What’s Important Financially in a Building Lease Agreement?
When negotiating a building lease agreement, whether it is a retail, office, industrial or another type of commercial real estate, the Landlord will usually provide the first draft of the lease agreement. It’s probably Landlord’s standard lease document, but the terms of a building lease agreement can (and should) be negotiated.
Landlord’s lease agreement is a draft, a first offer. An experienced, ethical Landlord will expect some changes and negotiation to the document. The document should evolve from a landlord-drafted standard lease form to a customized, negotiated document that is a mutual agreement between both of the parties.
Rent may not be the only charge Tenant pays to Landlord. Tenant should understand what legal and financial obligations it is taking on by signing on the dotted line. The best time to negotiate and to ask questions and to clarify obligations is before the lease is signed and legally binding. When Tenant reviewing the building lease agreement, here are a few financial items to look for and negotiate:
- Utilities- billed directly to Tenant or Landlord will bill Tenant for its share, or some combination thereof.
- Percentage Rent- if Tenant sell a certain amount of product (usually not services) from the location, Tenant pays a percentage of those sales to Landlord. This is most common in a retail situation.
- Penalties- late fees or interest charges if payments aren’t made on time.
- Maintenance contracts- Tenant may be required to pay for inspections or maintenance on the HVAC (heating, ventilation, air conditioning) or other systems
- Construction costs- who pays for what, including construction related to the Americans with Disabilities Act of 1996 (ADA)
- The total amount of the security deposit
- How it can be used- damages, late rent, for late fees and penalties, etc.
- How do you get it back at the end of the lease? Negotiation tip: put a time limit on when the security deposit, or balance, is returned to Tenant.
- If the security deposit is used, is there a replenishment requirement?
- The rent may increase during the term- it could apply to the security deposit as well.
NNN (Triple Net Expenses)
- Taxes- tax due on the real and personal property
- Insurance- Tenant should carry its own and may contribute to Landlord’s cost as well if there is a common area
- CAM/OpEx- common area maintenance or operation expenses are contributions to make sure the areas everyone shares are maintained.
- If the space becomes too big, too small, or too expensive, Tenant might have the ability to sublease or assign all or part of the space. Landlord may charge a review fee or may require Tenant to guarantee the remainder of the building lease agreement term.
- Tenant could negotiate a buyout or early termination right, but there’s usually a financial penalty attached.
- If Tenant defaults, and Landlord cures the default at its own expense, determine what charges Landlord can collect. Negotiation tip: Landlord might accelerate damages to get them all at once, instead of waiting as they come due. Watch out for the present-day cash value!
The building lease agreement is an expensive obligation, and Tenant should be prepared, legally and fiscally, before signing the lease document. It’s important for Tenant to have a team in place, and to make sure to review and understand its financial obligations under the building lease agreement.
This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.