Commercial Leases in Bad Times: Tenants Usually in the Driver’s Seat

Many analysts agree that in the world of commercial leases, tenants usually have the upper hand in today’s depressed economy. Several factors may contribute to commercial tenants’ strength in lease negotiations – and renegotiations – in current financial conditions:

• Commercial landlords may face increased vacancy rates with business tenants more likely to be driven out of business or into bankruptcy, or just less willing to expand or take risks
• Commercial lessors may have a harder time finding potentially acceptable business renters with solid credit and assets
• Developers may be financially overextended and stuck with vacant commercial spaces if buildings were constructed in reliance on lease agreements from which tenants have backed out, either from newly found bargaining power or because of economic stress
• Commercial entities of all types are increasing the amount of business conducted remotely via electronic means; less physical space is needed when, for example, meetings or negotiations can occur virtually by phone or computer; employees can sign into their employers’ computer networks from home; or showrooms or sales floors can be eliminated because they can be displayed to customers on the Internet
• Businesses may prefer to buy commercial space instead of rent, given current bargain-basement prices in many locales

Potential business tenants may be able to use these conditions to their advantage to push for favorable lease terms such as:

• Short terms
• Low rent, some period of free rent, or future rent reductions tied to tenants’ business performance
• Generous TI (tenant improvement) or build-out packages (provision of building materials by landlords to improve commercial premises, enhancing them for tenants’ particular business needs)
• Minimal CAM (common area maintenance) fees
• Lenient termination clauses allowing tenants to cancel leases in a variety of situations, such as low sales
• Set utility charges despite volatility in utility costs to landlords
• Smaller security deposits
• Rights to assign leases or sublease to other tenants
• Restrictions on the lessors’ ability to rent to tenants’ competitors
• Liberal lease extension clauses
• Prominent signage rights

Still, conditions may not always favor commercial tenants over landlords in particular geographical areas or specialized industries. For example, a unique industry may be concentrated in a particular locale, driving up demand for space. Landlords may have more clout in geographical markets that are more prosperous; where commercial activity is more normalized the traditional balance of power between the players may be improved. Or, a particular location might still be the perfect one that everyone wants, even at a premium.

If you are a business concern looking to lease commercial space, or a commercial landlord facing a lease negotiation, be sure to consult a knowledgeable attorney with experience in commercial real estate matters, so you have the guidance needed for a positive outcome in these tricky economic times.