Commercial leases carry far fewer tenant protections than residential leases. If you are planning to open a restaurant, a retail shop or even an office, it’s important to understand the hidden dangers of lease terms that can wind up costing you tens of thousands of dollars.

One “hidden danger” provision stems from a landlord’s right to access and use the premises. The right of access makes sense of course, and is necessary for a landlord to maintain the premises. In one of my former restaurant leases, the “Entry By Landlord” provision gave the landlord permission to enter the premises for a variety of reasons, the most burdensome being the repair of the premises and/or the building. When we decided to lease the space for the restaurant, the building above us was a vacant (and completely dilapidated) hotel in downtown San Francisco. Other than occupying one tiny portion on the ground floor of a much larger building, the premises that we were to lease were completely independent – we had our own entry, our own electricity, our own restrooms, etc. Still, as I went over the lease provisions, I worried that a building in such disrepair would soon require a major upgrade, and I discussed this with our attorneys. They of course agreed that the “Entry By Landlord” provision could be problematic down the road, but also advised us that making this a sticking point could backfire because, after all, it is standard procedure to have such a right of entry and most landlords are generally unwilling to give too much away. However, eager as we were to secure the premises and get our business off the ground, after running every possible doomsday scenario in my head, I decided that this was in fact a make-it or break-it issue that we could not ignore given the state of the building.

Eventually, the landlord realized that we were willing to walk away and agreed to language that would cap the amount of “free” time he could use to make repairs. We added language that capped the number of “free” days – in this case, to 7. AND, if the time needed to make the repairs exceeded 7 days and such repairs interfered with our ability to use the premises to prepare for normal business operations, or our customers’ access to or quiet enjoyment of the premises during our business hours, we would be entitled to abatement of rent for each day of interference. In other words, we were no longer stuck with an unbridled right of entry. We inserted new language in the “Entry By Landlord” provision that included the 7-day cap and the rent abatement, while maintaining certain safeguards for the landlord, and signed the lease.

The construction that we had planned for our business was mostly cosmetic, and was a matter of a month or two or work. However, less than 3 weeks after we signed the lease, as we had already begun our construction, the landlord informed us that the new tenant for the remainder of the building would need to run plumbing through our space. The entire plumbing system for the building needed to be revamped. Per the landlord, they would need access to the entire premises for a week or so, not much longer. As it turned out, the plumbing work turned into a full demo of our space, and took over 6 months, in large part due to delays in City sign-offs. As a result, the construction crew we had initially lined up was overbooked by the time we were back in the space, and we were 6 months behind schedule. AND, most importantly, had we not re-negotiated the “Entry By Landlord” provision, we also would have been out of pocket close to $35,000 for every month of rent due, even though we couldn’t do a thing with the space. $35,000 adds up very quickly when you are trying to get a business off the ground.

By setting some limits to the landlord’s right of entry, we didn’t get hit with paying rent while the space was unusable. In addition, had the landlord exercised the right of entry once we were up and running – resulting in reduced business hours, our customers’ inability to easily access the premises during business hours or actual closure, for instance – we were sure to avoid paying rent and other costs indefinitely. The average lease term for most commercial leases is usually 5 years; many things can happen during that time. An unbridled right of entry could end up costing an unwitting tenant a LOT of money.

Moral of the story: think outside of the bubble and think long-term. Make sure you look closely at everything: not only at the specific premises that you are leasing, but also the entire building if your premises are not free-standing. Due diligence is key, and I often recommend to clients that they look at past permits and building history for the premises to get a sense of whether major upgrades might possibly be on the horizon. And while this is particularly relevant to retail and restaurant spaces, it is equally as important when it comes to office space. In hot real estate markets like San Francisco, the cost of relocating an entire office or shutting down operations is not to be taken lightly. It may be that your future landlord will not agree to a limit on the right of entry, especially in markets where demand is higher than supply. In that case, at the very least you should be very aware of the potential risks. It’s truly worth protecting your business and yourself (i.e., as a result of a personal guaranty, to be explored in Part 3) as much as possible. Due diligence, a long-term view, and an attorney can help make sure you don’t wind up holding the bag while the landlord upgrades or repairs his or her building.

As an attorney with a litigation background and a former business owner, I have a unique perspective on balancing legal and financial risks, having experienced firsthand the joys (and pitfalls) of starting, running and selling small businesses. One of the first opportunities I had to leverage my legal experience came when I negotiated a commercial lease for one of my former restaurants. As is typical, we were handed a hefty, 20-page, fairly “standard” commercial lease (plus personal guaranty) – the kind that generally leaves the tenant holding the bag if anything goes wrong. As a seasoned attorney, I knew well enough to imagine all of the “what-ifs” and doomsday scenarios I could possibly conjure up, but really learned to navigate the murky waters of commercial leases, this time as a small business owner. Although “standard” commercial leases can actually differ significantly, I’ve identified a few hidden dangers that come up repeatedly, and will explore and share some practical ramifications here in a multi-part series.

-CG

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