During our reporting for “The Landlord Landscape,” we asked real estate attorney Scott Landblom, partner at DelMonte Landblom Law, for his best nuggets of leasing wisdom. (Disclaimer: This is not legal advice.)
DO … ask lots of questions, especially about how the landlord worked with other tenants during the COVID-19 crisis. A good broker will know the landlord’s reputation in the community and will be honest with you if the landlord is a creep.
DO … negotiate smarter, not harder. Every part of your lease is negotiable, but it’s wise to spend time on the pieces that will have the most impact on your business. If you are negotiating with a landlord and you come back with a thousand changes, they’re not going to look favorably on that and you’re not going to get a good response.
DO … be realistic about negotiations. If you’re an independent mom and pop outfit, you are not going to be able to negotiate as much as a larger chain because you don’t have as much leverage, especially when it comes to a personal guarantee. Depending on the financial strength of the tenant signing the lease and the personal guarantor, it may be possible to negotiate burnout provisions, sunsets, or rolling guarantees, which would limit exposure. Landlords might be more willing to look at releasing the personal guarantor from liability down the road as long as the tenant proves they’re able to pay rent as it comes due over a period of time.
DO … take a good, hard look at your lease’s force majeure clause. There’s been a renewed focus on [these] provisions coming out of COVID. If [yours] does not specifically mention pandemics, endemics, or government shutdowns of that nature, it’s not likely you are going to be able to invoke it. Additionally, it’s common for force majeure provisions to state that monetary provisions are not subject to force majeure. Be prepared to push back on that or be aware that rent may not be excused in the event of a future pandemic.
DO … make sure your lease has a flexibility of use provision. When COVID hit and restaurants were attempting to survive by pivoting to curbside pickup or delivery, some tenants were surprised to discover their landlords were not open to that.
DO … involve an attorney early in the process. If you’re not in the business of reading leases, you won’t know the potential pitfalls. An experienced attorney will know what is likely to happen, what the financial implications are, and where to best focus efforts. Involving an attorney at the letter of intent stage can help you avoid some issues as well, as most landlords expect you to stand by your word later on.
DO … consider the cons of percentage rent leases. If you have a strictly percentage of rent lease (which is very rare), it can be great because landlords share in the good and bad times. But most landlords will want a base rent plus a percentage of sales.
Also consider the additional administrative burden that comes with this type of arrangement, and the potential loss of leverage when it comes to negotiating a renewal: Since you’re reporting sales, your landlord could be inclined to increase your rent if they know you can afford it.
DON’T … go into a second-generation space thinking it will be a foolproof money saver. Generally speaking, when you take over [this type of] space, landlords are going to stipulate that you take it as is. Make sure the space really works for you with no modifications (including to the HVAC and kitchen equipment/layout, etc.) or it could end up being more expensive than going into a vanilla shell in the long run.
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