What do you do when you receive an invoice and you are charged $342,703 more than expected? That is the question that the pharmacy chain Rite Aid had to figure out for its retail lease in Glendale, California.

In Thrifty Payless, Inc. v. The Americana at Brand, LLC (2013) 218 Cal.App.4th 1230, Rite Aid alleged that its landlord overcharged $342,703 for Rite Aid’s annual share of taxes, insurance, and common area maintenance expenses in the large entertainment, shopping, dining, and residential complex known as The Americana at Brand. Rite Aid sued its landlord for damages and rescission of the lease, arguing that it should have only been responsible for 2.2% of the total common area operating expenses for the large shopping center. Instead, Rite Aid found itself responsible for 5.67% of the operating expenses.

As any investor or business owner knows, such a drastic difference in what is expected and what is due can tip the scales. It can cause a profitable investment to become an unprofitable one.

What caused this unfortunate dispute over operating expenses? Rite Aid alleged that there were vast differences between the figures the landlord provided in the letter of intent, the landlord’s later estimates of what the operating expenses would be, and what the landlord ultimately charged Rite Aid after the lease term began.

Rite Aid argued that the executed lease did not conform with the parties’ original intentions expressed during the negotiations. Rite Aid also argued that the landlord breached a specific lease provision by failing to allocate some of the common area operating expenses to nonretail tenants in the complex. The landlord disputed the claims, and both parties litigated this lawsuit for years.

This is just one out of the many cautionary tales for businesses to appreciate the importance of understanding and negotiating specific provisions in their commercial leases.

As a business owner signing a lease, it is not enough to know the basic terms negotiated in letter of intent. It is crucial to review the lease in detail and think about each of the material provisions.

For example, when it comes to the operating expenses, there are several questions you should be asking yourself and your broker:

• How much can your landlord increase the operating expenses annually?
• How is the landlord is calculating and allocating the operating expenses among you and the other tenants?
• What recourse do you have if you believe the operating expenses imposed on your business are unfair or unexpectedly high?

The trick answer to these questions is that they are all negotiable depending on the type of business you have, the type of property you are leasing, the location of the property you are leasing, who you are leasing from. Are you negotiating these provisions to your advantage?

Negotiating and drafting a lease that is tailored to your specific business and rental property can be the difference between a profit and loss for your business. It is worth taking the time to understand your lease, negotiate concessions, and draft enforceable lease provisions that effectuate those hard-won terms.

Key Provisions to Negotiate

For every lease, there are key provisions that each business owner should scrutinize and discuss with their real estate broker and real estate attorney.

As an initial matter, it is important to understand the type of lease you have (see “Types of Commercial Leases“). The type of lease used plays an important role in determining the scope and extent of the landlord’s and tenant’s respective responsibilities.

Once you understand the type of lease you have, it is important to go through the list below and think about each of the material provisions and how they may impact your business. The list below provides a basic set of material terms. However, this should not be construed as an all-inclusive list. Depending on the nature of your business and what provisions are present (or not included) in the lease, there may be additional terms and conditions that you need to add, delete, or modify before you execute the lease.

• Rent:
  • Rent commencement date.
  • Base rent amount.
  • Additional rent amount, such as operating charges or percentage rent.
  • Share of operating expenses, such as if there are multiple units in the building.
  • Types of operating expenses that the landlord may pass through to the tenant.
  • Expense stop, to establish the maximum level of expenses that the landlord may pass onto the tenant.
  • Escalation clauses that allow the landlord to increase the rent over time.
  • Rent-free or reduced rent periods, which may occur in the period when the landlord is making landlord improvements or when the tenant is making tenant improvements, or the property is unavailable or too damaged for the tenant to operate its business.
  • Payment schedules.
  • Penalties for late payment of rent.
  • Tenant’s right to obtain the landlord’s records and audit the operating expenses.
• Lease Term and Extensions:
  • Effective date of the lease.
  • The initial term of the lease.
  • Options to extend/renew the lease.
• Use and Definition of the Premises:
  • Definition and square footage of the premises and common areas.
  • Permitted uses and restrictions, which may include exclusivity clauses that prevent the tenant from competing with landlord’s other tenants or prevent the landlord from leasing to the tenant’s competitors.
  • Tenant’s ability to make alterations to the property.
  • Tenant’s right to remove improvements from the property after the lease ends.
  • Tenant’s hours of operation, particularly when the leased premises is part of a larger building or complex.
  • Tenant’s obligation to continue operating the business during the term of the lease, even if the tenant is operating at a loss.
• Property Condition, Maintenance and Repairs:
  • Condition of the property and facilities when the landlord turns over the property to the tenant at the start of the lease and when the tenant returns the property to the landlord.
  • Landlord’s and tenant’s respective responsibilities for repairs, maintenance, replacements, and improvements.
• Default, Cure, and Termination:
  • What constitutes a default and breach by the landlord and by the tenant.
  • Assignment and sublease rights.
  • Penalties for early termination of the lease.
  • Notice periods and procedures for giving notice of a default or breach.
  • Force majeure, which allows the parties to excuse or delay performing an obligation because of an unforeseen circumstance beyond the parties’ control.
• Damage and Insurance:
  • Types and amounts of insurance the parties are required to maintain.
  • Additional Insureds, which provides insurance coverage to someone other than the policyholder.
  • The parties’ respective liabilities when there is a casualty or condemnation event.
  • Indemnification clauses, which describes the circumstances under which one party must indemnify the other party.
  • Exculpatory clauses, which describes the circumstances under which a party may be protected from liability.
  • Tenant’s ability to terminate the lease if the destruction of the property prevents tenant from operating its business.
  • Waiver of subrogation, which waives an insurer’s right to recover claim payments from the other party and its insurer.
• Other Important Provisions:
  • Landlord’s improvements and tenant’s improvements, which are typically described in separate exhibits attached to the lease.
  • Rules and regulations and covenants, conditions, and restrictions (CC&Rs), which are typically attached as exhibits to the lease.
  • Right of first refusal offered to the tenant to purchase the property if the landlord receives an offer to sell the property to a third party.
  • Jurisdiction and governing law.
  • Merger/integration/entire agreement clause, which is used to prevent the parties from attempting to enforce agreements that are not contained in the signed lease.
  • Signage rights and restrictions.
  • Parking.
  • Security deposits.
  • Dispute resolution.

Conclusion

Before entering lease renewal negotiations or a brand-new lease agreement, consider seeking professional guidance. Without assistance, many business owners do not realize they at best, they may be missing out on significant savings, or at worst, they may be exposing themselves to future disputes and losses. A seasoned real estate leasing agent and real estate attorney can help you avoid pitfalls and obtain advantageous lease terms tailored to your specific needs.

Please note that the content provided on this website is for general information only; it is not intended to be and should not be construed as legal advice. Please reach out to Valerie Li Law, A Professional Corporation, to schedule a consultation.