Tenant-Friendly Commercial Lease Clauses

As any commercial tenant knows, there are many different types of clauses within a commercial lease. It’s often the case that clause language favors the landlord. After all, many lease agreements are prepared by landlords and, therefore, are designed in their favor. Also, depending on where you live, commercial real estate laws can make it easier for landlords to draft lease agreements that reflect their advantages. 

Tenants can protect themselves by negotiating clauses into their leases that favor them. These tenant-friendly clauses are not frequently included, but they can go a long way toward cutting costs and promoting the interests of the tenant. 

Choosing the right location and agreeing on economics is important; but there are other provisions that can be incorporated into a lease agreement that can help to strengthen a tenant’s position and potentially avoid unnecessary pitfalls. 

Beginning with the letter of intent, there are a handful of tenant-friendly clauses lessees can negotiate beyond the explicit financial terms of the lease. These clauses can include:

• Co-tenancy clause
• Common area restrictions
• Signage
• Designated parking
• Exclusive use clause
• Prohibited use clause
• Sales-related termination right
• Cap on controllable costs; cap on CAM costs

1. Co-Tenancy Clause

Many retail shopping centers or strip malls usually have one, maybe two, big-name retailers that attract a considerable amount of customers to a specific location. Small tenants who share space with those larger stores oftentimes benefit from the business they attract. That’s why those smaller lessees should consider adding a co-tenancy clause to their leases. 

A co-tenancy clause would enshrine a rent reduction in a commercial lease when an anchor tenant vacates  the space or closes for business (whether temporarily or permanently). That rent adjustment protects smaller tenants from potential business losses that may result from the anchor business’s closure.

Commercial tenants may want to consider requesting a co-tenancy clause to keep a steady flow of traffic to your location.

2. Common Area Restrictions

For in-line tenants, or smaller retailers, storefront visibility and access are important elements of business. To the extent that there are barriers that may be a nuisance to business owners, tenants may want to consider requesting certain common area restrictions. Obstacles such as kiosks, food trucks, or construction equipment can disrupt or interfere with business—and can, therefore, be the subject of negotiated restrictions. 

Tenants can negotiate specific language that would limit the placement of these—and other—facilities or obstructions in common areas and other mutually agreed zones. Common area restrictions can give your storefront a degree of protection from unwanted obstacles or other facilities that might impact your business.

3. Signage

Believe it or not, signage rights in commercial leases can be a real deal-breaker. Signage and other advertising materials, such as logos or trademarks, can help draw customers to a tenant’s business. But landlords are often very particular about signage requirements and specifications, which includes everything from specifying the location of signage on the premises, to the color and letter sizes of any graphics. 

Savvy commercial tenants know that their best chance at securing favorable signage rights is prior to the signing of the lease. If you have a specific vision for the exterior of your business, be sure to raise it with your landlord during the course of negotiations.

4. Designated Parking

Parking is an important consideration for any brick-and-mortar retailer. But because parking is usually construed as part of the common area, parking clauses in commercial leases are often vague or lack certain details. 

Commercial lease clauses pertaining to parking can be leveraged by tenants to secure arrangements that make it easier for customers to patronize their businesses by providing greater store access on location.

Tenants can negotiate designated parking spaces in their leases to protect customer access to their businesses. Negotiated language in these clauses could also address desired parking ratios, which refers to the division of parking space allocated to each tenant on the premises according to building size and footprint.

5. Exclusive Use Clause

To guard against competition and maximize sales, many savvy commercial tenants request an exclusive use clause, or “exclusive.” 

An exclusive use clause gives a tenant the right to be the sole business selling a particular product or providing a specific service on a given property. For example, if a tenant wants to open a barber shop in a popular strip mall, an exclusive use clause would ensure that only that tenant has the exclusive right to operate as a barber. 

It’s important to keep in mind, however, that landlords won’t want to grant exclusivity if it at all impedes their ability to lease the other locations on the property.  

Consider negotiating an exclusive use clause in your lease to better protect your business prospects.

6. Prohibited Use Clause

The inverse of an exclusive use clause is a prohibited use clause, which the former clause necessitates. Indeed, for a landlord to adhere to the terms of an exclusive use, they must be prepared to enforce its restrictions in other lease agreements through prohibited use provisions. 

But commercial tenants can also negotiate a prohibited use if they believe certain business operations—such as pot shops and liquor stores, among others—would create a nuisance or dissuade potential customers from shopping there. Prohibited uses could also extend to “high intensity” uses by negotiating a set distance from the premises to ensure parking remains available.

In order to bring in the right customer base, you may want to consider negotiating a prohibited use clause in your commercial lease.

7. Sales-Related Termination Right

Another provision commercial tenants can negotiate as part of their lease is something called a “sales-related termination right.” This clause gives a tenant the right to terminate the lease if their gross revenue falls below a minimum agreed upon amount due to sales underperformance.  

Sometimes your chosen location proves to be less profitable than you anticipated. Negotiating a right to terminate can protect you and your business in the event of sales-related losses.

8. Cap on Controllable Costs; Cap on CAM Costs

Common area maintenance (CAM) fees are a common source of tension between landlords and tenants. These fees cover the costs of maintaining the property’s common areas, and include items such as common area lighting, landscaping, snow removal, and parking lot maintenance. 

Often CAM costs are passed on to the tenant in lease agreements, saddling businesses with the bill. Because landlords aren’t incentivized to control CAM costs, operating expenses may increases excessively

To ensure that your overall costs remain low, you should consider negotiating a provision that outlines caps on CAM and other controllable costs. If a CAP on CAM is not an option, consider negotiating fixed annual CAM increases as this may be another route to set expenses you can budget for.

Additional Reading and Resources

• To learn more about other commercial lease clauses, visit: https://iskalo.com/insights/important-commercial-lease-clauses-tenants-should-know-about/ 
• To learn more about commercial lease clauses related to damage, signage, and repairs, visit: https://www.alblawfirm.com/articles/better-leases-for-commercial-tenants/ 
• To learn more about Common Area Maintenance (CAM) language in a commercial lease, visit: https://leasecake.com/cam-reconciliation/ 
• To learn more about commercial lease termination guidelines, visit: https://smallbusiness.chron.com/guidelines-termination-leasing-contract-65260.html