July 26, 2018
I. Steps in the Negotiation Process – Residential vs. Commercial
1. Tenant determines needs, requirements, and budget. Landlord prepares and markets property. Real Estate Brokers, attorneys, and CPAs may be consulted and usually should be consulted.
2. Determine market rental rates for space in the area.
3. Tenant will locate and tour properties. Potentially contact prior tenants to discuss space and personality of landlord.
4. Space Planning / Space Evaluation. Tenant should bring professional architects, engineers, contractors, etc., to determine whether space will work for needs. This is followed by discussion with professionals to determine estimated costs for upgrades, improvements, and other build-out. Once informed, the tenant can strategize lease negotiation. Tenant should consider proposals to multiple landlords in order to utilize threat of competition to get concessions from both.
4. Tenant can deliver a proposal to lease to owner for consideration (typically only commercial leases). In residential situations, especially multi-dwelling units and apartments, the tenant is provided a “take-it-or-leave it” form lease (with room for handwritten minor concessions).
6. Tenant then evaluates responses to proposals and/or compares options for space, landlord compatibility and history, proposed leases and terms, etc.
7. Landlord Evaluates Tenant: tenant Screening, criminal history check, eviction and civil judgment history check, credit worthiness evidence, Evaluate need and options for Increased Security Deposit, Letters of Credit, Personal Guarantees, Collateral/Security Interest in tenant property.
8. Negotiate rates, deposits, and terms.
9. Draft or revise lease and close on the transaction.
II. Understanding Typical Residential Lease Provisions
1. Lease Duration: Term Lease vs. Periodic Tenancy
-Term Lease expires on its own at end of certain lease term.
-Periodic tenancy continues on until terminated by providing sufficient notice by Notice to Quit served on tenant. C.R.S. § 13-40-107 provides the length of notice required:
(a) A tenancy for one year or longer, ninety-one days;
(b) A tenancy of six months or longer but less than a year, twenty-eight days;
(c) A tenancy of one month or longer but less than six months, seven days;
(d) A tenancy of one week or longer but less than one month, or a tenancy at will, three days;
(e) A tenancy for less than one week, one day.
Example Term Lease:
Landlord leases the Premises to Tenant from twelve o’clock noon on the day of , 20____, and until 11:59 p.m. on the day of , 20 (the “Lease Term”)
Example Periodic Tenancy: Landlord leases the premises to Tenant from
month to month, commencing ______________, 20___.
Periodic Payments vs. Lump Sum Installment Payments
Example Periodic Payments: Tenant(s) shall pay Landlord the following amount each month $______________.
Example Lump Sum Installments: Tenant(s) shall pay Landlord the following amount for the entire Lease Term (the “Rent”):
____________________________________ Dollars ($______________)
Tenant(s) may prepay the Rent, but shall the minimum monthly installment of: ____________________________________ Dollars ($______________
“Additional Rent” (utilities, repairs, late fees, etc.)
Example: Additional Rent: Tenant agrees that any amounts due under this Lease shall be deemed “Additional Rent,” which shall be paid together with Rent on the next monthly installment date or at the end of the Lease Term, whichever comes first.
Repairs in Lieu of Rent under Warranty of Habitability
Example: Repairs or Improvements in Lieu of Rent: In the event that the parties agree that Tenant shall be responsible for some or all of the repairs and/or some or all of the maintenance beyond that set forth in the Lease, then the parties shall execute a separate writing consistent with the requirements of The Colorado Warranty of Habitability Law, codified at § 38-12-501 et seq., C.R.S. indicating such agreement. Such separate writing may be appended to this Lease as an addendum.
3. Security Deposit
-Protects all tenant’s lease obligations
-30 – 60 days to return or account for withholding to last known address.
Example: Retention or Return of Security Deposit: Landlord may retain the Security Deposit for any reason related to Tenant’s faithful performance of this Lease, including but not limited to nonpayment of Rent or Additional Rent, repair of the Premises or Common Areas, replacement of damaged or missing items on the Premises or Common Areas, attorney’s fees and court costs, and/or cleaning of the Premises or Common Areas beyond normal wear and tear incurred during the Lease Term. Among other things, the Security Deposit may be used to professionally clean carpets, deodorize the property, clean oil on concrete, replace unreturned keys, garage door openers or other security devises, removal of unauthorized locks, replacing burned out or broken light bulbs, or to get landscaping back to move-in condition (if Tenant’s obligation), which Tenant agrees are not considered “normal wear and tear.” Tenant may not elect to apply the Security Deposit as last month’s rent. Any amount remaining from the Security Deposit, together with a written accounting for any portion retained, will be returned by mail to Tenant not more than Sixty (60) days after expiration of the Lease Term. Landlord shall mail the return or accounting to Tenant’s last known address. If Tenant fails to provide Landlord a forwarding address, the Premises will be the last known address. Unless directed by all Tenants in writing, if
Tenant consists of more than one person, Tenant agrees that Landlord may provide, at Landlord’s discretion, the return or accounting to any one Tenant or pro-rata refunds to each person.
4. Repairs and Maintenance: Tenant vs. Landlord obligations
Tenant vs. Landlord repairs / Warranty of Habitability Requirements Example: Repairs and Maintenance of the Premises: The Tenant shall be responsible for maintenance of the Premises in good, safe, clean, attractive condition, ordinary wear and tear accepted and as described further in the Lease at Tenant’s sole cost and expense. The Landlord shall be responsible for maintenance and repair of the Premises as described further in the Lease. Tenant shall reimburse Landlord for the cost of any repairs or replacements for damage arising out of Tenant’s use of the Premises. Tenant shall provide notice to Landlord of the need for repairs or replacements.
Example: Landlord’s Maintenance and Repair of the Premises: Landlord shall be responsible for the maintenance and repair of all structural components, interior and exterior walls, floors, ceiling, roofs, sewer connections, plumbing, wiring, appliances and glass used in connection with the Premises, upon prompt notice by Tenant to Landlord in writing. More specifically, (i) any repairs, replacements, restorations, or maintenance that have been necessitated by reason of ordinary wear and tear; (ii) any repairs, replacements, restorations, or maintenance that have
been necessitated by sudden natural forces or acts of God, or by fire not caused by Tenant; and (iii) any repairs, improvements or maintenance that are required by applicable state and municipal rental housing codes that govern the area in which the Premises are located, including, inter alia, the Colorado Warranty of Habitability as set forth in C.R.S. § 38-12-501 et seq. Notwithstanding the foregoing provisions of the Lease, if repairs, replacements, restorations, or maintenance have been necessitated by any other reason including, without limitation, Tenant’s intentional, reckless or negligent use, misconduct or abuse of the Premises, improvements or systems then Tenant shall be responsible for the cost and expense for repairs, improvements or maintenance occasioned by such acts or omissions. In the event the parties agree in a separate writing to the contrary as specified herein for the Tenant to be responsible for certain repairs and maintenance beyond those articulated to be the Tenant’s responsibility in the paragraph above, then the responsibilities of the Landlord, as set forth in this paragraph, shall be modified accordingly.
Example: Colorado Warranty of Habitability Statute: The Colorado Warranty of Habitability Law, codified at § 38-12-501 et seq., C.R.S (the “Warranty of Habitability”) imposes certain statutory obligations as to the condition of the Premises. As such, the Landlord hereby represents and warrants in this Lease, that the Residential Premises is fit for human habitation. Landlord shall be deemed to breach the aforementioned Warranty of Habitability in the event that:
a. The Residential Premises is uninhabitable as described in § 38-12- 505, C.R.S., or otherwise unfit for human habitation; and
b. The Residential Premises is in a condition that is materially dangerous or hazardous to the Tenant’s life, health, or safety; and
c. The Landlord has received written notice of the condition described in above and has failed to cure the problem within a reasonable time.
Uninhabitable Residential Premises. Section 38-12-505(1), C.R.S., provides that the Residential Premises is deemed uninhabitable if it substantially lacks any of the following characteristics:
d. Waterproofing and weather protection of roof and exterior walls maintained in good working order, including unbroken windows and doors;
e. Plumbing or gas facilities that conformed to applicable law in effect at the time of installation and that are maintained in good working order;
f. Running water and reasonable amounts of hot water at all times furnished to appropriate fixtures and connected to a sewage disposal system approved under applicable law;
g. Functioning heating facilities that conformed to applicable law at the time of installation and that are maintained in good working order;
h. Electrical lighting, with wiring and electrical equipment that conformed to applicable law at the time of installation, maintained in good working order;
i. Common areas and areas under the control of the Landlord that are kept reasonably clean, sanitary, and free from all accumulations of debris, filth, rubbish, and garbage and that have appropriate extermination in response to the infestation of rodents or vermin;
j. Appropriate extermination in response to the infestation of rodents or vermin throughout the Residential Premises;
k. An adequate number of appropriate exterior receptacles for garbage and rubbish, in good repair;
l. Floors, stairways, and railings maintained in good repair;
m. Locks on all exterior doors and locks or security devices on windows designed to be opened that are maintained in good working order; or
n. Compliance with all applicable building, housing, and health codes, which, if violated, would constitute a condition that is dangerous or hazardous to Tenant’s life, health, or safety.
Opt-Out: If the Dwelling Unit is contained within a mobile park, or if the Dwelling Unit is contained in a structure where there are four or fewer dwelling units sharing common walls and are located on the same parcel of property and are owned by the same owner, or if the Dwelling Unit is a single-family residential premises, and the opt-out is not inconsistent with any obligations imposed upon the Landlord by a governmental entity for the receipt of a subsidy for the Dwelling Unit, then the Warranty of Habitability Law provides that the parties may opt-out of certain maintenance obligations of the Landlord and provide that the Tenant shall undertake such maintenance obligations.
If the Dwelling Unit is located in a type of residential premises qualifying for such opt-out provisions, the parties hereby agree by good faith agreement that Landlord opts-out of the following items, which have been checked, and agree that the Tenant shall be responsible for same. In the event that no items are checked, then this opt-out provision shall not be applicable:
The Tenant shall be responsible for maintenance of the following: Common areas and areas under the control of the Landlord that are kept reasonably clean, sanitary, and free from all accumulations of debris, filth, rubbish, and garbage and appropriate extermination in response to the infestation of rodents or vermin;
Appropriate extermination in response to the infestation of rodents or vermin throughout the Dwelling Unit; and/or An adequate number of appropriate exterior receptacles for garbage and rubbish, in good repair.
4. Default: Events of Default and Substantial Violations
Example: Default: If Tenant is in arrears in the payment of any installment of Rent, any Additional Rent, or in violation of any other covenants or agreements set forth in the Lease (a “Default”) and the Default remains uncorrected for a period of three (3) days after Landlord has given written notice of the Default to Tenant pursuant to applicable law, then Landlord may, at Landlord’s option, undertake any of the following remedies without limitation: (i) declare the Lease Term ended; (ii) evict Tenant from the Premises and re-enter and repossess the Premises pursuant to applicable provisions of the Colorado Forcible Entry and Unlawful Detainer statute and re-let the Premises without terminating the Lease; (iii) recover all present and future damages, costs and other relief to which Landlord is entitled; (iv) pursue Landlord’s lien remedies; (v) pursue breach of contract remedies; and/or (vi) pursue any and all available remedies in law or equity. Pursuant to §§ 13-40-104 (d.5) and (e.5), and 13-40-107.5, C.R.S., hereby incorporated by reference, if repeated or substantial Default(s) occur under the Lease, Landlord may terminate Tenant’s possession upon a written Notice to Quit, without a right to cure. Upon such termination, Landlord shall have available any and all of the above-listed remedies. If possession is returned to Landlord before the Lease Term expires by surrender, abandonment, or through court proceedings, Landlord may from time to time re-let the Premises and all of Tenant’s future rent shall be accelerated and immediately due and payable for the remainder of the Lease Term, subject to Landlord’s duty to mitigate, whether or not the Lease is considered terminated. Landlord’s re-entry or taking possession of said premises by Landlord shall not be construed as an election on its part to terminate the Lease unless such intention be given to Tenant by written notice. Landlord in Landlord’s sole discretion may agree to a “Break Lease” charge in settlement, relieving Tenant of future obligations under the Lease.
Example: Substantial Violation: Tenant shall not commit a “substantial violation,” defined to include any act by the tenant or the tenant's guests or invitees on or near the premises (1) that endangers the person or property of the landlord, a co–tenant, or any person living on or near the premises; (2) that constitutes a violent or drug–related felony under Articles 3, 4, 6, 7, 9, 10, 12, or 18 of Title 18, West's C.R.S.A.; and (3) certain acts occurring in parking lots and other common areas of the building or complex where the leased premises are located.
5. Attorneys’ Fees, costs and interest
Example: Attorneys’ Fees, Costs and Interest: If either party fails to perform any of its obligations under the Lease, or if a dispute arises concerning the meaning or interpretation of any provision of the Lease, then the defaulting party or the party not prevailing in the dispute, as the case may be, must pay any and all costs and expenses incurred by the other party in enforcing or establishing its rights under the Lease, including, without limitation, court costs and reasonable attorneys’ fees as per §13-40-123, C.R.S. Attorneys’ fees and costs for any legal action or for sending notice to Tenant shall be considered damages and Additional Rent and Landlord may retain the Security Deposit in part or whole, as damages for attorneys’ fees and costs incurred by Landlord. Further, Tenant shall pay 18% per annum interest on any delinquent Rent.
6. Liability Waivers / Indemnifications
- not enforceable in residential lease
III. Understanding Commercial Rental Rates and Space in Commercial Leases
TYPICAL TYPES OF RENTAL RATE OPTIONS
- Full Service Gross (tenant pays a flat monthly charge – typically multi-tenant office buildings)
- Single Net / Industrial Gross (tenant pays base rent and for its own utility services, janitorial and trash removal – typically warehouse/small office building)
- Double Net (tenant pays base rent and pro-rata share of all services, taxes and insurance, plus any systems maintenance and owner pays to maintain roof, foundation, and side walls – typically retail leasing or free standing single tenant property)
- Triple Net (tenant pays base rent plus pro-rata share for all services, the taxes and insurance plus maintenance of the building and its systems – typically retail leasing or free standing single tenant property
MEASUREMENT OF SPACE
Gross square footage is usually the basis of rent and CAM costs for warehouses, industrial buildings and freestanding retail buildings. Office buildings usually are measured by the square footage that a user may occupy – called “rentable square feet” as opposed to the area that a tenant exclusively uses which is the “usable square feet.” This is termed the load factor. The higher the load factor, the more the tenant is paying for use of common areas.
Some property managers use the standards for calculating rentable space set out by the Building Owner’s and Manager’s Association (BOMA). These guidelines assist with calculations such as where and how to measure certain areas of the property.
IV. Room for Negotiation in Residential Leases
- Rent and Term– Repairs/improvements in lieu of rent
- Repairs and maintenance obligations - warranty of habitability opt-out
- Options to buy (how much rent goes toward purchase and lock in purchase price)
- Military Clause – deployments or changes of station
- Break Lease Fee
- Tenant improvements (does tenant take)
- Covenant of Quiet Enjoyment – Right to inspect / show property/notice requirements
- Security Deposit –
*Amount (pets, smoking, type and number of tenants, credit history/criminal background, etc.)
*Deadline to return / account for withholding
V. Room for Negotiation in Commercial Leases
Leverage in negotiation often comes down to market availability and demand, and whether the tenant is highly desirable. It is critical for both the landlord and tenant to understand the market they are in, so that negotiations may proceed reasonably to get the deal done.
TENANT IMPROVEMENT / MOVING ALLOWANCE / RENT HOLIDAY
A tenant moving in may have considerable leverage in the right market to request that a landlord make improvements to the space at landlord’s cost. The longer the term of the lease, the better the chance that the landlord will not require the cost to be fully passed on to the tenant. Also, a landlord can offer a moving allowance or a rent holiday or stepped up rent, to induce the tenant to lease the space.
COMMON AREA MAINTENANCE COSTS
Landlord’s Perspective: From the landlord’s perspective, CAM costs should be subject to the landlord’s current costs for expenditures for common areas, all facilities of the building/shopping center, and all improvements serving the building/shopping center, including the roof, structural elements, adjacent parcels, and outdoor areas used only by specific tenants or the landlord. The landlord wants a CAM clause to cover all of the landlord’s costs of ownership, management, maintenance, repair, replacement, inspection, improvement, operation, and insurance, together with any costs allocated to administration and overhead. The landlord wants the CAM costs to be flexible and increase to the tenants in proportion to the increased costs landlord may have – such as increases in property taxes or insurance rates. A landlord faced with unexpected increases in operating expenses faces the prospect of losing all profit and potentially being unable to make loan payments on the building/shopping center.
Tenant’s Perspective: From the tenant’s perspective, however, the tenant would like to define these areas as narrowly as possible and limit CAM charges to those incurred in relation to the parking and enclosed areas meant for their customers’ use. Tenants typically view the landlord’s ownership costs as costs of doing business, and worry about being “nickel and dimed,” by CAM costs that periodically and/or unpredictably increase due to market conditions, unforeseen repairs, and governmental requirements. Tenants try to negotiate for fixed CAM costs or capped CAM costs to limit their exposure to unforeseen increases in rent.
Landlord’s Capital Expenditures: Some landlords seek to have tenants share the cost of capital expenditures for improvements to the building/shopping center that houses the tenant’s unit. Such pass-through of investment costs are likely to be objectionable to tenants who believe they should not be subject to rent increases for what amounts to an investment that the landlord makes. The improvements are investments of the landlord only inure temporarily to the tenant. Some improvements that may directly benefit the tenant may be worth the tenant helping to pay, such as new lighting, parking lot expansions, or energy efficient HVAC upgrades. In most cases , however, tenants must demand strict controls on passing through capital expenditures, so they are not subject to the total discretion of the landlord. Further, tenants should demand that such costs be amortized over the estimated life of the improvement, so that it is spread out and more reasonably coordinates with the time the tenant gets the benefit of the improvement. Landlords that try to incorporate such language often understand such concerns and are willing to make such concessions.
It is a good idea to identify whether a replacement of an obsolete fixture/component is maintenance or an improvement. From a tenant’s perspective, base rent is for the space, including all the fixtures thereto – and accordingly a replacement is the cost of landlord keeping such purchased space and fixtures in items in use/place. From the landlord’s perspective, replacement of obsolete fixtures/components is typically cheaper than continued repair/maintenance which is a standard CAM cost. The parties should distinguish what is a replacement versus a capital improvement. CAM costs for Management and Administrative Fees. While commercial leases typically provide an administrative charge of between 5% to 18% for costs for operating and maintaining the shopping center / building, some leases allow landlords to charge a “management fee,” in addition to the administrative fee – typically the cost for a property management company. Tenants feel this is a form of double-dipping. A tenant should try to include a provision that there shall be no duplication of charges under the lease, which should effectively trim down a broad CAM clause.
Security Interests: Tenants may find that providing security interests to landlord in the Tenant’s property will allow for a smaller deposit.
VI. Negotiation Tactics
1. Walk –Out
At an impasse, one party walks away, hoping the other will call back and give-in. Must be willing to lose-deal, but can result in concessions.
2. Need Approval
Slows down concession process by claiming you need approval from another person not there. One can call-out the party by insisting that you will consider a concession only after knowing the absent person’s position.
3. Deadline Approaching
A party attempts to control the negotiations by setting real or arbitrary deadlines, since most concessions are typically made when a deadline is approaching. Sometimes the deadline deals with attempts to convince the other that there is another interested party or another available property. It is a good idea to inquire as to the reasons for another’s deadline to test whether it is arbitrary.
The “Nibbler,” asks for more concessions after reaching an agreement – taking advantage of the other letting their guard down after getting the basic deal agreed to. The way to combat this is to make the Nibbler feel cheap or threaten to re-open negotiations, or to resort to the “need approval” tactic and buy time to consider the concession or build a defense strategy.
5. Never-ending Requests for More
A party, on the cusp of agreement, asks for more concessions. The best defense is to take time to respond, require mutual concessions at all times, and threaten to take back concessions if there is nothing else left to gain.
6. Reframing the Issue
Sometimes the best way to get out of an impasse is to try reframing the issue. All parties should be alert to reframing, lest it be used as a trick to change the proper focus.
7. Use of Emotional Impact
Some negotiators will get angry or overreact in order to get the other party to deal with the emotion by making concessions. The best defense is to be calm and state you are flexible, but without any specific concession. Try to get the other to their bottom dollar.
VII. Renewing and Extending Leases
Tenant’s can make a critical mistake by not investigating the market with sufficient time prior to the expiration of the lease. If rental rates have dropped in the market, the tenant may not have the time to fully investigate and negotiate with the current landlord or another prospect. The unwitting tenant ends up simply renewing at the going rate and may substantially overpay. If market conditions favor the tenant, the tenant may be successful in obtaining concessions to stay with the current landlord, such as a refurbishment of the premises, additional space, a rent holiday / period of reduced rent, return of a portion of the security deposit, or requirement to hold security deposit in an interest bearing account.
A tenant with leverage renewing can request that the renewal year is now the base year for the purpose of determining increases in operating expenses over the base year. This will relieve the tenant of increases in operating costs that have accumulated over the lease term and will give the tenant a year without increases.