Navigating a commercial lease can feel like deciphering a foreign language, and overlooking key clauses can lead to significant headaches and unexpected costs down the line. This blog distills essential insights from a recent webinar with real estate experts Tara Hudson and Heather Thomas , highlighting critical lease clauses you need to scrutinize.
1. Permitted Use: Don’t Get Boxed In
The “permitted use” clause defines what you’re allowed to do in your space. While seemingly straightforward, a narrowly defined clause can severely restrict your business’s ability to evolve.
What to Watch For:
“Solely for the operation of” : This rigid language can prevent you from expanding your offerings. For example, a juice bar lease stating “solely for the operation of a juice bar” might prohibit you from adding smoothies or protein bowls without landlord approval.“No change in use or trade name without landlord consent” : This gives the landlord significant control over your business’s future direction.Ties to a specific brand or product type : If your lease specifies “Smoothie Spot,” rebranding or switching concepts could force you to walk away from the space.
How it Can Cost You:
Limited Growth : Inability to adapt your business model or expand your menu.Rebranding Challenges : Difficulty changing your business name or concept.Reduced Resale Value : Potential buyers might not qualify under the restrictive terms, hindering the sale of your business.
2. Exclusive Use: Protecting Your Market Share
An “exclusive use” clause protects your business from direct competition within the same shopping center. This is vital for maintaining foot traffic and customer loyalty.
What to Watch For:
Vague language : Terms like “substantially similar” or “primary use” can create loopholes. For instance, if your lease specifies “primary use is coffee,” a donut shop might still be able to sell lattes, directly competing with your coffee business.Insufficient detail : Ensure the language clearly defines your exclusive use, specifying product types or even origins if relevant (e.g., “specialty coffee”).Lack of enforcement protections : Your lease should include remedies like rent reduction or termination rights if the landlord violates the exclusive use clause.
How it Can Cost You:
Divided Customer Base : Competitors selling similar products can dilute your sales.Decreased Foot Traffic : More options for customers within the same center can lead to less traffic for your store.Diminished Performance : This can hurt your ability to meet sales thresholds and negotiate favorable terms during renewal.
3. Alterations: Flexibility for Your Space
This clause dictates how and when you can modify your leased space, from signage to full interior build-outs. Poorly defined alteration rights can stifle your growth and agility.
What to Watch For:
Landlord approval requirements : Understand if all changes require prior written consent, or only structural/material ones. Look for clear timelines for approval.Restoration obligations : Clarify your responsibilities for restoring the space upon move-out.Permitting and code compliance : Ensure the lease defines who is responsible for meeting building codes and ADA standards for alterations.Equipment clauses : Be very careful about language stating that equipment (e.g., a pizza oven, grease trap) stays with the space upon move-out.
How it Can Cost You:
Opening Delays : Landlord approval delays can push back your opening date.Unexpected Costs : Mid-stream changes or landlord rejections can add to your build-out expenses.Hinders Flexibility : Prevents you from adapting your space to new business needs or products.Loss of Equipment : You might be forced to leave valuable equipment behind upon lease termination.
4. Assignment: The Ultimate Exit Strategy
Even if you don’t plan to sell your business, the “assignment” clause carries significant financial risks and opportunities. It controls your ability to transfer your lease to another party.
What to Watch For:
Landlord written consent requirements : This is standard, but the key is how much discretion the landlord has.Profit-sharing clauses : Some landlords claim a percentage (even 100%) of any profit you make on an assignment.Fees : Be aware of legal review, administration, and processing fees, even if the assignment falls through.Recapture rights : This allows the landlord to terminate your lease if you request an assignment, instead of approving it.Personal guarantee release : Ensure your personal guarantee is released upon an approved assignment; otherwise, you remain liable for the new tenant’s defaults.Vague landlord standards : Phrases like “equal financial strength” or “landlord may withhold consent in its sole discretion” give the landlord excessive control.
How it Can Cost You:
Killing Sales : Landlord delays or refusal can cause sales or transfers to fall through.Wiped-Out Profit : Profit-sharing clauses can eliminate your return on building a successful business.Thousands in Fees : Costs can accrue even if the deal doesn’t close.Loss of Location : Recapture rights can force you to lose your business location at a critical time.Ongoing Financial Risk : Remaining liable for a new tenant’s defaults.
5. Relocation: When the Landlord Wants to Move You
This clause grants the landlord the right to move your space within the center during your lease term. While often used for center reconfigurations, it can significantly disrupt your operations.
What to Watch For:
Notice period : How much advance notice must the landlord give you before requiring a move? Short notices create serious challenges.Cost coverage : Does the landlord cover all moving costs, including build-out, signage, permitting, and any downtime?Size and quality guarantees : Does the new space have to be equal or better in square footage, visibility, and access?Limitations/exclusions : Can the clause only be exercised under certain conditions (e.g., before opening, during renewal)? Is there a cap on how often you can be moved?
How it Can Cost You:
Downtime and Expenses : Moving incurs costs related to staff, reduced revenue, and logistical headaches.Loss of Visibility : You could be moved to a less prominent location, reducing foot traffic.Unexpected Expenses : Even with reimbursement, hidden costs can add up.Opportunity for Negotiation : A relocation request can be an excellent opportunity to renegotiate your rent and other lease terms.
6. Co-Tenancy: A Must for Retailers
Especially vital for retail businesses in shopping centers, this clause protects you if anchor tenants or a certain percentage of the center become vacant. Many tenants don’t realize they have it until it’s too late.
What to Watch For:
Existence of the clause : Not all leases include this tenant-favorable clause.Ongoing application : Does the clause only apply at the opening, or does it remain in effect throughout the lease term?Tenant substitution : Does it allow the landlord to substitute any tenant to satisfy the co-tenancy, even if they don’t drive traffic?Cure/notice period : How long does the landlord have to cure a vacancy before you can take action?
How it Can Cost You:
Forced to Stay Open in Empty Center : If a major anchor leaves, you could be paying full rent while sales plummet.No Rent Relief : Without a strong clause, you’re stuck paying full rent regardless of center performance.Trapped in Long-Term Lease : No leverage to renegotiate or exit a struggling location.Damaged Brand Perception : Vacant neighbors can hurt your reputation and customer trust.Costly Exit : Your only options might be a costly lease termination or defaulting.
7. CAM (Common Area Maintenance) : Unpredictable Costs
CAM charges cover your share of maintaining shared spaces. How this clause is written can make it one of the most unpredictable and expensive parts of your occupancy costs.
What to Watch For:
No cap on annual increases : Without a limit, CAM charges can spike significantly year after year.Inclusion of capital expenditures : Some leases allow landlords to include major capital projects (e.g., roof replacement) in CAM, even if they don’t directly benefit your space.Vague language : Phrases like “all costs of maintaining and managing the center” can give landlords broad discretion to charge for various items.Administrative/management fees : Landlords often tack on an additional 10-15% (or more) of CAM charges as administrative fees.Lack of clear allocation methods : You could end up paying a disproportionate share, especially if other spaces are vacant.No audit rights : Without this, you cannot challenge inflated charges or review documentation.
How it Can Cost You:
Surprise Bills : Significant annual increases and large year-end “true-up” bills can disrupt your cash flow.Paying for Others’ Upgrades : Bearing the cost of capital projects that don’t directly benefit you.
Cost of Administration: Many landlords add administrative fees (often 10-15%) on top of CAM charges, potentially doubling your bill.
Disproportionate Share : Without clear allocation methods, you could pay a larger share of CAM, especially if other spaces are vacant.No Audit Rights : You lose the ability to challenge inflated charges or review documentation, essentially writing a blank check.Surprise “True-Up” Bills : Annual adjustments can lead to large, unexpected bills if estimates are too low, disrupting cash flow.
8. Signage: Your Business’s Front Door
Signage is crucial for visibility, brand recognition, and attracting foot traffic. Ambiguous signage clauses can severely limit your marketing reach.
What to Watch For:
Placement limitations : Does your lease specify where you can place signage (facade, storefront, monument sign)? Is street visibility guaranteed?Monument Signage Access : Especially for smaller tenants, ensure you have a right to be added to the monument sign if space becomes available or if you expand. Negotiate installation and maintenance costs.Design Approval Requirements : Understand the landlord’s discretion over size, color, materials, and illumination.Maintenance Responsibility : Clarify who is responsible for repairs (e.g., burned-out letters).Flexibility for temporary signage : Can you put out sandwich boards, banners, or other temporary marketing materials without landlord approval?
How it Can Cost You:
Lower Foot Traffic : If customers can’t easily find you, sales will suffer.Loss of Brand Impact : Limited signage means missing out on valuable on-site advertising and brand reinforcement.Unforeseen Expenses : You might incur costs for removing non-compliant signage.Missed Opportunities : Lack of monument sign access can make you invisible to drive-by traffic, especially for new or local brands.Marketing Restrictions : Inability to use temporary signage to boost sales during slow periods or special events.
9. Parking: The First Impression
Often overlooked, parking clauses are critical, especially for customer-facing businesses. Poorly defined parking rights can deter customers and create operational headaches.
What to Watch For:
Guaranteed minimum spaces : Is there a specified number of exclusive or shared parking spots?Restrictions on landlord’s right to reassign/reduce parking : Can the landlord unilaterally change parking configurations or reduce the number of spaces?Defined delivery/loading zone access : Are these areas clearly specified and accessible?Employee parking rules : Are there provisions to keep premium customer spots open?Paid/time-limited parking : Who bears the cost of validation or enforcement if parking becomes paid or time-limited?
How it Can Cost You:
Lost Sales : Customers will drive away if they can’t find a spot, especially during busy times.Conflicts with Neighbors : Unregulated shared parking can lead to disputes with other tenants over space.Operational Disruptions : Lack of designated delivery zones can cause delays, fines, and reroutes.Reduced Customer Access : Landlords can repurpose parking areas, install paid parking, or prioritize new tenants, affecting your customers’ access.Employee Parking Issues : Employees occupying prime spots can frustrate customers and force you to manage enforcement.No Remedy : If the lease is vague, you may have no right to rent reductions or other remedies for parking issues, affecting your ability to assign or sell your business.
10. ADA (Americans with Disabilities Act) Compliance: Staying Legal and Accessible
ADA compliance is a federal law, and non-compliance can lead to lawsuits, fines, and costly modifications. Your lease should clearly define responsibilities.
What to Watch For:
Clear responsibility for compliance : Does the lease specify who is responsible for initial and ongoing ADA compliance (e.g., entrances, restrooms, ramps, parking)?Landlord’s existing compliance : Can the landlord provide an ADA compliance certificate, recent inspection report, or disclose any known violations?Shared costs for common areas : Ensure the lease addresses shared costs for ADA improvements that benefit the entire center or common areas, especially if requirements change.Specific restroom requirements : Understand and negotiate responsibilities for potential changes in restroom accessibility standards.
How it Can Cost You:
Lawsuits and Fines : Non-compliance can result in costly legal actions, even for minor oversights.Unexpected Modification Costs : You might be solely responsible for expensive upgrades if the lease doesn’t specify shared responsibility, especially for common area improvements.Ongoing Monitoring Burden : Constantly changing ADA requirements mean you need to stay vigilant about compliance, and the lease should outline landlord assistance.Lack of Protection : Without clear language, you might bear the full financial burden for issues that benefit the landlord long-term.
11. Force Majeure: Beyond Your Control
This “act of God” clause addresses events beyond your control that prevent you from fulfilling lease obligations, such as natural disasters, epidemics, or government actions.
What to Watch For:
Specific covered events : Ensure the clause explicitly lists events like acts of God, fire, flood, war, terrorism, supply chain issues, pandemics, and government orders. The more comprehensive, the better.Exclusions : Many clauses exclude financial obligations like rent, even during a shutdown. Understand if your rent payments are still due during a force majeure event.Notice requirements : Determine if you need to provide notice to the landlord to trigger the clause’s protections.Impact on deadlines : See how the clause affects construction, opening dates, or delivery times.
How it Can Cost You:
Uninterrupted Rent Obligation : If the clause excludes financial obligations, you’re still on the hook for rent even if your business is shut down by an uncontrollable event.Operational Delays : Without protection, you might face penalties for delays in construction or opening due to unforeseen circumstances.Lack of Recourse : If the clause is poorly defined or narrow, you may have no legal recourse to suspend obligations or seek relief during a crisis.Uncertainty : Ambiguous language can lead to disputes with your landlord during critical times, adding to your stress and legal costs.
In Conclusion:
Understanding these key lease clauses is paramount to protecting your business and avoiding costly surprises. Don’t hesitate to seek expert advice to ensure your lease aligns with your business goals and minimizes your risks.
To learn more about Leasecake’s lease management platform and how we can help you grow your business, manage multiple locations, save money by understanding exactly what’s in your documents, and minimize the risk of overpaying or missing a lease renewal, schedule a demo .
