This article was written for Climbing Business Journal and was published May 12, 2023.
When it comes to commercial leases, gym tenants can often feel overwhelmed by the concepts and clauses found in the contracts presented to them. By simply knowing what to look for—and how to best position themselves when negotiating a commercial lease—gyms can establish a lease agreement that best suits the unique needs of their business. While it is always advantageous to have an attorney representing the gym's interests throughout the contracting process, being aware of the following key points will help any gym during lease negotiations.
The Term of the Lease
One of the most important aspects of a commercial lease for gym owners negotiating their lease agreement is the term—or length—of the lease. While this may seem like an obvious point, the term of the lease can in fact be much shorter than explicitly stated in the agreement and there are various pitfalls to avoid.
A tactic some landlords utilize to their advantage is placing options within the contract, providing the ability to cut the term of the lease short of what the gym owner believes they are agreeing to—i.e., providing triggers or conditions to end the term early. The triggers may not be immediately apparent from the face of the lease and may not be confined to the section or page(s) of the lease detailing the term.
By way of example, a gym signs a contract to lease a property for ten years. The gym spends the first few months building out its walls, installing belay stations, creating a custom training center, putting up its signage, hiring a full staff, and establishing a steady clientele. But then, the landlord has a change of heart and informs the gym that it has six months to vacate the property. The gym remembers signing the ten-year lease and is confused, as it believed the gym would be using the property for a minimum of ten years. However, the gym overlooked that the lease contained an option to terminate the lease prior to the conclusion of the term provided the landlord gives six months' notice of its intent to terminate (and thus evict the tenant). So, while the gym in our example believed it was signing a ten-year lease, in effect, it signed a six-month lease because of the termination option. Stated another way, the term is only as long as the earliest chance to end the lease. [This six-month example is somewhat hypothetical; it is not based on an actual known situation that occurred with a climbing gym. But it would not be out of the question for a gym operator to encounter a termination clause that required such short notice, and the authors are aware of similar circumstances to tenants in other industries.]
For any gym, it is important to know the true term of the lease and what options exist within the contract so as to not be blindsided in the event the lease is cut short. This is especially true for climbing gym owners given the nature of the business, most notably the sunk costs of building out the gym and investing in the property.
Unless the property contracted for was previously used as a climbing gym, a new gym owner is likely going to construct various fixtures to the property to facilitate its use as a climbing gym—e.g., climbing walls, padding. As all of you reading are aware, these fixtures are very expensive and, to fully recoup the costs of said fixtures, gym owners often expect to use them throughout the term of their lease and possibly further if they renew. But, if an option exists in the contract where the landlord can terminate the lease shorter than contracted for, a gym could be in a position where it has yet to make a profit due to the initial costs associated with furnishing the property to be a climbing gym.
These examples are meant to illustrate the potential issues that can surface if the true length of the lease is not fully understood, which is the crux of any commercial lease. For a gym in these hypotheticals, there could be some remedial options if a landlord indeed cut a lease short, but the best option is to simply avoid the situation entirely by knowing outright what the lease term is and how it can be altered. It's much easier to negotiate the lease term on the front end as opposed to altering it once the landlord has started eviction proceedings.
Hidden Costs
Looking past the term, a gym also needs to understand if the lease has hidden or latent costs. For example, a lease may be a "gross lease," which means that all costs are included. Alternatively, a lease may be a "net lease," which means there are additional costs beyond the rent. Many commercial leases, unlike most residential leases, make the tenant responsible for maintenance and upkeep of common areas.
A gym needs to get the details on these costs upfront and determine whether to negotiate any of these costs to fully understand its financial obligations under the lease. And, if the gym is responsible for maintenance of certain elements or systems of the property, the gym will want to review those elements and systems in advance to determine their condition before accepting the responsibility to maintain their upkeep.
If the lease contains separate costs, such as maintenance costs, the gym should try to negotiate dollar amount caps or negotiate for a slightly higher rent in exchange for the landlord assuming certain costs. These provisions are negotiable and can be leveraged to gain more favorable terms in other areas of the lease, as necessary.
Other Favorable Clauses
Finally, when negotiating a lease, a gym will want to consider what favorable clauses it needs, and those it wants. For example, a co-tenancy clause is common in commercial leasing and allows co-tenants to pay a reduced rent or cancel its lease if a key tenant, often called an "anchor tenant", or a certain number of co-tenants leave the retail space. A co-tenancy clause will allow a gym to break a lease if the large tenant, perhaps one that drives business to the gym, leaves the retail space.
Likewise, it is possible for gyms to negotiate limitations with the landlord on the types of other businesses to which the landlord can lease neighboring property in the retail space, including a restriction that forbids the landlord from leasing neighboring property to a competitor, such as another climbing gym or fitness center.
On a related note, in order to ensure tenants rights are maintained in the event of a landlord change, a gym may want to consider adding a "survival clause" to a lease. Although most lease agreements include standard clauses stipulating that the agreement is binding on the landlord and all their assignees, survival clauses could provide greater protection in fleshing out this stipulation in greater detail.
Concerning the building itself, it is also possible for the gym to negotiate with the landlord to ensure that certain improvements are made prior to moving in, such as updates to the HVAC system or plumbing. Those details can (and should) be fully negotiated between the parties and impact the cost issues noted above.
Additionally, the gym will want to ensure that it is permitted to put up signage or related marketing materials, especially if the gym plans on installing physical signage or altering the physical structure.
While there are many additional lease terms to consider, and all written terms should be carefully vetted, these key considerations are some of the most important for gyms to evaluate when negotiating a commercial lease.
Renewal Process
Another aspect of the commercial leasing process tenants often feel unsure about is the renewal process. This aspect is especially important as gyms can find themselves fully established in their business but feel as though they have no leverage in negotiating the renewed lease. Unfortunately for those tenants, they will often agree to renewal terms clearly in favor of the landlord to ensure the continuation of the lease and thus their business.
A lease renewal can come with a litany of changes, but most common is the market rate adjustment for rent owed to the landlord during the renewed lease's term. In almost every renewed lease, landlords will want to adjust the rate at which they are leasing the premises, as the market has likely adjusted since the formation of the original lease. While this is common, there are certain factors for tenants to keep in mind when the time comes to renew the lease and agree to new rental rates.
First, it should be noted that a market rate adjustment that truly adjusts based on comparable rates in the area—and the current market conditions—is not necessarily a bad thing. This is likely the fairest rate adjustment option for both sides because in a down market the rate would lower and in an up market the rate would increase. To contrast this, some commercial leases will have a set percentage increase if the tenant wishes to renew regardless of market conditions. While this may seem beneficial because a tenant will know in advance the exact rate they will have to pay if they renew, it can be detrimental to the tenant if the market is down and they are required to pay a higher rate than before. With that said, if the market booms and comparable properties are leasing for much higher rates than the set percentage, it could turn out to benefit the tenant as the set percentage could act as a cap of sorts. This shows that a set percentage rate increase can often be more of a gamble in unstable market conditions.
Second, gyms may have more leverage than they think in the renewal process. Finding new tenants for commercial property can be a long and expensive process. A landlord's goal for their property is to continuously lease it out to create and maintain a revenue stream. With no tenant, the revenue is cut off for as long as it takes to fulfill the vacancy. Tenants can benefit from reminding landlords during the negotiation process of the costs associated with the potential downtime it takes to find a new tenant. Beyond this, given most gyms have constructed numerous fixtures to the property to make it a suitable climbing gym, even if the landlord has a new tenant in mind, there will inevitably be downtime or general costs for the removal of the fixtures assuming the next tenant doesn't intend to use them. This reminder is not likely to completely flip the leverage in the gym's favor, but making this information known to the landlord can only help the tenant during the renewal negotiation process.
These are just a handful of aspects to keep in mind during the negotiation of a commercial lease. Given the complexity and variety of each commercial lease, there can never be a concrete checklist for every gym to follow. However, having a better understanding of the process in general and knowing the areas of importance can be beneficial for any gym looking to ensure their commercial lease benefits their business rather than hinders it.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
