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COMMERCIAL REAL ESTATE LEASES (PART 1)
BASIC QUESTIONS
There are many questions to ask and issues to address when deciding to sign off on a lease. The following is just a small sample:
- Basic Terms: Even the obvious can be missed. Recently, I discovered that the first month payment amount required of my client (the tenant) by the lease (which had been drafted by the landlord's highly skilled attorney, reviewed by the landlord, landlord's real estate broker, my client and my client's real estate broker) included first month's Base Rent, first month's Additional Rent and the Security Deposit. Quite normal - except that the negotiated lease gave my client first month "Free Rent" and was stated as such in the lease. In other words, what the lease language gave, the actual dollar amount listed took away. A $7,600 mistake that may never have been caught except that I have an old-fashioned habit of actually reading every word in a document. Never assume that the so-called non-controversial terms are correct. This includes the premises description, term of the lease, correct names of the parties, statement of landlord's work, actual condition of the premises, etc., etc.
- Beyond the Base Rent: What have been the historical charges for operating expenses, taxes and building insurance? What is your proportional share (and is the calculation correct)? How will capital expenditures by the landlord be handled (amortization versus direct pass through)? Do you have the right to review or audit the calculation and back-up for these charges? Who pays for replacement of dedicated HVAC, exterior windows and doors, flooring, structural members, etc.?
- Permitted Use: Is the Permitted Use language in the lease broad enough not only for now but also if your business changes or you need to sublet or assign? Is the Permitted Use allowed by applicable zoning, any CCR's or other rules or regulations?
- Beyond the Premises: There is a whole lot more to consider than whether the square footage and general space configuration works for you. Some items to consider (if not applicable, move on to the next item): Parking (number and location of spaces, need for dedicated spaces, spaces for your vehicles that need to be parked overnight, etc.); Interior and/or exterior storage - do you need it and where is it; will you need roof top space for ventilation, etc.; utility access; telecom chases and risers; overhead doors; vaults; overhangs; etc.
- Renewal, Contraction and Expansion Rights, Assignment and Subletting: Get these in writing in the lease - your landlord today may well not be your landlord when the issue arises. Remember, the landlord will usually choose to fill other vacancies in the building/development before helping you sublet. And, if you sell your business, the sale may be contingent upon your ability to assign the lease of your Premises to the buyer.
- Insurance, Guarantees and Indemnifications: Check with your insurance agent before committing to secure insurance coverages that may be very expensive or impossible to obtain. Indemnification clauses could cause you to make the landlord more than whole and cost you big money. Personal guarantees are sometimes unavoidable. However, an existing business with a positive P&L has a good argument to avoid imposing a massive potential personal liability on the owner(s). Remember that the total potential liability can be sum of all rents for the entire lease term plus …..
- Buildout, Inspections and Commencement Date: This is an area where the right broker can be extremely helpful. Translating your needs and wants into the buildout plans, making sure the buildout is being done to specifications in a timely manner and motiving the landlord to get it done right and on time are critical services. In a perfect world, you could afford an architect, construction engineer and other professionals. In your world, making the right choice when you select a real estate broker is the best practical alternative.
- Relocation: If you are moving into a multi-tenant building or development, the lease will probably grant the landlord the right to relocate you within the development. It is not unreasonable for a landlord to demand this right. Large tenants need expansion space. What is unreasonable is for the landlord to resist giving you rights, including the right to terminate the lease, in such an event. Many issues should be addressed in the lease concerning the right to relocate your Premises.
- Read The Lease: My undergraduate education was in engineering. It was common for many professors to put "RTP" at the top of a test paper. It stood for "READ THE PROBLEM". One of the goals was to stamp out a normal human process of making assumptions and reaching conclusions before we got all the facts. Your problem is the lease your prospective landlord gives you with a smile. What the lease actually states is what is important.
If there ever was such a thing as a standard commercial lease, those days are long gone. Your lease may look like a "standard" document. However, this is due more to modern word processing and printing than to substance. Reaching conclusions and making assumptions after reading each and every word of the proposed lease is the first part of my job. Your first jobs are to understand as much as you can from reading the proposed lease and listening to your attorney and broker.
Remember, you will be living with the lease provisions for many years. Especially if you renew after the initial term. Do it right at the beginning.
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