Summary
Explains why commercial lease clauses often matter only after a triggering event such as a sale, expansion, or sublease request, then walks through five clauses to read closely (co-tenancy, relocation, personal guaranties, assignment and subletting, percentage rent). Closes with what to do before signing and an FAQ covering landlord changes, guaranty scope, review timing, and Alabama, Florida, and Mississippi differences.
By: Jordan Gerheim, CEO – Outside Chief Legal LLC
A commercial lease clause can sit unnoticed for years and then become central to a growing business’s next decision. Many owners sign a lease, file it away, and do not revisit it until a landlord invokes a right or remedy under the agreement.
By then, the business may be facing a lease renewal, expansion, relocation, ownership change, sale, sublease request, or financial challenge. The issue is not necessarily that the landlord is doing anything improper. Commercial leases are written to protect the landlord’s interests as well as the tenant’s. The challenge is understanding what the lease requires before a particular clause becomes important.
Commercial leases often contain provisions that matter only after a specific event occurs. A change in ownership, a request to assign or sublease the space, the departure of an anchor tenant, a relocation notice, or sales reaching a defined threshold can all activate rights and obligations that were easy to overlook at signing.
Reading the lease carefully before signing, not after a dispute or deadline arises, can be the difference between a manageable business decision and a costly surprise.
Why Lease Clauses Matter Later
Commercial leases can run dozens of pages, and some extend well beyond 100 pages. When a business is securing its first location or opening a new site, the owner’s attention is understandably focused on rent, square footage, location, buildout, and the move-in date.
The provisions that create the most significant issues later are often found in sections that seem less urgent at the beginning of the relationship. These may include co-tenancy provisions, relocation rights, personal guaranties, assignment and subletting restrictions, percentage-rent obligations, repair responsibilities, operating-expense pass-throughs, default provisions, renewal rights, and use restrictions.
None of these provisions is unusual. The concern is not that a lease contains them. The concern is signing a lease without understanding how the language could affect the business when circumstances change.
This often becomes important during growth. A business may be considering a larger location, a second market, a sale, new ownership, a partnership, or a reorganization. The lease that felt manageable when the business was smaller may now govern decisions that the owner did not anticipate when signing it.
Five Clauses to Read Closely
1. Co-Tenancy Requirements
Co-tenancy provisions are most common in retail and shopping-center leases. They may tie some part of the tenant’s rent obligation or termination rights to occupancy conditions at the property.
For example, a lease may provide a rent reduction, alternative rent structure, or termination right if a named anchor tenant closes or if occupancy falls below an agreed percentage of the shopping center’s leasable space. The details matter. A co-tenancy clause may be limited by notice requirements, cure periods, replacement-tenant standards, sales thresholds, or narrow definitions of what counts as an anchor tenant.
- Does the lease identify a specific anchor tenant or require a minimum occupancy level?
- What remedy does the tenant receive if the condition is not met: reduced rent, the right to terminate, or something else?
- Does the landlord have time to cure the issue by replacing the anchor tenant or restoring occupancy?
- Are there notice, sales, or operating requirements the tenant must satisfy before using the remedy?
A co-tenancy clause can be valuable leverage for a retail tenant, but only if the tenant understands the clause and follows its requirements.
2. Relocation Clauses
A relocation clause may give the landlord the right to move a tenant from one space to another within the same building, shopping center, or development. The landlord may want this flexibility to accommodate a larger tenant, redesign the property, consolidate available space, or improve the property’s overall tenant mix.
For the tenant, relocation can affect more than a street address. It can disrupt customer traffic, signage, visibility, parking, accessibility, layout, buildout investments, and day-to-day operations.
- How much notice must the landlord provide before requiring relocation?
- Must the replacement space be comparable in size, layout, visibility, access, condition, and location?
- Who pays moving costs, new signage, telecommunications changes, permit costs, and buildout expenses?
- Is the landlord responsible for restoring tenant improvements or reimbursing the tenant for unamortized improvement costs?
- Does the lease provide protection for business interruption or downtime during the move?
A relocation provision is not automatically unreasonable, but it should be specific enough to prevent the tenant from bearing an unfair share of the cost and disruption.
3. Personal Guaranties
Many commercial landlords, especially when leasing to a newer or closely held business, require an owner to sign a personal guaranty. The business entity may be the tenant under the lease, but the guaranty can expose the owner’s personal assets if the business defaults.
The scope of a guaranty can vary significantly. Some guaranties cover all rent and other obligations for the full lease term. Others may be limited by amount, duration, or specific obligations.
- Is the guaranty unlimited, or is it capped at a dollar amount, a number of months of rent, or another defined limit?
- Does the guaranty expire after a period of on-time payment, at lease renewal, or after another negotiated milestone?
- Does it apply to all lease obligations, including rent, operating expenses, repair costs, attorney fees, and damages after default?
- Does the guarantor remain liable if the lease is assigned to a buyer, successor, or subtenant?
- Does the guaranty cover renewals, amendments, extensions, or additional leased space?
The fact that a business is organized as an LLC or corporation does not prevent personal liability if an owner signs a guaranty. The terms of the guaranty itself are critical.
4. Assignment and Subletting Restrictions
A business may want to sell, bring in a partner, restructure, downsize, move, or sublease unused space. The lease may determine whether the business can do so without the landlord’s approval.
An assignment generally involves transferring the tenant’s full interest in the lease to another party. A sublease generally allows another party to occupy all or part of the space while the original tenant remains responsible to the landlord.
Commercial leases frequently require landlord consent before an assignment or sublease. The language may also address whether consent can be withheld, conditioned, or delayed, whether the landlord has a recapture right, whether the landlord receives some portion of sublease profit, and whether the original tenant or guarantor remains liable.
- Does the lease require landlord consent for an assignment, sublease, merger, ownership transfer, or change of control?
- Does the lease state that consent cannot be unreasonably withheld, conditioned, or delayed?
- Can the landlord terminate the lease or recapture the space instead of approving a transfer?
- Does the original tenant remain liable after an assignment or sublease?
- Does the clause apply to a sale of the business, a sale of ownership interests, or an internal reorganization?
A restriction in this section can slow a business sale or expansion if it is discovered only after a buyer, partner, or subtenant has already been identified. In Alabama, the lease language is especially important because commercial assignment and subletting rights are largely governed by the contract.
5. Percentage-Rent Provisions
Percentage rent is most common in retail leases. Under this arrangement, the tenant may pay base rent plus an additional percentage of gross sales above a negotiated breakpoint.
For a successful business, this can mean that rent increases as sales increase. The issue is not necessarily the percentage-rent structure itself. It is understanding how the lease defines “gross sales,” how the breakpoint is calculated, what sales reporting is required, and what exclusions apply.
- What sales are included in gross sales, and are returns, taxes, online sales, gift cards, or other items excluded?
- What is the sales breakpoint that triggers percentage rent?
- How often must sales reports be delivered to the landlord?
- Does the landlord have audit rights, and who pays if there is a dispute over reported sales?
- Does the percentage-rent provision apply throughout the entire term, including renewal periods?
A percentage-rent clause should not be a surprise after a strong year. The tenant should understand the formula, reporting obligations, and potential financial impact before signing.
Why This Often Surfaces During Growth
A lease signed during a business’s early years may receive less legal review than a later agreement, when the company has more resources, more employees, and more at stake. By the time a business is expanding, opening a second location, renewing a lease, bringing on investors, or considering a sale, the original lease may already control important decisions.
This is a common pattern: language that seemed like boilerplate at signing becomes central once the landlord invokes it or the tenant needs flexibility. The earlier a lease receives a careful review, the more options the business typically has when the issue arises.
A lease review can also be valuable even after signing. Before renewing, expanding, selling the business, changing ownership, or requesting a sublease, the business should revisit the existing lease and identify the rights, restrictions, notice periods, and consent requirements that may affect the next step.
What To Do Before Signing
A commercial lease does not have to become a surprise later. Before signing, a business owner should take the time to understand the full agreement, not only the rent amount and lease term.
- Have the complete lease reviewed, including all exhibits, guaranties, amendments, addenda, work letters, site plans, and incorporated documents.
- Ask how key provisions would apply in realistic business scenarios, such as a sale of the business, a move to a larger location, a need to sublease space, an anchor tenant’s departure, or a downturn in revenue.
- Understand every personal guaranty, including the dollar amount, duration, scope, renewal effect, and whether it can be reduced or phased out over time.
- Review assignment, subletting, and change-of-control language before a sale, investment, partnership, or expansion is already underway.
- Revisit an existing lease before renewal, extension, expansion, financing, or a change in ownership rather than assuming the terms operate as they did when the business first signed.
No lease review can guarantee a particular outcome. A clause’s meaning and enforceability depend on the specific language, the circumstances involved, and applicable law. A lease that has been read closely, however, is far less likely to create an avoidable surprise.
Frequently Asked Questions
What commercial lease clauses do business owners often miss?
Common examples include co-tenancy provisions, relocation clauses, personal guaranties, assignment and subletting restrictions, percentage-rent provisions, operating-expense pass-throughs, repair obligations, renewal provisions, and default remedies. The effect of any clause depends on the language in the specific lease.
Can a landlord change the lease terms after signing?
Generally, the landlord cannot unilaterally change the lease terms after signing unless the lease itself gives the landlord that right or both parties later agree in writing to an amendment. A landlord may, however, exercise rights that are already stated in the lease, such as a relocation right or a remedy following a default, if the agreement’s conditions are met.
Does a personal guaranty always create personal liability?
Not always to the same extent. Some guaranties are limited by amount, duration, or specific obligations. Others are broad and may expose the guarantor to a substantial portion of the tenant’s lease obligations. The exact language of the guaranty determines the scope of potential liability.
When should a business have its lease reviewed?
Before signing is best. A review is also valuable before renewing, extending, expanding, selling the business, changing ownership, financing the business, assigning the lease, or subleasing any part of the space.
Is commercial lease law the same in Alabama, Florida, and Mississippi?
No. The enforceability and interpretation of commercial lease provisions can vary by state, and the result also depends heavily on the terms of the lease. A business operating or expanding across Alabama, Florida, and Mississippi should have the specific lease and the applicable state law reviewed before making a significant decision.
A commercial lease is often one of the largest and longest commitments a growing business makes. It is worth treating it that way from the beginning, not only when a clause becomes urgent. If your business is reviewing a lease, renewing an existing agreement, expanding into a new location, or planning for a sale or ownership change, a Risk-Free Strategy Session can help you identify the questions that should be addressed early.
General information only. This article is not legal advice.
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