NYC Commercial Lease Traps: What Every Business Owner Needs to Know

Signing a commercial lease in New York City is one of the most consequential decisions a business owner will make. Unlike residential leases, which carry significant statutory protections under New York law, commercial tenants operate with far fewer safety nets. The lease itself is the governing document, and courts in New York will generally enforce commercial lease terms as written. That means every clause matters, and the ones you overlook are often the ones that cost the most.

Most business owners approach a commercial lease focused on two numbers: the monthly rent and the lease term. Those matter, of course. But the provisions buried deeper in the agreement are where the real financial exposure lives. Escalation clauses, personal guarantees, restoration obligations, and operating expense pass-throughs can transform what looks like an affordable space into a serious liability. A commercial lease attorney who regularly negotiates these agreements in the New York City market will recognize these issues immediately. For a business owner reading a lease for the first time, they are easy to miss.

This article walks through the most common traps in NYC commercial leases and explains what to watch for before you sign.

The Good Guy Guarantee: Not as Friendly as It Sounds

The "Good Guy Guarantee" is one of the most misunderstood provisions in New York commercial leasing. The name suggests a reasonable arrangement, and in concept, it is: a personal guarantor agrees to be responsible for rent and lease obligations only until they vacate the space and return it in good condition. Once the tenant surrenders the premises, the personal guarantee terminates.

The problem is in the details. Good Guy Guarantees typically require the tenant to provide several months of advance written notice before vacating, sometimes six months or more. If a business fails suddenly and the tenant leaves without providing that required notice, the guarantee does not terminate cleanly. The guarantor remains personally liable for rent until the notice period would have expired, and in some cases, for additional damages the landlord claims.

There are several points a commercial lease lawyer should negotiate in any Good Guy Guarantee. The notice period should be reasonable, typically three to four months at most. The guarantee should explicitly state that liability ends upon surrender of the premises and payment of rent through the notice period. Any ambiguity in the termination language can result in a landlord arguing that the guarantee extends further than intended. Tenants should also negotiate to exclude consequential damages, such as lost rent from the landlord's inability to re-let the space, from the scope of the guarantee.

If you are signing a commercial lease in NYC as an LLC or corporation, expect the landlord to request a Good Guy Guarantee from the individual principals. This is standard practice. But "standard" does not mean the terms are non-negotiable.

Escalation Clauses and Operating Expense Pass-Throughs

A commercial lease that starts at an appealing rent figure can become significantly more expensive over time through escalation clauses. In New York City, the most common escalation mechanisms are fixed annual increases, Consumer Price Index (CPI) adjustments, and operating expense pass-throughs.

Fixed increases are the most predictable. The lease specifies that rent increases by a set percentage or dollar amount each year. A 3% annual escalation on a $10,000 monthly rent, for example, means the tenant pays over $11,590 per month by year five. That is straightforward math, but many tenants do not calculate the cumulative impact over the full lease term before signing.

Operating expense pass-throughs are less transparent and far more dangerous. Under a typical pass-through provision, the landlord establishes a "base year" for building operating expenses, usually the first year of the lease. In subsequent years, the tenant pays a proportionate share of any increase in operating expenses above that base year amount. Operating expenses can include property taxes, insurance, utilities, maintenance, management fees, security, and building staff costs.

The trap here is that base year expenses are sometimes artificially low. If the building was not fully occupied during the base year, or if the landlord deferred maintenance, the operating expenses for that year do not reflect normal costs. When occupancy rises or deferred work gets completed, the tenant's proportionate share of the increase can be substantial. An experienced commercial real estate attorney will negotiate a "grossed-up" base year that reflects full occupancy, or negotiate caps on the annual increase in pass-through charges.

Tenants should also watch for overbroad definitions of "operating expenses." Some leases include capital improvements in the definition, which means the tenant ends up subsidizing building upgrades that primarily benefit the landlord. Capital expenditures should either be excluded entirely or amortized over their useful life with the tenant paying only the portion attributable to their lease term.

The Commercial Rent Tax in Manhattan

Business owners leasing space in Manhattan south of 96th Street need to account for the Commercial Rent Tax, or CRT. This is a tax imposed on commercial tenants, not landlords, based on the rent paid for the space. The nominal rate is 6% of base rent, though all taxpayers receive a 35% rent reduction, which brings the effective rate to approximately 3.9%.

The CRT applies when annualized gross rent equals or exceeds $250,000. Tenants with annualized rent between $250,000 and $300,000 before the reduction may qualify for a sliding-scale credit that partially offsets the tax. Certain exemptions also apply, including for theatrical productions, not-for-profit organizations, and properties in the World Trade Center area.

This tax catches many tenants by surprise. It is not typically mentioned in the lease itself, and some commercial real estate brokers do not flag it during the space search. For a tenant paying $25,000 per month in rent south of 96th Street, the CRT adds roughly $11,700 in annual tax liability. That figure needs to be part of the occupancy cost calculation from the beginning.

Restoration Obligations at Lease End

Restoration clauses are among the most expensive surprises in commercial leasing. Under a standard New York City commercial lease, all fixtures, improvements, partitions, and installations made by the tenant become the property of the landlord upon installation. At the end of the lease, the landlord can require the tenant to remove those improvements and restore the space to its original condition.

The cost of restoration can be enormous. A tenant who invested $200,000 in a buildout, including walls, flooring, electrical work, plumbing, and custom fixtures, may be required to spend a comparable amount tearing it all out. This obligation applies even when the landlord approved the original improvements and even when the next tenant would likely want to keep them.

A commercial lease attorney should negotiate this provision carefully. The best outcome is a clause stating that the tenant has no restoration obligation, or that the landlord will notify the tenant at the time improvements are made whether restoration will be required. Some leases include language giving the landlord the option to require restoration by providing written notice within a specified period before the lease expires, typically 20 to 30 days. Without modification, this creates uncertainty that makes it difficult for the tenant to budget for the end of the lease term.

At minimum, the tenant should negotiate the right to leave standard office improvements in place, such as ceiling tiles, lighting, HVAC distribution, and standard flooring. Restoration should be limited to specialty installations that are genuinely tenant-specific.

Assignment, Sublease, and Transfer Restrictions

Most commercial leases in New York City prohibit the tenant from assigning the lease, subletting the space, or transferring ownership interests in the tenant entity without the landlord's prior written consent. On the surface, this seems like a standard protective measure for the landlord. In practice, these restrictions can severely limit a tenant's flexibility.

Consider a scenario where a business owner wants to sell their company. If the lease prohibits assignment without landlord consent, and the landlord has broad discretion to withhold that consent, the sale can be delayed or blocked entirely. The same issue arises if the business needs to downsize and sublease a portion of the space, or if the owners restructure the company and transfer membership interests in the LLC.

The negotiation here should focus on several points. First, landlord consent to assignment and subletting should not be unreasonably withheld, conditioned, or delayed. Second, transfers of ownership interests that do not change the effective control of the tenant entity should be explicitly permitted without landlord consent. Third, transfers to affiliates, subsidiaries, or successors in a merger or acquisition should be carved out as permitted transfers. Without these modifications, the tenant's hands are tied in ways that can directly affect the value and operational flexibility of the business.

Personal Guarantee Exposure Beyond the Good Guy

Some landlords request a full personal guarantee in addition to, or instead of, a Good Guy Guarantee. A full guarantee means the individual is personally liable for the entire lease obligation, including all rent for the remaining term, damages, and legal fees if the tenant defaults. For a 10-year lease at $15,000 per month, that represents $1.8 million in potential personal exposure.

Business owners who formed an LLC or corporation specifically to limit personal liability often do not realize that signing a personal guarantee effectively eliminates that protection for purposes of the lease. The entity structure still protects against other liabilities, but the guarantor is personally on the hook for everything the lease requires.

If a full guarantee is unavoidable, negotiate a "burn-off" provision. Under a burn-off, the guarantee reduces over time as the tenant demonstrates reliable payment. For example, the guarantee might cover the full lease obligation for the first two years, then reduce to 50% for years three and four, and terminate entirely after year five. This gives the landlord security during the riskiest period while limiting the guarantor's long-term exposure.

Permitted Use Restrictions and Certificate of Occupancy Issues

Every commercial lease specifies the permitted use of the space. This might be stated broadly, such as "general office use," or narrowly, such as "operation of a retail bakery." Tenants need to verify two things before signing: that the permitted use clause covers everything the business actually does, and that the building's Certificate of Occupancy allows that use.

The Certificate of Occupancy, issued by the New York City Department of Buildings, specifies what activities are legally permitted in the building. If the tenant's intended use does not conform to the Certificate of Occupancy, the tenant may need to apply for an amendment or a special permit, which can take months and may be denied. Operating without a conforming Certificate of Occupancy exposes the tenant to fines and potential closure by the city.

A related trap involves "exclusive use" provisions. If another tenant in the building has negotiated an exclusive right to operate a certain type of business, the new tenant may be prohibited from engaging in that activity even if their lease's permitted use clause would otherwise allow it. The landlord may not volunteer this information during negotiations. The tenant's attorney should request confirmation that no other lease in the building contains an exclusive use provision that would conflict with the tenant's intended operations.

Holdover Provisions

A holdover occurs when a tenant remains in the space after the lease expires without signing a renewal. Holdover provisions in NYC commercial leases typically impose punitive rent, often 150% to 200% of the final month's rent, for every month the tenant remains after expiration. Some leases escalate the penalty further after 30 or 60 days, reaching 250% or even 300%.

Holdover situations arise more often than tenants expect. Renewal negotiations may stall, a new space may not be ready on time, or the tenant may simply underestimate how long it takes to relocate a business. At 200% of a $20,000 monthly rent, the holdover penalty is $40,000 per month, an amount that can drain a small business quickly.

The negotiation point is to reduce the holdover multiplier to something more reasonable, ideally 125% for the first 60 to 90 days, with higher penalties applying only after that initial period. Tenants should also negotiate a mutual obligation to begin renewal discussions at least nine to twelve months before the lease expires, giving both sides adequate time to reach an agreement or make alternative plans.

Rent Commencement and Free Rent Periods

In the current New York City commercial real estate market, tenants have more leverage to negotiate concessions than they did during peak demand periods. One of the most valuable concessions is a free rent period, sometimes called an abatement, during which the tenant occupies the space without paying rent.

The trap is in how the free rent period interacts with the lease commencement date. Some leases start the term on the date the tenant takes possession, with the free rent period running concurrently. Others start the term after the free rent period expires. The distinction matters because the lease term, and all obligations tied to it, begins on the commencement date. If the free rent period runs concurrently with the lease term, the tenant effectively loses months from their total occupancy period.

Additionally, "free rent" is not always truly free. Some leases require the tenant to pay operating expenses and real estate tax escalations during the abatement period, even though base rent is waived. The tenant's commercial real estate lawyer should confirm that the abatement covers all charges, not just base rent, and that the free period does not count against the lease term.

Insurance Requirements That Go Beyond the Basics

Every commercial lease in New York City requires the tenant to carry insurance. The minimum is typically a commercial general liability policy, usually with at least $1 million per occurrence and $2 million in aggregate coverage. But the lease often imposes additional requirements that can be costly and complicated to satisfy.

Many landlords require the tenant to name the landlord, the landlord's managing agent, and sometimes the landlord's lender as additional insureds on the policy. Some leases require specific types of coverage beyond general liability, such as business interruption insurance, property insurance covering the tenant's improvements, and even terrorism insurance for buildings in certain areas of Manhattan. The lease may also specify minimum ratings for the insurance carrier, such as an A.M. Best rating of A- or better, which limits which companies the tenant can use.

The trap is that these requirements are rarely discussed during negotiations. Tenants discover them after signing and are then forced to purchase more expensive policies than they anticipated. A commercial lease lawyer should review the insurance provisions before the lease is executed and negotiate any requirements that are disproportionate to the risk. Tenants should also pay attention to indemnification clauses, which often accompany the insurance section. A broad indemnification provision can require the tenant to defend and hold the landlord harmless for virtually any claim arising from the tenant's use of the premises, including claims caused in part by the landlord's own negligence. Under New York General Obligations Law Section 5-321, lease provisions that exempt a landlord from liability for its own negligence are void, but poorly drafted indemnification clauses can still create disputes about the scope of the tenant's obligation.

Construction and Buildout: Who Pays, Who Owns, Who Approves

Most commercial spaces in New York City require some degree of buildout before the tenant can operate. The cost can range from $50 per square foot for basic office improvements to $200 or more per square foot for restaurant or medical buildouts. The lease governs every aspect of this process, and several provisions require careful attention.

First, the tenant needs to confirm whether the landlord is providing a tenant improvement allowance, commonly called a "TI allowance," and how that allowance is structured. Some landlords provide a lump sum at the start of construction. Others reimburse the tenant after construction is completed and invoices are submitted, which means the tenant must front the entire cost and wait for reimbursement. Still others apply the allowance as a rent credit over time rather than a cash payment.

Second, the lease typically requires the landlord's prior written approval of all construction plans and contractors. This approval process can take weeks or months, and some landlords use it as leverage to impose conditions, such as requiring the tenant to use the landlord's preferred contractor or pay a construction supervision charge. These added costs should be anticipated and negotiated.

Third, as discussed in the restoration section above, the improvements the tenant installs may become the landlord's property upon installation. The intersection of the buildout provisions and the restoration provisions determines whether the tenant pays to build out the space, loses ownership of the improvements to the landlord during the lease, and then pays again to remove them at the end. Without proper negotiation, the tenant pays three times: once to build, once in rent on a space improved at the tenant's expense, and once to demolish.

What Happens When the Landlord Defaults

Commercial leases are heavily focused on tenant obligations and landlord remedies. What receives far less attention is what happens when the landlord fails to perform. Landlord defaults can include failure to provide essential services like heat, water, or elevator access; failure to make structural repairs; and interference with the tenant's use and enjoyment of the premises.

Under New York law, a commercial tenant's remedies for landlord default are limited unless the lease specifically provides for them. Unlike residential tenants, commercial tenants generally cannot withhold rent without risking eviction. The tenant's primary remedy is to bring a lawsuit for breach of contract, which takes time and money.

A well-negotiated commercial lease should include a "self-help" provision that allows the tenant to make emergency repairs and deduct the cost from rent if the landlord fails to act within a specified period after notice. The lease should also provide that if the landlord's failure to maintain the building renders the space unusable for a sustained period, the tenant's rent is abated proportionally. Without these provisions, the tenant is stuck paying full rent on a space that is not fully functional while pursuing legal remedies that may take months to resolve.

New York City has also enacted commercial tenant harassment protections. Under the current law, landlords are prohibited from using force or threats, interrupting essential services, commencing frivolous legal proceedings, or engaging in other conduct intended to force a commercial tenant to vacate. Commercial tenants who experience harassment may be entitled to a restraining order, damages, civil penalties ranging from $1,000 to $50,000, and reasonable legal costs. These protections are relatively new, and many commercial tenants are not aware they exist.

Negotiating Renewal Options

A five-year or ten-year commercial lease may seem like a long commitment, but the end of the term arrives faster than most tenants expect. Without a renewal option, the tenant has no right to remain in the space after the lease expires. The landlord can refuse to renew, demand significantly higher rent, or impose entirely new terms. For a business that depends on its location, losing the space means losing customers.

A renewal option gives the tenant the right to extend the lease for an additional term, typically at a predetermined rent or at fair market value as determined by a specified process. The critical negotiation points include the length of the renewal term, the method for determining renewal rent, the deadline for exercising the option, and whether the renewal is automatic or requires written notice.

Fair market value renewals can be contentious. If the lease does not specify how fair market value is determined, disputes are common. A well-drafted renewal clause includes a process for resolving disagreements, such as each party selecting an appraiser with a third appraiser deciding if the first two cannot agree. The clause should also specify what happens to the rent during the appraisal process to avoid a scenario where the tenant is paying holdover rent while the renewal terms are being determined.

Tenants should exercise renewal options well in advance of the deadline. Missing the exercise date, even by a single day, can result in the permanent loss of the renewal right. Courts in New York have enforced strict compliance with renewal option deadlines, leaving tenants without recourse even when the delay was minimal.

Why a Commercial Lease Review Is Not Optional

The provisions discussed in this article are present in virtually every commercial lease in New York City. They are not hidden or unusual. They are standard. But "standard" in commercial leasing means the document was drafted to protect the landlord's interests, not the tenant's. Every clause is negotiable, and the tenants who negotiate effectively are the ones who have their lease reviewed by a commercial lease attorney before signing.

A lawyer who handles commercial leases in NYC regularly will identify these issues quickly because they have seen them in hundreds of prior transactions. They know what landlords will agree to modify and what requires more aggressive negotiation. More importantly, they understand how these provisions interact with each other. A restoration clause combined with a short holdover grace period, for example, creates a situation where the tenant must complete expensive demolition work under extreme time pressure or face punitive rent.

If you are negotiating a commercial lease in New York City, whether for office space in Manhattan, a retail storefront in Brooklyn, a restaurant in Queens, or a warehouse in the Bronx, the cost of having an attorney review your lease before you sign is a fraction of what these traps can cost if they go unaddressed. For a more general overview of what to expect in the commercial leasing process, see our Commercial Lease Guide.

Agarunov Law Firm represents commercial tenants and landlords across New York City and New Jersey. To schedule a free consultation, call (212) 920-5989 or contact us online.