September 15, 2019

Tales from the dark side, landlord edition

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When I get a call from a client who is looking to sell or buy a business the first questions I ask are about the lease and the landlord. Why? In my experience (particularly in multi-unit franchise deals), there is always a hurdle with the landlord.  Always.

While I’m not a real estate lawyer, I have reviewed and negotiated dozens of leases and dealt with landlords big and small all over the country. Honestly, it’s not my most favorite part of my work because tenants (and their lawyers) are in an inferior bargaining position and mostly end up holding the short end of the stick. Recession times notwithstanding, of course.

This is why it is so critical that you negotiate hard on the front end of the lease. Leases are long and ridiculously verbose, and truth be told most tenants don’t spend much time negotiating, reading, or thinking about them. But they should because when something goes awry it’s just too late to dig out from an abusive clause.

Here, in no particular order, are my top tips to put your in a better position:  

1. Test the waters and be ready to bail. If a landlord or their rep is nasty, unreasonable or difficult at the beginning of the relationship you better believe it will get much worse when you sign on the dotted line. Truth. Find a different property and fast.  

2. Catastrophize liberally. Ask every conceivable ‘what if’ question when reviewing the lease at the front end because weird things regularly happen on the backside. Great things (like selling your business) can get derailed by lease impediments you didn’t consider. Make sure the landlord doesn’t have absolute and unfettered discretion to withhold approval of transferring, assigning or subletting the space to your buyer because that will tank a deal. Here are just a few of the potential gotchas I have seen in leases in the last year:  

  • No Transfer, Assignment or Sublease at all “without the landlord’s approval which can be granted or denied in landlord’s sole discretion.”  
  • You can Transfer, Assign or Sublease but only with some crazy restrictions or ridiculous financial requirements.  
  • Transfer, Assignment or Sublease triggers a negotiation of a whole new lease.  
  • Check to make sure buyouts of members of the LLC or shareholders don’t trigger the transfer definition.    

3. Have a lawyer look at the lease. Really. I know it’s an extra expense but a lawyer will closely read the lease and will even work with you to prioritize what matters you should attack. Lease lawyers understand the market, the landlord, and standard work-arounds. Don’t go it alone.  

4. Personal Guarantees. I hate them but most landlords (particularly if you are a franchised business) require them. If you can’t eliminate a Personal Guarantee, try to manage it. You can propose any of the following:  

  • Cap it at a dollar amount or a reasonable time frame.  
  • Eliminate a Trailing Guarantee if you can assign, transfer or sublet your premises.  
  • Have the Guarantee burn off. Which means if you pay on time for 24-36 months the Guarantee disappears.    

5. Be sure what you are responsible for. If you are in an NNN Lease, meaning you, not the landlord, will cover maintenance, taxes, insurances, etc, pay particular attention to what, if any, structure the landlord will be responsible for. In most NNN leases I have recently seen you, not the landlord, will be responsible for repairing HVAC, even roof units. That will bust your budget quickly and it’s a shock to most tenants who never bothered to read that provision until the unit(s) went out. If you can’t get the landlord to pick up the tab on the HVAC, think about a cap or a warranty from the landlord that if the HVAC goes out in the next 24 months it is the landlord’s responsibility to repair.  

6. Check the square footage. Really. I can’t tell you how often it is wrong.  

7. Beware of clauses that say the landlord may move your business wherever they want in a business/retail center during your lease term, even if they pay for the move. Most landlords won’t negotiate this term out altogether but you can blunt its impact. Moves are disruptive and will cost you money you can’t even begin to calculate and the landlord will never be able to fully compensate you for that.  

8. Try to negotiate some perks. Things like free rent (harder right now) or signage. Remember, signage is not a given. It has to be in the lease.  

9. Make sure that you understand the rules and regulations. There are typically pages of them. Tedious, yes. Read them.  

10. If you want to have outside seating make sure it is in the lease. It’s a bad surprise when you order your tables and the landlord says no.  

11. If you are interested in an option for a longer term, negotiate it in. Same for a right of first refusal on an adjacent space if you intend to grow.

Finally, the process takes much longer than you would think. If you are working with a broker, she or he will have valuable information on the landlord’s negotiating style and general time frame. Negotiating can take weeks or months depending on the landlord’s process. It can be frustrating, especially when you are trying to get a new business off the ground. Make sure you build potential delays into your pro forma -- and maybe a massage or two to help manage the stress.