Spring Cleaning for Commercial Leases
Published: May 2, 2023
Spring is here! We finally have warmer weather, longer days, and the prospect of weekend plans not getting ruined by rain. If you’re anything like me, you were ready for the turn of the season after a very wet winter. What I wasn’t ready for was the inevitable assault on my senses, as pollen has suddenly filled the air and unleashed its annual crusade to dampen the optimism of spring. If I had remembered to start my Flonase and Claritin regime earlier, perhaps I wouldn’t be flying through tissue boxes as I sneeze and cough my way through the day.
A similar situation occurs in commercial leasing. As the end of a lease term nears and the parties consider extending their agreement, the optimism of an extension often causes parties to overlook the need to update the terms of their lease. While parties and their brokers typically focus on the length of the term or the new rent, few take the time to evaluate whether the terms of their existing lease still make sense for both parties. Yet if the parties took the time to conduct a little “spring cleaning” of their lease, they could end up enjoying their relationship in each upcoming summer, fall, and beyond.
For landlords, there are several important lease provisions that should be revisited. For example, depending on the length of the existing lease, current insurance requirements for the tenant may need to be increased or otherwise modified. Landlords also should not overlook the importance of obtaining updated financials for their tenant, and if necessary, increasing the security deposit/letter of credit to match the new rental rate or adding a new guaranty. On a more technical basis, if the landlord has not addressed CASp requirements or force majeure following COVID-19, the lease extension is an appropriate opportunity to update the lease sections.
For tenants, it is critical not to overlook provisions that can be reset for the start of the new term. If the lease includes a base year for operating expenses, the tenant should seek to have this updated for the start of their extension. In a triple net lease scenario, the tenant could alternatively try to push the landlord to assume responsibility for major replacements (like HVAC) which may be showing signs of age and need repair. In retail, with the increase of curb-side pick-up and delivery services like DoorDash, it may be time for a tenant to add exclusive or short-term parking in front of their space. For office tenants, now may be the time to negotiate in a down market, obtaining important tenant improvement concessions to freshen their space for the remainder of their term.
Obviously, whether a party can obtain these updates to their lease will depend on the particular circumstances of the transaction, including whether the party has leverage based on market conditions and the property economics to seek these concessions. However, overlooking the opportunity to fold these issues into the negotiation of a lease extension may be worse than embarking on a day of spring gardening without a healthy supply of antihistamines or sunscreen.