You might remember my last column: Jim, owner of the traffic school, Fun While Drinking and Driving, had come to see me about the lease for his new space.
He was skeptical about the need to pay an attorney to review the document. So, I challenged him with eight issues he had not considered. Here they are in more detail.
First, were there any renewal periods? There were, but he really didn’t know the specifics. So, we examined the lease and learned a few things. There was one option to renew. It was silent as to what the renewal rate would be other than to say, “Market Rate.” So, if Jim had a smoking rate now, the landlord could make some of that money back, because the current lease would be below market. I recommended he ask for a definite amount or at least a predetermined percentage of increase rather than the vague “Market Rate.”
Then we talked about the landlord’s reserved right to force him to move. This was shocking news to Jim. “You mean my landlord could force me to move to a completely new location at his whim?” I confirmed that the landlord had that right under the lease. And while the landlord might help pick up the costs of the move, he most definitely would not pay Jim for any lost profits. That concept sucked.
I asked Jim if he was going to get any tenant improvement (or TI) allowance for the work he had to do on the new space. No, he didn’t even know he could ask for it.
Speaking of TI work, did Jim have any concept about how long the work was going to take? Did he have a general contractor inspect the location and give him an estimate of the cost? Was his anticipated use of the premises even permitted under the current zoning laws? Did he know if there was adequate parking? I strongly advised Jim to have those questions answered before he signed the lease. Because if he signed and then learned there were problems with the use, or that the TI work was going to take several months, it was too late to back out of the lease.
An obvious question was: When did he have to start paying the 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?
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? Would 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?
I alerted Jim that he was going to have to give a personal guarantee. That meant the landlord could sue Jim personally if his new 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.
We then started talking about CAM charges, which will be the subject of the next column. ©