Five Lease Clauses to Understand Before Signing Your Lease

March 17, 2021 | Written by: Robyn Swihart, Owner

Outside of negotiating the deal economics of rent, free rent, allowances, and credits, the terms of your lease may have restrictive and, in some cases, costly repercussions.

We always suggest that you have an attorney familiar with retail real estate lease negotiations review your lease.  Your counsel can highlight certain passages favoring the landlord and advise you of strategies to minimize your risk.   

1.     Personal Guaranty.  This clause obligates the business entity’s owner(s) to personally pay the rent and additional rent due under the entire term of the lease.  Without a guaranty, the landlord has no recourse to recover rental fees due under the lease.  If you set up a single asset entity for your business, your lease may still require a personal guaranty.  As an example, if you sign a five-year lease but go out of business in year three, you would still have to pay the rent due under the lease even if you are not open and operating.  While a guaranty of some sort may be unavoidable, seek to limit your personal exposure to the shortest time possible.  A landlord’s willingness to negotiate a guaranty will depend on many factors such as your creditworthiness, operating experience and sales at other locations, landlord’s investment in your tenancy (both hard and soft costs like performing landlord work letter items, allowances, commissions and fees), and overall market dynamics (i.e. are you competing for this space in a tight “Landlord’s Market,” or is vacancy rising, with the landlord running a risk of this space being vacant for some time without your deal?).  To conclude, be sure to discuss and understand your guaranty responsibilities throughout and at the end of the primary lease term and in the event of a sale of your business and assignment of a lease.  

2.     Force Majeure.  French for “superior force,” this provision excuses the parties of a lease from performing their duties under the lease in an unforeseen event, such as actions of war or terrorism, labor strikes, and natural disasters, like hurricanes, earthquakes, tornados.  The clause is not intended to shield a tenant from normally assumed risks of doing business, but rather to protect a tenant from an “act of God” situation that would make it impossible to perform.  Above all, know that courts have held that pandemic events do not qualify as a force majeure event, and you may not be awarded protection from your lease obligations of staying open and paying rent because of a future pandemic.

3.     Permitted and Exclusive Use.  These terms sound implicitly obvious but have potential to seriously affect your operation.  By definition, your permitted use is what you are expressly allowed to do in the premises.  A broader definition usually benefits the tenant, while a narrow use description is more desirable for a landlord.  For example, if you want to operate a coffee shop, a permitted use of a “restaurant or any other use permitted by law” (versus just a“café”) may give you later flexibility to add a bar or retail component.  The broader use definition will also be beneficial if you need to sublease your space to a user who has a different operation.  Your permitted use should encompass your primary business as well any possible uses you may want to add in the future.  A hair salon may want a use that allows esthetician services in case a booth renter offers eyelash tints and eyebrow waxing.  Make no mistake, your permitted use is not the same as your exclusive use.  If your lease does not specifically state an exclusive use, the landlord would have the legal right to lease space in the same shopping center to a direct or indirect competitor.  An exclusive restricts other tenants in the same shopping center from using their premises for the same or similar use.  It generally protects tenants from direct competition but may allow another tenant of the center to have ancillary sales of the exclusive, usually as a defined percentage of overall sales.  Back to our coffee shop example, your coffee exclusive would prevent the landlord from leasing a space to Starbucks but would not prevent the diner next door from having coffee on their menu, so long as sales of coffee do not exceed 15% of overall sales.   One final takeaway, be wary of the shopping center, property, or development definition as they relate to your permitted and exclusive use rights.  Landlords may seek flexibility to lease to competitive users in other buildings within an overall development by limiting your exclusive area to just the building in which your premises are located.  

4.     Continuous Operation.  Inexperienced lessees often disregard a continuous operations clause.  The proposition is that if a store is closed, the shopping center loses traffic, and vacant/closed storefront deters shopping trips to other businesses within the center.  The effect of continuous operation is that you may have to remain fully open, stocked, and operating even if your location is losing money.  Less confining leases may allow the tenant to “go dark” (close operations while fulfilling other obligations of the lease like paying rent.)  

5.     Assignment and Subleasing.  Sometimes tenants are unprofitable or have another reason to vacate their premises early.  These two clauses may alleviate you of certain lease obligations.  Assignment allows you to assign the rights of your lease to a replacement tenant.  Conversely, a sublease keeps the lessee (tenant) liable under the lease, but allows a new tenant to occupy and pay rent to the original lessee.  Landlords are more averse to assignment because they carry more risk for the landlord.  If a lease permits assignment, the landlord may require the assignee to have a similar or greater net worth, or operating experience, as the original tenant.  Subleases may be restricted on the grounds of creating competition for other spaces that the landlord is marketing in the development.   The landlord may further require review and approval of the new tenant’s proposed use, and there may be a fee involved with administering new tenancy.

Your broker should have familiarity with these important lease clauses and be able to provide knowledgeable guidance about how these clauses are handled within the local marketplace and by certain landlords.   Want to take a deeper dive?  Contact us at info@equivis.com for discussion and attorney referrals.

Disclaimer:  This article should not be seen as legal advice.  Please consult your attorney before you rely on this information.