Exit Strategy in Commercial Lease Agreements

Firemen have an unwritten but clear code of conduct: Do not enter a building on fire, unless you know where the exits are. One of the first things that flight attendants do before take-off is familiarizing passengers on exits in the aircraft. Needless to say, knowing when and how to exit from a sticky situation is the first prerogative of a responsible individual.

Precisely the approach that one must adopt while entering into a Commercial Lease Agreement! With both landowners and tenants looking at ways to maximize returns on commercial property, Commercial Lease Agreements have only become more complex and less transparent over time, particularly in California.

Martire Law has been helping commercial lessees create an exit strategy in their Commercial Lease Agreements. Changes that can happen in the company, industry, or local market cannot always be predicted at the beginning of a lease term. Nevertheless, they must be planned for and negotiated effectively in the agreement.

CC&Rs (caveats, conditions & restrictions) imposed by landowners can be classified into two categories depending on how serious is their long-term impact on the tenant.

Key areas of concern

Some of the areas where tenants have blundered by not properly evaluating lease language pertain to:

• ‘Use’ of Property: Land owners are known to restrict the lessee’s usage of the property by having a narrow use clause. This can limit assignment of the lease, sale of the business, and diversification prospects over time. A good legal advisor can help keep the usage options as open as possible, even if the lessee is only seeking “general office use.”
• Parking: As companies look at various staffing models such as the use of temps, double shifts, consultants (vis-a-vis employees) who do not work full-time, etc, estimating parking needs in the long run can be difficult. A good legal advisor can help you secure as much parking as possible, even if it’s not needed, especially if there is no additional fee involved.
• Assignment and subletting:  A lessee must be able to get out of a lease if the space is no longer needed; however, a termination clause may not always be available or may be expensive. In such a case, subleasing or subletting the property is a good alternative. Again, subleasing space may not be easy and not knowing how to negotiate it can turn out to be a costly affair to the lessee.

Other clauses requiring clarity

• Guaranties: Factoring guaranties pertaining to termination after certain duration, limiting amount of rent, unamortized landlord costs, etc.
• Relocation and Transition: Negotiating the timeline and costs in order to avoid delay damages in case the release of the premise or relocation cannot happen immediately.
• Rights of Recapture and Leaseback: Knowing about exceptions when the landlords’ right of recapture and leaseback of a Tenant’s Space must be waived.
• Defining ‘Default’: Tenants are expected not to be in default during the entire lease term. It’s important to define what is called default and what the exceptions to the same are.
• Profit sharing from subletting/assignment: Negotiation involves limiting the owner’s profit participation and factoring various costs borne by the tenant against the profits accrued.
• Liability of Tenant/Assignor & Guarantor: Negotiation involves understanding the extent of liability, and exceptions that can secure release from liability after the Lease Assignment.
• Renewal & Expansion Options of Tenant
• Non-Disturbance Agreements and Signage clauses

With evolution of the business, real estate requirements of companies can change. A good exit strategy can factor this shift, making it a top priority for tenants entering into a commercial lease agreement. Not having such a strategy can be risky to the business, and in worst case cause partial or total closure of its operations.