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Negotiate the

Best Lease For

Your Business

by Attorneys Janet Portman and Fred S. Steingold

2nd edition

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Negotiate the

Best Lease For

Your Business

by Attorneys Janet Portman and Fred S. Steingold

2nd edition

Second Edition JULY 2005

Editor MARCIA STEWART

Illustrations LINDA ALLISON

Cover Design TONI IHARA

Book Design TERRI HEARSH

Production SARAH HINMAN

Proofreading EMILY K. WOLMAN

Index THÉRÈSE SHERE

Printing CONSOLIDATED PRINTERS, INC.

Steingold, Fred.

Negotiate the best lease for your business / by Fred S. Steingold and Janet Portman. --

2nd ed.

p. cm.

Rev. ed. of: Leasing space for your small business/ by Janet Portman and Fred S.

Steingold. 1st ed. 2001.

Includes index.

ISBN 1-4133-0216-5

1. Commercial Leases. 2. Office leases. 3. Small Business--Management. I. Portman,

Janet II. Portman, Janet. Leasing space for your small business. III. Title.

HD1393.25P67 2005

658.15’242--dc22

200540536

Copyright © 2001 and 2005 by Nolo and Fred S. Steingold

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Acknowledgments

We couldn’t have written this book without the assistance and support of many

people.

We’d like to thank Jake Warner, Nolo’s founder and executive publisher, for his

conviction that we could write this book—and patience while we did it. To the extent

that readers find the text clear and to the point, credit goes to our meticulous editor,

Marcia Stewart, who can spot a mushy sentence a mile away and fix it in a trice.

Others at Nolo who helped include:

Stan Jacobsen, who provided valuable research assistance

Tamara Traeder, who offered useful editorial advice

Terri Hearsh, who designed the book and threw in a little editing, gratis, and

Mike Mansel, of Argo Insurance Group in Pleasanton, California, who is technically

not a Noloid but whose generous help on insurance issues over the years makes him

part of the family.

Thanks go also to the Practicing Law Institute, whose programs and materials on

commercial leasing were invaluable.

Table of Contents

Introduction

A. How Leases Are Made and What They Look Like ................................. I/2

B. How This Book Can Help You Negotiate a Favorable Lease .................. I/3

Part I: Finding and Evaluating Space and

Developing a Negotiation Strategy

1 What Kind of Space Do You Need?

A. Do You Need to Move Now? ............................................................... 1/4

B. Setting Your Priorities ........................................................................... 1/9

C. Rent, Deposits, and Improvements .................................................... 1/10

D. Location............................................................................................. 1/11

E. Length of the Lease and When It Begins ............................................ 1/13

F. Size and Physical Features ................................................................. 1/16

G. Other Tenants and Services in and Near the Building ........................ 1/20

H. Parking ............................................................................................... 1/21

I. Building Security ............................................................................... 1/21

J. Image and Maintenance .................................................................... 1/22

K. Expansion or Purchase Potential ........................................................ 1/23

L. Preparing Your Rental Priorities Worksheet ........................................ 1/26

M. Subleasing Space ............................................................................... 1/26

2 Looking for Space and Using Brokers

A. How to Find Space on Your Own ......................................................... 2/3

B. Working With a Real Estate Broker ...................................................... 2/7

C. The Value of Hiring Your Own Broker ................................................ 2/12

D. How to Find a Real Estate Broker....................................................... 2/13

E. How to Choose a Broker.................................................................... 2/14

F. Signing a Contract With Your Broker .................................................. 2/16

G. Handling Problems With Your Broker ................................................ 2/21

3 Evaluating the Space and the Landlord

A. Visiting and Evaluating Prospective Space ........................................... 3/3

B. Further Investigation of Promising Space ............................................. 3/8

C. Environmental Issues to Consider When Evaluating Space................. 3/12

D. Learning About the Landlord ............................................................. 3/18

E. Management Companies ................................................................... 3/24

F. Holding the Space With a Deposit ..................................................... 3/24

4 Understanding the True Size and Cost of the Rental

A. How Landlords Measure Square Feet ................................................... 4/3

B. Additional Rent: Gross Versus Net Leases .......................................... 4/10

C. Percentage Rent—Sharing Income With the Landlord........................ 4/13

D. Computing the True Rental Cost ........................................................ 4/15

5 Setting the Stage to Negotiate

A. How Much Clout Do You Have? .......................................................... 5/4

B. Your Landlord’s Compliance With the Executive Order on Terrorism ... 5/12

C. Getting Past Deal Breakers................................................................. 5/14

D. Letter of Intent ................................................................................... 5/18

E. Finding and Paying for a Lawyer ........................................................ 5/27

6 Your Negotiation Strategy

A. Your Negotiation Strategy Worksheet ................................................... 6/4

B. How to Use Your Negotiation Strategy Worksheet ............................. 6/12

C. How Your Lawyer Can Help With Negotiations ................................. 6/20

D. How to Modify the Landlord’s Lease .................................................. 6/25

Part II: Common Lease Terms

7 Lease Basics

A. Naming the Landlord and Tenant: Parties to the Lease ......................... 7/3

B. Describing the Leased Space ............................................................... 7/6

C. The Use Clause and Exclusive Clause .................................................. 7/9

8 The Length of Your Lease

A. When Do Your Legal Responsibilities Begin and End? ......................... 8/2

B. The Crafty Use of “As of” [Date] .......................................................... 8/5

C. How to Keep Track of Dates With a Timeline ....................................... 8/6

D. Staying After the Term Ends: Holdover Rent ......................................... 8/7

9 Rent

A. Basic Rent ............................................................................................ 9/3

B. Taxes As Additional Rent ..................................................................... 9/8

C. Insurance As Additional Rent ............................................................. 9/14

D. Operating and Common Area Maintenance Costs

As Additional Rent ............................................................................. 9/24

E. Audit Rights ....................................................................................... 9/29

10 Security Deposits

A. Where the Landlord Will Keep the Deposit ....................................... 10/2

B. How the Landlord Will Use the Deposit ............................................ 10/3

C. When the Landlord May Use the Deposit .......................................... 10/4

D. The Fate of the Deposit at the End of the Lease .................................. 10/5

E. Letter of Credit: An Alternative to a Cash Deposit .............................. 10/6

11 Improvements and Alterations

A. Improvements Versus Trade Fixtures................................................... 11/3

B. Renting Space in a Building Under Construction ............................... 11/6

C. Improvements to Your Space .............................................................. 11/7

D. Paying for the Improvements............................................................ 11/11

E. The Tenant Improvement Allowance (TIA)........................................ 11/14

F. The Building Standard Allowance, or “Build-Out” ........................... 11/16

G. Paying a Fixed Amount for Improvements ........................................ 11/17

H. The Landlord Pays for All Improvements .......................................... 11/17

I. When Do You Start Paying Rent?...................................................... 11/18

J. Making Alterations During Your Tenancy.......................................... 11/22

12 Maintenance, Utilities, and Code Compliance

A. Maintenance, Repairs, and Janitorial Services.................................... 12/2

B. Utilities .............................................................................................. 12/6

C. Compliance With Building Codes and Other Laws ............................ 12/9

D. Compliance With the Americans With Disabilities Act (ADA) .......... 12/13

13 Parking, Signs, Landlord’s Entry, and Security

A. Parking ............................................................................................... 13/2

B. Hours of Operation............................................................................ 13/3

C. Signs .................................................................................................. 13/4

D. Landlord’s Right to Enter Your Rental Space ....................................... 13/5

E. Building Security ............................................................................... 13/7

14 Option to Renew or Sublet and Other Flexibility Clause

A. Restrictions on Your Flexibility ........................................................... 14/3

B. Option to Renew the Lease ................................................................ 14/5

C. Option to Expand Clause ................................................................... 14/8

D. Rights of First Refusal and First Offer ............................................... 14/11

E. Option to Lease Less........................................................................ 14/13

F. The Assignment and Sublet Clause .................................................. 14/16

G. Termination Clause .......................................................................... 14/28

H. Option to Purchase .......................................................................... 14/33

15 Insurance Clauses

A. Property and Liability Insurance ........................................................ 15/2

B. Insuring Your Trade Fixtures and Inventory ......................................... 15/2

C. Rental Interruption Insurance............................................................. 15/3

D. Business Interruption Insurance ......................................................... 15/4

E. Leasehold Insurance .......................................................................... 15/5

F. Waivers of Subrogation Rights ........................................................... 15/5

G. Indemnity or Hold Harmless Clause .................................................. 15/7

16 Breaking the Lease, Disputes, and Attorney Fees

A. The Landlord’s Remedies If You Fail to Pay Rent or

Breach Another Lease Term ................................................................ 16/2

B. The “No Waiver” Clause .................................................................... 16/7

C. Your Remedies If the Landlord Breaches ............................................ 16/9

D. Mediation and Arbitration................................................................ 16/11

E. Attorney Fees ................................................................................... 16/15

17 Foreclosures, Condemnations, Guarantors, and

Other Clauses

A. Subordination and Attornment ........................................................... 17/3

B. Estoppel Certificates......................................................................... 17/10

C. The Condemnation Clause ............................................................... 17/12

D. Surrender Clause ............................................................................. 17/17

E. The “Entire Agreement” Clause ........................................................ 17/19

F. The “Severability” or “Survival” Clause ............................................ 17/20

G. Lease Guarantors ............................................................................. 17/20

H. Signatures ........................................................................................ 17/23

Index

Introduction: Using This Book to Negotiate

Your Commercial Lease

A. How Leases Are Made and What They Look Like ................................................. I/2

1. There Are No “Standard” Leases....................................................................... I/2

2. How Leases Are Organized .............................................................................. I/3

B. How This Book Can Help You Negotiate a Favorable Lease .................................. I/3