SIMPLE LAW TX
Are you wondering how to negotiate a commercial lease in Houston, TX? As a realtor in Houston, TX, you may find yourself negotiating a commercial lease on the side of the landlord or the tenant. Such a negotiation will have stark differences from that of a residential lease.
Often the landlord and the tenant are excited about the budding business relationship and will overlook key provisions. The landlord and tenant may not be thinking about the multitude of things that can go wrong during the tenancy.
That’s where your expertise will come in to assist your client. After all, the saying “An ounce of prevention is worth a pound of cure” rings true. This article explores how to negotiate a commercial lease in Houston, TX, and what to take special note of when negotiating a Commercial Lease.
All commercial leases should have a provision, usually toward the beginning of the lease, regarding the permitted use of the premises. Typically, the use is limited to the exact business of the tenant. But a savvy tenant will want the words to be a bit broader allowing for a tenant to pivot the business as needed.
A landlord will want to have a stricter use clause so if the tenant does change its business model, the landlord can choose whether to approve it or not. After all, the change in business may cause significantly more wear and tear on the landlord’s property. Since most tenants are not thinking about pivoting their business, this clause is often overlooked.
It’s very common for commercial leases to last for many years and include multiple options to renew. Including the renewals, it is common to see commercial leases that can last 30 years!
There are benefits and detriments here regarding risk – if a tenant establishes a booming business, moving could be incredibly damaging giving the landlord the upper hand in lease renewal negotiations down the line. On the other hand, a failing business will not want to be on the hook for many years.
The safest provision for a tenant is to have a shorter initial term with many renewal options exercised solely at its discretion. A shorter initial term can work in the landlord’s favor too in giving a landlord control over the premises, especially if the landlord has to approve the renewals. An early termination clause can also be included.
The lease can and should include an increase in rent each year – a tenant will likely want the amount of the increase specified, but a landlord will likely prefer to have a percentage increase tied to inflation or another market standard.
The tenant is usually in the strongest negotiating power at the start of the lease, and it is common for the landlord to make substantial alterations to the property for the benefit of the tenant’s business. A landlord will want to minimize this cost. This provision is rarely overlooked by landlords and tenants and is customarily a substantial part of the initial negotiations.
A knowledgeable and creative realtor in Houston, TX, can quickly assess each party’s desires and limits in this area and use that as leverage for other provisions. For example, if a landlord doesn’t want to pay much in initial costs to alter the premise, a tenant could negotiate for little to no rent for the first few months of the lease.
Pay close attention to the wording of who is responsible for maintenance and repairs. Often these terms can seem sufficient at a quick glance, but a deeper review reveals massive ambiguity. Spend time thinking about all the maintenance and repair work that may need to be done and whether the terms of the lease are clear as to who is responsible.
For example, routine maintenance is needed to keep an HVAC in good working order, but the failure to properly maintain could lead to structural issues. If one party is responsible for routine HVAC maintenance and the other party is responsible for structural issues – who pays when the failure to properly perform the routine maintenance is arguably the cause of something in the scope of the other party’s responsibility? Be sure to discuss in detail with your client what they want in their scope of responsibility.
A tenant never expects to default at the onset of a lease, so they often overlook overly harsh penalties for a default. The realtor for the tenant will want to pay close attention to this provision. The realtor of a landlord may want to protect their client. Parties should consider whether provisions requiring mediation or arbitration as a means to reduce costs are in their best interest.
It is common for a landlord to want the owner of the tenant’s business to sign a personal guaranty, especially if it is a newer business. A clever relator can limit the tenant’s liability by negotiating for the guarantee to only last for the first year or two of the lease term. This rarely would be advantageous for a landlord.
Nearly ever commercial lease has a provision requiring the tenant to maintain certain insurances and allowing the landlord to request proof of insurance. However, the reality is that landlords often fail to request proof of insurance from the tenant after the first couple years of the lease.
It is best practice for a landlord to include a provision mandating that the tenant is automatically required to send such documents to the landlord. It can be tied to a yearly event to help the parties remember, such as having the proof required to be sent within ten business days of the landlord providing the yearly HVAC cleaning, as an example.
Make sure there are no promises made between the landlord and tenant that are not included in the terms of the lease. The lease will have a “merger” clause which states that all terms are in the agreement. If either party made a promise outside of the wording in the lease, the other party likely won’t be able to enforce it.
While there will be verbiage in the lease that are legal terms of art, the language should be understood to all parties. After all, Texas contract law requires the court to enforce the terms stated in the lease unless there is a public policy reason at issue (which is rare). This means that the words mean what they say. Commercial leases can be long and densely worded so it is important that you as the realtor read the lease many times because landlords and tenants will frequently fail to read the document in its entirety. Understanding in detail every word of the lease is the best way for you to protect the interest of your client.
Negotiating a commercial lease requires careful attention to detail and a thorough understanding of the legal and practical implications involved. The realtors on both sides play a vital role in helping their client understand the terms and providing advice on their client’s best interest. Together, we can help create a successful landlord-tenant relationship for many years.
Let me know if you need any guidance on how to negotiate a commercial lease in Houston, TX, or if you need advice on creative negotiation strategies to overcome stalled discussions. Simple Law TX is here to help with intricate legal clauses or find creative solutions to meet both parties’ needs. Our team can provide personalized guidance and support.
Contact Simple Law TX today to schedule a consultation via our website, phone 281-697-6678, or email contact@simplelawtx.com.
Schedule a Consultation
Hear From Our Clients
