By The Hughes Marino Legal Team
Recently I had the honor of serving on a CLE panel for the Orange County Bar Association alongside fellow attorney David Wensley, managing partner at Cox, Castle & Nicholson, and my colleague at Hughes Marino, commercial real estate broker Tucker Hughes. We were invited to speak to the audience of 50+ attorneys regarding various issues in the current – and quickly appreciating – commercial real estate market in Orange County.
Tucker and I spoke about ways to avoid common pitfalls when it comes to commercial lease negotiations, focusing on specific areas in a lease where attorneys can help their tenant clients negotiate better terms. We explained that most commercial leases are prepared by a landlord’s attorney, which means the terminology in a typical lease will generally favor the landlord. However, tenants still have the opportunity to secure more favorable provisions.
While most attorneys are adept at reviewing contracts, many are not aware of the areas in a lease where a tenant can “push back,” and which areas are considered standard for the market. Some of the areas in which tenants can negotiate more favorable terms include expansion rights (i.e. a right of first offer or right of first refusal), operating expenses, building condition, landlord’s relocation right, and assignment and sublease provisions.
For example, tenants – or their attorneys – must pay attention to the way operating expenses will be calculated and applied. (As a general rule, operating expense accounting should be applied consistently and the types of capital improvements that landlords can pass through to tenants should be limited).
Similarly, tenants or their attorneys need to understand who is responsible for code compliance, especially with the recent changes made to Title 24, where complying with strict new energy efficiency requirements may increase your tenant improvement costs by $6 to $12 dollars per square foot. (For more on this from a broker’s perspective, read Tucker’s excellent post on the three things tenants should understand when negotiating a lease.)
At the conclusion of the panel, we were thrilled to receive flattering, and overwhelmingly positive feedback from attorneys in attendance. Their only complaint was that we didn’t have more time to talk.
It reminded us how important it is for corporate tenants to seek appropriate guidance when making major real estate decisions, as this information is not common knowledge for professionals outside our industry. Whether that means consulting with an outside real estate attorney, or working with a tenant representative who has the support of an in-house legal team, every tenant should take steps to protect themselves before signing a lease that’s not in their best interests.