Whether leasing out industrial, retail, office space or other real estate, a landlord must beginning negotiations by establishing a framework – assessing each party’s positional strengths and the landlord’s range of acceptable terms. Failure to take such time to do so at the onset could lead to a less-than-optimal deal and months or years of regret.

In entering negotiations, a landlord would be wise to not only view a prospective tenant as a possible source of income, but also hold it to the same standard that it would a business partner. If the tenant doesn’t bring some demonstrable history of integrity and reliability to the table, the landlord may want to seek another, even if under less attractive terms. Therefore, the landlord should seek information from the prospective tenant, not only of its finances, but also its business practices and model. Of course, the prospective tenant may scoff at some such requests, especially if it involves information that may be proprietary, but there is certainly no prohibition to asking and such concerns may often be resolved using a non-disclosure agreement. In addition to financial information, however, the landlord should never forget to use the “smell-test.” Trusting one’s instincts will often steer one right.

In addition to conducting reasonable due diligence on the tenant, the landlord should also consider thresholds for the lease terms. Here is a non-exclusive list:

• Leasehold premises:  If the building is suited for multiple tenants, how much, or how little is the landlord willing to lease? Even if there is only one tenant, will it have rights and obligations with regards to the entire landlord-owned premises? The specific leasehold premises should be as particularly described in the lease as possible to avoid any ambiguity.
• Lease term and base rent:  For what term will the landlord agree and for what rent amount? For the sake of stability and predictability, the landlord may consider reducing rent in return for a longer term, but should also consider an escalation clause in the lease to account for inflation and a change in market conditions. Quite often, the rent escalation is tied an an index such as the Consumer Price Index (“CPI”).
• Additional rent: Quite often in commercial leases, the landlord may require that the tenant to pay additional rent to cover the tenant to pay for insurance and taxes, as well as common area maintenance and assessments (“CAMs”). If so, the lease should specifically identify required liability limits and specific coverage amounts for insurance, as well as the CAMs and the tenant’s proportionate responsibility therefore. If the landlord will be assessing the CAMs and paying expense therefrom, the landlord may want to include a management fee.
• Late fees and interest: There is no limitation under South Carolina law for late fees and interest for late payments. The landlord should negotiate favorable penalties for such late payments while not being disproportional or unreasonable.
• Utilities:  The lease should clearly identify responsibility for utilities. Again, if the landlord is going to include utility costs as additional rent, the landlord should consider a management fee to cover its costs for doing so.
• Maintenance and improvement of the premises:  Maintenance responsibilities should be clearly defined in the lease. In addition, the lease should require landlord consent for any alterations to the premises or, otherwise, should lay out very clear rules and parameters of alterations. Similarly, any buildout provisions for the tenant’s business use and function should be specifically laid out showing the plans, specifications, approval process, the landlord’s work, the tenant’s work, each party’s financial obligations, the selection and approval of contractors, insurance requirements, indemnity provisions and a timeline.
• Use Clause:  The landlord would almost always want to clearly define the tenant’s permitted use of the premises, and at the very least, should prohibit noxious and illegal uses to help protect it from liability. In the retail environment, use restrictions that prohibit one part of the property from being leased by a competitor is crucial to maintaining long-term tenants and will usually be insisted upon by savvy tenants.
• Default  and holdover provisions:  Savvy tenants will also insist that default provisions be included, not only for breaches by the tenant, but also the landlord. In turn, a savvy landlord may insist on this anyway and use the default provisions as a means to limit its liability in such an event. The landlord should also ensure that the default provisions include a mechanism for recoupment of attorney fees and costs for breach, as well as the recovery for damages to the premises caused by the landlord and other economic loss. Along these lines, including stiff penalties for the tenant’s refusal to leave the premises after termination of the lease would be advised. A substantial security deposit requirement my also offer additional protection in this regard.
• Personal guaranty:  A lease with a business entity, as opposed to a solvent person, without a personal guaranty, may not be worth more than the paper it is written on. Though there are mechanisms for insuring the continued financial stability of the business entity (e.g. requiring ongoing financial disclosure or some form of financial security), the landlord should seek personal liability where its negotiating strengths allow.

Again, the above is not an exclusive list of matters to be considered when negotiating a lease by any means. However, it can hopefully serve as a starting point for a landlord to begin assessing its negotiation framework and, along with other considerations, such as market conditions, enter negotiations and a lease that will allow for both stable profit and protection from a ruinous tenant.

Information Sources:  Commercial Real Estate Transactions Handbook, Mark A. Senn, Ed. 3 (Supp. 2008); The Components of a Commercial Lease, Alan J. Taylor, 2016 WL 1105255.