[Commercial Lease] Use Clause - standard

TLDR

Use clauses in commercial leases define how tenants can utilize the leased space. While they are common and standard, overly restrictive use clauses can hurt a business’s ability to adapt and grow.

What Is a Use Clause?

In the world of commercial leases, a use clause specifies the allowable activities a tenant can perform on the leased premises. For example, it might limit the space to “retail purposes” or “general office purposes.” While these clauses are standard in lease agreements and serve to protect the landlord’s property and ensure compatibility with other tenants, they can become problematic if not carefully reviewed and negotiated.

According to the National Association of Realtors (NAR), 35% of tenants find their operations restricted due to not fully understanding use clauses in their leases. This statistic underscores how common it is for businesses to encounter difficulties stemming from these clauses.

When Use Clauses Go Wrong : worst case scenario

You raise a large series A and expand into a leasing office space with the intention of developing innovative software solutions. Excited about the future, the company signs a 5-year lease without scrutinizing the fine print of the use clause. Here is what the clause states:

"Tenant shall use the Premises solely for general office purposes related to software development and programming. No other business activities are permitted without Landlord's prior written consent."

At first, everything runs smoothly. But as the company grows, you run into a series of unexpected roadblocks:

1. Limited Pivot Options: The company’s plans evolve, and they want to venture into hardware development. However, the use clause explicitly prohibits any activity outside of software development, leaving the startup with no flexibility.

2. Sublease Difficulties: Due to market changes, the company decides to downsize and sublease part of their space. Unfortunately, potential subtenants, such as marketing agencies or creative studios, are excluded by the restrictive use clause.

3. Collaboration Restrictions: The startup envisions hosting tech workshops and community events to network and build their brand. These activities fall outside the definition of “general office purposes,” forcing them to seek external venues.

4. Innovation Constraints: The team wants to set up a small prototyping lab to test hardware-software integrations, but this is not permitted under the lease terms.

5. Expansion Limitations: When the startup acquires a digital marketing agency to broaden its services, they discover they can’t integrate the new team into their current office space due to the use restrictions.

These unforeseen challenges highlight how a narrowly defined use clause can derail even the best-laid business plans. And unfortunately, as the NAR statistic reveals, scenarios like this are far from uncommon.

Negotiating the Use Clause: Protecting Your Business Flexibility

To avoid these pitfalls, it’s crucial to approach lease negotiations with care, especially concerning the use clause. Here are some key tips:

1. Anticipate Future Needs: Consider where your business might be in 3, 5, or 10 years. Ensure the use clause allows for reasonable flexibility to accommodate growth, pivots, or diversification.

2. Define Broad Parameters: Instead of specifying narrow activities, negotiate for broader terms such as “general office and related purposes,” which leaves room for future changes.

3. Add Specific Allowances: Propose language that explicitly permits activities like hosting workshops, setting up small labs, or other foreseeable needs that align with your business goals. For example, the clause could be revised to state: "Tenant may also conduct ancillary activities reasonably related to its primary business operations, such as workshops, training sessions, or community events."

4. Include Event and Collaboration Clauses: If hosting events, workshops, or community activities is part of your strategy, make sure these are explicitly allowed. For instance, "Tenant may host occasional events, workshops, or meetings related to its business operations, provided such activities comply with all applicable regulations."

5. Plan for Subleasing: Request that the use clause provides leeway for subleasing to a variety of businesses, especially those with complementary activities. Example language: "Subleasing is permitted to tenants engaged in activities consistent with or complementary to office, creative, or technological industries, subject to Landlord’s prior approval, which shall not be unreasonably withheld."

6. Seek Landlord Flexibility: Negotiate provisions that allow for “reasonable” changes to the use clause with landlord approval, without needing to renegotiate the entire lease. A suggested revision might be: "Tenant may modify the use of the Premises with prior written consent from the Landlord, which shall not be unreasonably withheld, conditioned, or delayed."

7. Consult Experts: Work closely with a knowledgeable commercial real estate broker or attorney who understands the nuances of use clauses. Their expertise can be invaluable in securing terms that align with your business objectives.

Final Thoughts

While use clauses are a standard part of commercial lease agreements, they should never be treated as boilerplate text. By thoroughly reviewing and negotiating these terms, you can ensure your lease supports your business’s flexibility and long-term success. Partnering with a skilled broker or legal advisor is a small investment that can prevent significant headaches down the road.