What to know before signing a commercial lease in New York

Most tenants negotiate rent and term, then sign everything else as drafted. In New York, that is where the expense hides.

Escalations, guarantees and restrictions on assignment can add more to the real cost of a lease than the headline rent, and they are far harder to change once the keys are handed over. Over twenty years of representing tenants and landlords, from Midtown offices to Brooklyn retail, we have found that the same five issues decide whether a lease works for a business or against it.

Know what you are really paying for

Base rent is only the starting figure. Most Manhattan office and retail leases add a share of real estate tax increases over a base year, plus an operating expense escalation or a fixed annual increase of 2.5 to 3.5 percent. Ask the landlord to state your proportionate share as a percentage, along with the square footage it is calculated on, and confirm whether the space is measured on a rentable or usable basis.

Request the last three years of tax and operating statements. If the base year falls in a year when taxes were artificially low, for example under an abatement that is about to expire, your escalations will rise sharply from year two.

Limit the personal guarantee

Landlords routinely ask owners of small and mid-sized businesses to guarantee the lease personally. A full guarantee makes your personal assets answerable for every dollar of rent for the entire term. In New York the usual compromise is a “good guy” guarantee: your liability ends once you give proper notice, pay rent through the date you vacate and return the space in the agreed condition.

Negotiate the notice period (three to six months is typical), a cap tied to a fixed number of months of rent, and a burn-off after a period of timely payment.

“The lease you sign in month one is the lease you will be arguing about in year seven.”

Daniel Reyes, Managing Partner

Protect your right to assign or sublet

Businesses change faster than ten-year leases. If you sell the company, merge or need to downsize, a strict anti-assignment clause can leave you paying for space you cannot use. Seek the right to assign to an affiliate or a successor by merger without consent, and require that consent to any other transfer not be unreasonably withheld, conditioned or delayed.

Watch for recapture clauses, which let the landlord end the lease when you ask to sublet, and for profit-sharing provisions that take half or more of any sublease premium.

Read repairs, alterations and restoration together

Who pays to fix the HVAC, the storefront or the roof is usually set out across several sections, not one. Confirm that the landlord is responsible for the structure and building systems, and that your obligations are limited to the interior. Before you build out, agree in writing which alterations you must remove at the end of the term. Restoration on a full-floor fit-out can cost more than six months of rent.

Plan the exit before you enter

Check the term, any renewal options and how renewal rent is set. A fair market value reset with no floor or cap can price you out of your own space. Look for an early termination right, even one that carries a fee, and confirm how the security deposit or letter of credit reduces over time.

Finally, insist that the work letter specifies the landlord’s contribution, the delivery date and what happens if the space is not ready. Rent should not start until you can lawfully occupy the premises.

Key takeaways

1. Ask for the rentable square footage, your proportionate share and three years of tax and operating statements before you agree the rent.

2. Replace a full personal guarantee with a capped “good guy” guarantee and a clear notice period.

3. Secure the right to assign to an affiliate or buyer without consent, and remove recapture where you can.

4. Agree restoration obligations and the renewal rent formula in writing before you sign.

This article is for general information and is not legal advice. Reading it does not create an attorney–client relationship. Lease terms and market practice change, so speak with a lawyer about your own circumstances before you sign. Prior results do not guarantee a similar outcome.