By Carl Kanowsky
This is the second installment of a three-part series. The Signal published part one on March 22, and part three will appear May 17.
In last month’s column, I introduced you to Jim, owner of a traffic school called “Fun While Drinking and Driving.” Jim came to see me about signing a lease on new office space.
Jim was skeptical about the need to pay an attorney to review the lease document. So I challenged him with eight issues that he had not considered. Here are seven of the eight in more detail.
1. Does the lease contain renewal periods? In Jim’s case, yes, is does, but he’s hazy on the specifics. We examined the lease and learned a few things. There is one option to renew. It’s silent as to what the renewal rate would be other than to say he would pay “Market Rate.”
If Jim has a great rate now, the landlord could make some of that money back on the renewal even though the current rent is comparatively cheap. I recommended that he ask for a definite amount. At the very least, he should negotiate a cap on the increase as a percentage of the current rent. “Market rate” should be left for buying lobster tails, not leasing commercial space.
2. Under what circumstances can the landlord evict Jim? He was shocked to learn that the landlord reserved the right to force him to move.
“You mean my landlord could force me to relocate to a completely new location at his whim?” I confirmed that the landlord retained that right under the lease. And while the landlord might help pick up the costs of any move, he most definitely would not pay Jim for any lost profits. That surprised Jim.
3. I asked Jim if he was going to get any Tenant Improvement (or TI) allowance for the work he had to do to improve the new space. No, and he didn’t even know he could ask for it.
4. Speaking of TI work, did Jim have any concept about how long the work would take? Had he asked a general contractor to inspect the location and give him a cost estimate? Was his anticipated use of the premises even permitted under the current zoning laws? Did he know if there was adequate parking?
His answers: no, no, no, and no.
I strongly advise Jim to get those questions answered before signing the lease. Because, if he signed and then learned that there were problems with how he used the space, or found out the TI work would take several months, it was too late to back out of the lease.
5. An obvious question is when did he have to start paying rent? Was it when he signed the lease? Or did the landlord give him a few weeks to finish his TI work before sending invoices for rent? What happens if the TI work takes much longer than anticipated? Will he be in a position where he’s paying rent before he’s even open for business?
6. Did he get an agreement that no other traffic schools would be allowed in the shopping center? In other words, did the landlord grant him an exclusive use right? And, how exclusive is that right? Does it prohibit all traffic schools or just comedy ones?
How about a driver’s training business – did that violate the exclusivity clause? Did the exclusivity apply to tenants already in the shopping center? And, what were the consequences if the landlord screwed up and rented to another school? Could Jim force the landlord to disown the new lease or did Jim just receive some payment for his damages?
7. I alerted Jim that he was going to have to give a personal guarantee. That means that the landlord could sue Jim personally if Jim’s business ever fails. So, all of Jim’s personal assets were at risk for the full term of the lease, as well as any extension.
8. The eighth item, charges for common area maintenance, make up an entire can of worms unto itself. More on CAM charges next month.
Carl J. Kanowsky of Kanowsky & Associates is an attorney in the Santa Clarita Valley. He may be reached by email at email@example.com. Mr. Kanowsky’s column represents his own views, not necessarily those of The Signal. Nothing contained herein shall be or intended to be construed as providing legal advice.