commercial real estate lease

[Rita Droz]

I am not sure if anyone can answer this question, but I figured I would give it a shot.  In a commercial lease agreement, is there language that can be inserted that mitigates the lease obligation of the tenant in the case of the tenant breaching the contract?  Basically, if the tenant's business does not succeed is there any way to protect themselves from the lease obligation if they fall short of the term?

[Account Closed]

yep u can propose a contingency/rider that allows u to exit before lease terminates if your business fails during the lease term however it reduces chances of the PM/owner taking it seriously as they would then have to monitor ur monthly revenues (something many commercial owners do anyway in order to assess royalties due) or proof of lack thereof

[Rita Droz]

@Neil G. Thank you for the info, I appreciate the feedback!

[Neil Schoepp]

@Rita Droz  something else you may want to check into with your attorney. 

Most times a lease will be written to you the individual. Holding you responsible if your business closes and you end the lease early. 

Form a business entity and have the lease written between the business and the landlord. If the business fails your not on the hook. Not sure if this applies nationally but I read this online and it was confirmed by my lawyer 9 years ago when I opened my LLC.

[Rita Droz]

@Neil G Yes, I was thinking that, I do have an LLC so I would have them written to the business and I will also look to add some sort of mitigating language as well. Thanks again!

[Joel Owens]

Rita it depends on how desperate the landlord is to lease the space.

Are you talking an industrial lease, office lease, retail lease?? How much space out of the total complex??

Is the location a premium spot in the complex or one of the extra filler spaces??

When setting leases if the tenant isn't national with a corp. guarantee then we do not like doing rent increases every 3 to 5 years. With national for retail they usually go up 2% a year but in blocks every 3 to 5 years. So for instance rent would stay the same and then go up 6% in one shot.

For mom and pop they could sign a five year lease and go out in year three. For this reason we like to set the 2% rental increases YEARLY to drive maximum yield if they go dark early.

The landlord looks at tenants for liquidity and net worth when it's mom and pop or a startup. I want to know that if your business losses 2,000 a month but you are worth 2 million then you will keep paying the rent or I will come after you for it etc. with the personal guarantee.

For space build out there is TI ( tenant improvements ) and then LC ( leasing commissions ) if any for the landlord. A startup up outfit it's better to usually give free rent over paying for their TI. This way if they go out you are not out much money as landlord. If it's a Starbucks coffee with a national guaranteed lease then giving some TI as the landlord makes sense as chances of honoring the lease full term are high.

When a business starts to fail generally a negotiated settlement is reached with the landlord. For instance if the total value of the remaining lease in commercial is 200,000 over 3 years left they might let it go for 40,000 for a liability release. The landlord wants to settle as the business might file BK in the future or if personal guarantee the tenant might file personally.

The landlord might go for when doing the lease no guarantee for a certain time and then it converts to a guarantee.

There is all kinds of middle ground and workouts with the commercial attorneys negotiating the lease agreement.

You want no responsibility if the business tanks. The landlord wants ultimate security just like a bank to protect themselves. You are looking at a business liability of likely a few hundred k and the landlord has a center in the millions to tens of millions in capital exposure for their risk side. 

So if a solution is to be made likely it is in the middle somewhere where you both have an acceptable amount of risk to move forward.

I would vet your business idea as well being a landlord. Does this tenant have a track record?? Do they own other locations?? Is this start up a franchise they are doing or their own idea??

Is their a ton of competition for the concept they want to open in the area?? For example ten pizza places already exist in a 1 mile radius. Does the tenant have experience in the business they want to open?? Example they want to open a florist shop and while never owning a business they worked for a national florist company for ten years and was a manager.

Hope it helps.    

[Rita Droz]

@Neil G.  I do have another question, so I hope you don't mind, I am going to PM you.

[Rita Droz]

@Joel Owens Thank you Joel, that was a wealth of information!

[Account Closed]

Rita yea Neil S & Joel provided a wealth of info

I like Neil S's idea of having your business apply to rent it and see if they accept it that way if your business folds you may be off the hook but like Joel mentioned they are assessing risks and might require a personal gaurantee in order to rent to you/your biz especially if your business credit or its assets are somewhat 'thin'.

[Rita Droz]

Thank you everyone! and Neil S., sorry I got confused with Neil G.!