailer:
- Space Alterations provisions
- Landlord’s repair and maintenance obligations
- Short-term parking spaces for customers
- Right to install cart corrals or cart containment systems
- Right to “Go Dark” (tenant’s right to cease operations at its leased space for certain periods of time)
- Delivery of possession blackout periods
If your business is gym/fitness:
- Waiver of landlord lien on financed equipment
- Noise and vibration mitigation provisions
- Ancillary uses for additional services, such as tanning, yoga, etc.
- Delivery of possession blackout periods
- Operating Hours
Ron Nelson is Senior Real Estate Counsel at DLC. Ron has been at DLC since 2014 and has been deeply involved in drafting and negotiating retail and ground leases, as well as related documents for a wide range of spaces within the company’s shopping center portfolio.