Lease Negotiation Is Not Common; Mistakes in Lease Negotiation Are

Vintners and brewers do not engage in lease negotiation on a regular basis. In fact, the average small business owner will only negotiate a handful of leases during the life of the business. Accordingly, it is imperative to do everything possible to get it right each time and avoid becoming a prisoner of your own lease.

When it comes to lease negotiation, a small business owner will generally focus his or her efforts on base rent and landlord concessions, and accept the balance of the terms the landlord offers. However, even a landlord’s “standard lease” is negotiable. Consequently, knowledge of the various potential issues, terms and conditions of a lease can be invaluable.

Before Lease Negotiations Can Begin, a Property Must Be Identified

In order for a small business owner to ensure the best possible lease terms, it is important to understand the steps involved and to have the right team in place.

• Project Team. Members of this team should be organized even before potential properties are identified. These members include one or two company representatives (i.e., owner, manager), advisors (i.e., real estate broker, attorney), and design professionals (i.e., architect, engineer).
• Space Requirements and Needs. Considerations include location, space requirements, storage, shipping/delivery access, and staff/employee projections.
• Market Survey. Once space requirements and needs are identified, a vintner or brewer can begin to evaluate potential properties within the market.
• Property Review. Just like it sounds, the next step is to view potential properties to see if they comport with the needs of the winery or brewery. This would be a good point to involve design professionals to provide input into whether or not the property meets local building codes, in particular issues surrounding the Americans with Disabilities Act. If the space needs to be converted to operate as a winery or brewery, can the building structurally handle the renovations? Also, is the landlord upside-down on the property? Is there a chance a bank or other party will foreclose on the property? Before spending any time on lease negotiation, these questions should be answered.
• Zoning, Land Use and Permits. Questions that need to be asked in this regard include: Will local land use and zoning laws allow a winery or brewery to operate at the property? What permits are required? And how long does it take to obtain the necessary permits. If renovations/improvements are planned for the property, what is the permitting process (i.e., cost, timing)? Are any documents recorded against the property restricting its use (i.e., CC&Rs)?

Once a property has been identified that meets the needs of the vintner or brewer, lease negotiations can begin. These discussions could begin with a letter of intent signed by both parties, or through presentation of a lease by the landlord.

Lease Analysis and Negotiation, aka Horse Trading

Tenants are often presented with a lease which the landlord will describe as its standard form lease. In other words, the lease reflects the landlord’s wishes but is lean on tenant protections. However, just because the lease is “standard” does not mean its terms are not negotiable. This may result in some back-and-forth between the landlord and the tenant over concessions and obligations under the lease.

Although best practices suggest an attorney should be involved in the lease process from the beginning, it is at the lease negotiation stage that a lawyer’s services can be invaluable (even if the tenant is working with a real estate broker).

The following are some examples of issues the vintner or brewer should not overlook when negotiating with the landlord, even if the lease is “standard.”

• Indemnification. It is common for the landlord to require the tenant to indemnify it against claims for personal injury or property damage arising out of the tenant’s business. But what about the landlord’s obligations to indemnify the tenant? The landlord may also require the tenant to name it as an additional insured under the tenant’s insurance policy. At the same time, the tenant should confirm that the landlord has its own, independent insurance.
• Property Tax Increases. More often than not, when a winery or brewery move into a leased space, the overall value of the property increases. This raises the potential for the assessed value of the property to increase, too, thereby increasing the property taxes. As a consequence, the tenant should be mindful of who takes on the increased tax liability under the lease: the landlord, the tenant or both on a pro-rata basis.
• Tenant Improvements and Contingencies. Depending upon the landlord and the property, restrictions may be placed upon what improvements or renovations the tenant may undertake. Further, to guard against the risk that the necessary permits cannot be obtained or the space cannot function as intended, the tenant should negotiate contingencies allowing the tenant to terminate the lease if the contingencies are not met.
• Tenant’s Right to Setoff. If the landlord does not perform all of its obligations, increasing the business costs of the tenant, can the tenant reduce those costs from the rent?

Miscellaneous Costs. A new business owner will sometimes assume that certain costs associated with maintaining the overall property will be absorbed by the landlord. This is not always the case, and the tenant should inquire about and include in the lease who is responsible for various costs, such as:

• Landscaping
• Hardscape maintenance (i.e., parking lot, sidewalks)
• Utilities (electric, gas, water)
• Refuse collection

As noted earlier, a new tenant’s concerns generally relate to base rent and landlord concessions. In this regard, the longer the lease term, the more likely the landlord will be open to decreasing the base rent and increasing the number of concessions. Other landlord concessions can usually be obtained through negotiation, too, on a give-and-take basis.