NEWS, EVENTS, PUBLICATIONS & EMERGING ISSUES
SW&M EMERGING ISSUE
February 11, 2010
NEGOTIATING THE BEST LEASE FOR YOUR CREDIT UNION
As the commercial real estate market continues to struggle, opportunities abound for our credit union clients who either are looking to expand their operations or to relocate existing headquarters. Recently, we have seen many credit unions take advantage of the grim economic realities faced by commercial lessors and enter into new leases that include quite favorable terms.
Credit unions should realize that, as highly regulated, member-owned financial institutions, they have particular needs that are not common to most commercial tenants. As such, the importance of incorporating these unique issues and requirements into the lease cannot be overstated. Taking the simple step of fully analyzing your credit union’s distinctive requirements and including them in the lease will better insure that the functionality of the leased space will be satisfactory over the entire term of the lease. Of course, experienced brokers are also often helpful in this process; however, they may not have the particular experience with credit unions and their unique issues with respect to leasing that are essential to incorporate into the lease.
We have assisted our credit union clients in successfully negotiating hundreds of commercial leases. In our experience, the following five issues are particularly important to include in such a lease.
1. Confirm Placement and Security of ATMs. In order to avoid subsequent disputes and the landlord’s potential placement of the ATM in an undesirable location, the Credit Union should confirm the location (e.g., stand alone vs. through the wall) of the ATM, if any, in the lease. In addition, since California Financial Code § 13000 – 13070 sets forth lighting requirements and landscaping requirements for areas around outdoor ATMs, the lease should also address the parties’ obligations in this regard. Who is responsible for the maintenance of the ATM? Will the credit union be permitted to hire its own security guard for the ATM? Can the credit union be provided with a few short-term parking spaces near the ATM for its members’ convenience? All of these issues should be addressed.
2. Agree Up-Front About Removal of Improvements. In many instances, a credit union will make significant improvements to the leased premises, such as upgrading plumbing, wiring and electrical fixtures; installing internal walls to make offices; and affixing millwork such as custom-built cabinets. Unfortunately, many draft leases leave the removal of these items at the end of the lease and restoration of the premises up to the landlord in its sole discretion. This can result in an unwelcome surprise for the credit union, as such removal and restoration can be quite costly and time-consuming. As such, the lease should clearly delineate the parties’ obligations regarding removal of such improvements, particularly if the credit union expects to undertake substantial renovations. This way, the credit union can determine – prior to undertaking the desired work—whether the alterations continue to make economic sense if they must be removed and the premises restored to their original state at the end of the lease.
3. Restrict the Landlord’s Access to Certain Areas. In most commercial leases, the landlord has the right to enter the premises at any reasonable time, typically either to make necessary repairs or, towards the end of the lease, to show the property to potential new tenants. However, the credit union should ensure that the landlord’s right of access (and, importantly, that of its employees, agents, and contractors) is restricted with respect to highly sensitive areas of the credit union, such as the vault, safe deposit boxes, server room, or anywhere where confidential member information is present. At a minimum, the landlord should be required to be accompanied by at least one credit union employee when accessing such areas.
4. Insist on Exclusivity. The credit union should ensure that the landlord agrees not to lease any other space within the same building or shopping center to another financial institution without the credit union’s prior consent. Clearly, the last thing that a credit union wants after expending significant time, money, and energy negotiating a lease is to discover that another financial institution has opened up shop on another floor of the same building or across the parking lot. The credit union may also want to include in-store branches (such as a bank branch in a grocery store) and stand-alone ATMs within this “exclusivity right.”
5. Eliminate the Security Deposit. Many landlords require their tenants to furnish a security deposit, which provides the landlord with a source of funds to pay for repairs after a default by the credit union or the termination of the lease. The security deposit is usually required to be in cash in an amount typically equal to either the first or last month’s rent. However, as highly creditworthy, reputable business, there should be no doubt as to a credit union’s willingness and ability to pay for repairs. As such, the credit union should attempt to eliminate the requirement of a security deposit, which can result in significant savings to the credit union. Requesting the elimination of the security deposit sometimes does not occur to credit unions, as they are under the impression that it is a standard, non-negotiable lease term. In fact, in the vast majority of leases we negotiate for clients, we have successfully eliminated the security deposit requirement in its entirety.
Of course, the above list is not exhaustive, but can serve as a helpful “road map” for the credit union in the lease negotiation process. A well-drafted lease that is responsive to your unique needs as a credit union can serve to minimize, or hopefully even eliminate, any bumps in the road that might otherwise crop up during the term of the lease, together with associated costs and expenses (such as legal fees).
We thoroughly understand the special issues faced by credit unions in commercial real estate leasing and have significant experience assisting our clients in negotiating favorable leases. If we can be of assistance to your credit union with respect to a commercial leasing project, whether in regard to drafting the letter of intent or the lease negotiation process itself, please do not hesitate to contact us.
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