So you are ready to open your first physical store. You have chosen the right space, in a great location, and just the right size. It can be incredibly exciting, until you receive a 30-page document from the landlord’s attorney, written in small print and heavily peppered with legal terminology.
Your initial instinct may be to place it in a corner of your desk and to ignore it. This approach is not recommended.
Whether you choose to seek the assistance of legal counsel or not, there are things you can do to get yourself closer to a signing date, lower your risk, keep your stress level in check and perhaps decrease your dependence on external legal.
Here are 10 steps to keep in mind.
- Keep notes of all the points you have negotiated with the prospective landlord. These notes will be helpful as you get to the end of what could be lengthy negotiations.
- When negotiations have ended, ask the landlord for a “letter of intent” or “term sheet.” This is a non-binding document that memorializes the parties’ negotiated terms (e.g. rent, start date, free rent period, security deposit, term, broker fees, store opening date, etc.). Confirm that the letter of intent accurately reflects the tentative deal as you have come to understand it. A reasonably detailed letter of intent will be helpful to have on hand once you receive the first draft of the lease.
- The prospective landlord may ask you to sign the letter of intent, to acknowledge receipt. This is fine, but you should ask that a paragraph indicating its non-binding nature first be added to the document. In some jurisdictions a letter of intent could be legally binding, so you want to make sure it is not.
- When you receive the first draft of the lease from the prospective landlord, compare it to the letter of intent. Make sure that the lease accurately reflects all the terms you negotiated. If you find any discrepancies, simply point them out. They could be honest errors, so avoid making any accusations. Remember, you want the space and no good could come from accusing your prospective landlord of dishonesty.
- Some paragraphs are entirely legal creatures (e.g. indemnification, subordination and condemnation), and you may feel uncomfortable reviewing and approving those provisions. This is where a real estate attorney, specializing in retail leasing, may be of assistance. Provide your attorney with the letter of intent and indicate what, if anything, is still not reflected accurately in the draft lease.
- Provide your attorney with as much background as possible in your initial meeting. An hour spent here will a go a long way toward keeping legal costs down and getting to a final version of the lease sooner. Avoid simply dumping documents on your attorney, because he or she will charge you for time spent trying to figure out the context of all these documents.
- Provide a copy of the draft lease to your insurance broker. The draft lease likely has insurance obligations and your prospective landlord may require that you produce proof of insurance once the lease is signed. Your broker may wish to modify some of the language, in order to reconcile any discrepancies between what the prospective landlord is requiring and what you can truthfully provide under your policy. If you have chosen to hire counsel to assist you, provide your attorney with the contact information of your insurance broker.
- Work closely with your contractor, because the draft lease will likely have obligations that would affect how your contractor performs any work on the premises. Confirm that your contractor is capable of complying with these proposed requirements. If there is a conflict, make an attempt to modify the language. Your prospective landlord may agree. Otherwise, there may be a compromise that is workable for both sides. If you have chosen to hire counsel to assist you, provide your attorney with the contact information of your contractor.
- When you have received and approved the final version of the lease, initial all pages (including exhibits) and sign where indicated on the signature page. Do not forget to keep an original and mutually-executed version of the lease for your records. You have no idea how often I have come across situations where a client has signed a lease or a contract and failed to secure a fully-executed copy for his or her records. Don’t consider the deal done until you have received a fully-executed signed original!
- File away the fully-executed original and include all your notes, including a copy of the letter of intent. I would also suggest that before filing these documents away, have them scanned and archive the digital copies.
Now focus on getting that store built out in time for your grand opening!
©Fabio R. Silva. 2016