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Ask Sam: What do I need to know about signing a commercial lease?

There's more to negotiate with a commercial lease than a residential one. 

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Question:

I am outgrowing my home office and about to rent office space for the first time. The landlord gave me a very lengthy lease to review. How is a commercial lease different from a lease for an apartment? Can I negotiate the terms? What should I be on the lookout for and what should I want included? Do I need a lawyer?

Answer:

There tends to be greater negotiability with commercial leases than with residential ones, and you should consider hiring an attorney before you commit to a lease, says Sam Himmelstein, a lawyer who represents residential and commercial tenants, tenant associations, and co-op shareholders. 

“Unlike residential leases, which are rarely negotiable, with commercial leases, having a lawyer is the norm,” Himmelstein says. “The terms of the lease are usually negotiable.”

Ordinarily, when a client comes in with a commercial lease, Himmelstein says, he asks them to make a list of what they need as part of their tenancy.

Depending on the type of business, for instance, some commercial tenants want a clause in the lease that gives them the option of sharing the space, or subletting in case the business doesn’t work out.

Whether you are signing the lease as an individual or an LLC or other corporate entity will also impact some of its terms. With tenants registered as LLCs, landlords will want to protect themselves from the risk that the tenant breaches the lease and the corporation dissolves, leaving the landlord without rent payments.

“Commercial landlords almost always want a personal guarantee from the individual of their financial obligations under the lease,” Himmelstein says. “We often include a ‘good guy clause’ that says if the rent is not being paid, so long as the tenant is not otherwise in breach, they give back the space and the guarantee ends.”

Other clauses in the lease may cover physical aspects of the space being rented, like whether tenants may put up signs and make other kinds of alterations. Most landlords will require a work letter detailing who is going to do alterations and the costs involved. Landlords will sometimes agree to perform or pay for these renovations.

You should be particularly vigilant for clauses related to rent increases, which could send your monthly payments skyrocketing.

“Watch out for rent escalation riders,” Himmelstein says. “Your rent might be $3,000 a month, but the landlord might include a rider stating that if their operating or real estate expenses go up, you have to pay a portion of that.”

This is typically calculated based on the percentage of square feet you occupy in the building, and costs can quickly escalate. Keep in mind, too, that there is no rent regulation for commercial leases, so when your lease expires, the landlord can increase the rent by as much as they want, or refuse to renew the lease without specifying a reason. 

Another commonly negotiated aspect of commercial leases is the length of the lease.

“Sometimes you might want the option to terminate early, if this is a new business and you’re not sure how it’s going to work out,” Himmelstein says. “But you want to avoid giving your landlord the option to terminate early. Sometimes they put clauses allowing them to terminate early if they decide to demolish or renovate the building, and a 10-year lease can end up becoming a two-year lease.”

Commercial landlords will sometimes also insert language into a lease that can affect your ability to fight a potential eviction. 

Residential tenants whose landlords bring them into court on claims of breaching their leases (for issues like illegally subletting, having a pet in a no-pet building, or other lease violations) are given a chance to cure—that is, remedy the issue—and avoid eviction, even after trial.

Commercial tenants, on the other hand, don't have the same right. 

"In a commercial tenancy, if the landlord claims a breach of lease, you have to go to Supreme Court and get an injunction," Himmelstein says. "If you don't, you don't have the same chance to cure and could lose your tenancy."

The reason for this is that commercial tenants only have 10 days to address the issue after a landlord moves to terminate their leases, and time often runs out before they can get the opportunity to cure. 

Tenants can avoid this by getting "Yellowstone injunction," which allows them to maintain tenancy until given a chance to cure. However, some commercial landlords ask tenants, in their leases, to waive their right to get a Yellowstone injunction—something else to look out for, and which an attorney can help you negotiate. 

It’s important to work out these details before you sign a commercial lease, because it will be much more difficult to deal with these issues in court.

“The rights commercial tenants have in court are very limited, and governed much more by the lease than by the law,” Himmelstein explains. “The laws that apply to residential tenants, like stabilization laws, the right to sublet, the right to roommates, the warranty of habitability—none of those apply in commercial leases.”

Also unlike residential tenants, if your landlord is not providing services as promised or doing repairs promptly, you cannot withhold rent; instead you’ll have to sue them, unless the conditions are so bad that you are effectively evicted from the space.

Your ability to negotiate the terms of your commercial lease will depend on a number of factors, including what you’re asking for and how long the space has been on the market. It’s wise to have an attorney help with the negotiation ahead of time, since commercial tenants have fewer rights than residential tenants.

“At the end of the day, the relationship between a commercial tenant and a landlord is viewed as a business transaction,” Himmelstein says.

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Sam Himmelstein, Esq. represents NYC tenants and tenant associations in disputes over evictions, rent increases, rental conversions, rent stabilization law, lease buyouts, and many other issues. He is a partner at Himmelstein, McConnell, Gribben, Donoghue & Joseph in Manhattan. To submit a question for this column, click here. To ask about a legal consultation, email Sam at shimmelstein@hmgdjlaw.com or call (212) 349-3000.