Commercial landlords generally use large law firms to prepare their standard contracts. As you might expect, these contracts often run 20 or 30 pages or more, and are filled with dense "legalese." For a typical small to midsized physician practice, it is not feasible to negotiate all of these provisions. This article provides a guide to some provisions that are particularly important, and offers thoughts on the negotiating process.

Negotiating Process

As in any negotiation, leverage is the key. If you will be a large tenant leasing significant amounts of space, you will have more leverage than if you are seeking only a few thousand square feet. There is not much you can do about your size. However, you can improve your odds in other ways.

Consider using a broker to help you evaluate space. Oftentimes the fees charged by these real estate professionals are paid by the landlord who ultimately signs you to a lease, so in such a case the broker’s services will cost you nothing. These brokers deal in the commercial space market every day, and thus are in tune with whether market conditions are "tight" (landlord has little need to negotiate) or "soft" (tenant has significant choice of space and therefore market leverage), and what the going rates are in terms of rents, buildout allowances, and so on. Brokers know where the available rental properties are, and can take you on a whirlwind "tour" of the various sites in a single day. However, a note of caution. A seller-paid broker is not going to be the toughest negotiator in the world; if they are too aggressive, landlords may refuse to deal with them. You may therefore wish to consider a broker whose fee is paid by you. You should also retain an attorney to do a read-through and mark-up of your draft lease. You’ll have a "second opinion" (in addition to your broker’s), and this opinion will be free of any conflict of interest.

Talk with multiple landlords, and look at draft leases from each before focusing on one property. If Landlord A feels like he or she is in competition with Landlord B for your business, you may get a more favorably worded contract than if you have told Landlord A that his space is perfect for you, and you are anxious to sign. If you are willing to consider renewal of your current lease, talk with your current landlord and prospective new ones, to maximize your options and leverage.

Give yourself time. Start looking a good six to nine months in advance of the expiration of your current lease. You’ll need time to evaluate different properties, negotiate the lease terms, and then the landlord will need to fit out the space. If you wait until your current lease has expired, you’re going to be in a vulnerable position.

Ask around about the landlord’s reputation. Do they maintain their buildings well? Do they make repairs promptly? Ask to talk with other tenants.

Contract Language

Parties. If the physician is in a group practice, the group will normally be a corporation or limited liability company. These entities provide the physicians with protection from personal liability for breach of contract, such as with broken real estate leases, but only if the entity is the sole signatory to the contract. Landlords are certainly wise to this, and if the group is small, they may require personal guarantees or signatures from the individual physicians. This is in part a question of leverage. If the landlord is anxious for your business, because the market is soft, then it may settle for the corporate signature only, rather than requiring personal signatures.

Term. A typical lease will run five to seven years, sometimes longer. A shorter lease is going to be more expensive in terms of rental rates, because the landlord will have less time to recoup its upfront costs in fitting out the space to your specifications. Plus landlords obviously like long leases; a vacant building is their worst case scenario. If you can make the longer commitment, you’ll get a more favorable rate.

Triple Net Leases. Most commercial leases are "triple net," meaning that only part of the monthly rent is a fixed rate. The balance, often referred to as "additional rent," is a pure pass through of costs to you. Some of these costs will be specific to your suite (you absorb 100 percent); others will be allocations of common costs, such as maintenance of common areas and elements, exterior maintenance, snow removal, etc.

There are two items to watch for here: First, make sure that your allocation of common area or general costs does not exceed your proportionate share of the buildings square footage. Typically, your pro-rata share of these costs will be fixed from the outset, based on your suite’s square footage versus the buildings total available square footage. However, some leases specify that if the building is not fully leased, that your share will be the square footage of your suite versus the total square footage that has in fact been leased! Thus, if there is significant vacancy in the building, you would absorb much more of these common costs than you had planned.

Second, common costs typically include management fees paid to a company to manage the property. Ask what the management fee is (it should not be more than a few percentage points of your rent), and whether the management company is an affiliate of the landlord. If it is an affiliate, the management fee may be overpriced. Make sure the management fee has a limit, and is not left completely open-ended.

Fit-Outs. Landlords will typically provide a fit-out or build-out allowance to induce you to select their space. This is another item easily compared from lease to lease. Recognize that the landlord recoups the fit-out allowance through the fixed rental rate. The benefit of a higher fit-out allowance offered by Landlord A versus Landlord B may be offset by Landlord A’s higher rent rate over the term of the lease.

Other Initial Costs. The landlord will often make some changes to the space separate and apart from the fit-out allowance, in order to get you to move in. Be clear on what will be charged to your allowance, and what will not.

Up to Code. Make sure the lease specifies that the landlord represents and warrants that the space complies with ADA and other code requirements. If it turns out that the space is not compliant, such a representation will require the landlord to make the change at its own expense, not yours.

Competitive Tenants. Ask the landlord to put a clause in the lease saying that it will not rent space to another medical practice of the same specialty as yours. This can be very valuable, for obvious reasons. Conversely, check to make sure that the lease does not restrict you from expanding into an ancillary service that you may want to offer in the future, such as an imaging suite or lab. This is a frequent restriction in medical office building suites owned by the hospital.

Right to Relocate. Look for a provision that allows the landlord to relocate you within the building, at its discretion. Even if the provision specifies that the landlord will pay your moving costs, this is a disruption that you don’t want the landlord to have the ability to impose on you.

Holdover. Commercial leases nearly always have a provision to address "holdover," namely the tenant remains in the space beyond the lease term. Oftentimes the landlord uses the holdover provision to extract punitive rent, such as two times the historical rent rate. Negotiate for continuation of your current rent, or a modest percentage increase only.

Mitigation of Damages. Ask for a provision that requires each party to "mitigate damages" in the event of a breach. Otherwise, if you must break the lease, the landlord may be able to demand full payment of all remaining rents due under the lease, without obligation to find a replacement tenant. A mitigation of damages clause means that if landlord does not make a reasonable effort to find a tenant, then after a period of time your liability for remaining rent will be reduced or eliminated.

Non-Recourse. Incredibly, landlords often insert provisions stating that if the landlord breaches the contract, the tenant’s sole recourse is against the landlord’s interest in the building, and that beyond that interest, the landlord has no "personal" liability. That’s like telling your bank that if you default on your mortgage, the bank can foreclose against your house, but cannot sue you personally for any remaining loss. Delete such a provision.

Confession of Judgement. This is an onerous clause that gives the landlord immense leverage against you in the event that you break the lease. It is so onerous that most states have ruled it illegal. However, Pennsylvania still permits it, and landlords in Pennsylvania routinely insert it into their contracts. If you are small, you will probably lack the leverage to get this clause removed. If you are a larger tenant, you should definitely try.