It’s easy to enter into an oral lease agreement with your landlord. There are no confusing documents to read and no formal rules. But easy doesn’t mean smart. Let’s look at why you need a written commercial real estate lease.

Your monetary investment doesn’t come cheap.

When you enter an agreement with a landlord, you’re typically responsible for putting down a security deposit. When you end the lease, you have the opportunity to get that deposit back if the premises is in acceptable condition. Without a written agreement, you have no idea what the landlord deems acceptable. He could change his mind and you could lose your security deposit. With a written lease, specific terms will be defined in order to receive your security deposit back.

As a tenant, you will also be responsible for rent. A lease will, in no uncertain terms, define the amount of rent and due date. This will give you peace of mind. You won’t have to worry about the landlord changing the rental amount each month or asking for rent earlier than expected.

If a dispute arises, the landlord has the option to pursue legal action. That could mean your credit rating takes a hit, especially if you signed the lease in your name, or if you have a personal guarantee. If you’re forced out of the property, you not only possibly lose your security deposit, but you’ve got to come up with even more money to find a new location.

Property

Your landlord should be maintain and security your space. But if there’s no written agreement in place, you have no way of knowing who is responsible for what. Issues could come up such as water damage from busted pipes or a faulty HVAC system. Maintenance obligations can add up to a hefty amount if there are problems. The repair money may come out of your pocket simply because you didn’t sign a lease that explained the responsibilities.

Expect the unexpected

That’s not something you want hear in regards to your commercial real estate lease. You want to know what to expect! That’s where a written lease comes in.

  • Your landlord could evict you with very little warning and no reason, and there’s nothing preventing him from doing so.
  • You want to promote your business. Can you display a company sign?
  • Let’s say you want to be the only store in the building that sells watches. Your landlord can bring in other watch dealers without telling you.

Without a written lease, the landlord can get away with practically anything. He/she doesn’t have to ask your permission or adhere to any rules. Nothing is written to define the terms. Leases are created so that each party (the landlord and tenant) is held responsible.

Although oral leases are enforceable in the state of Texas, you need to know what to expect and what’s permitted. When you hire a commercial real estate lawyer, she helps protect you from the unexpected. Call me to discuss creating a safe, enforceable, predictable lease for you business.

Disclaimer
The transmission and receipt of information contained on this website does not constitute an attorney-client relationship. Persons should not act upon information found on this website without first seeking professional legal counsel.

When a tenant enters into a commercial real estate lease, there is often a request for the tenant to sign a personal guarantee. The Balance Small Business explains that, “Before a bank lends money to a startup business, they often require additional guarantees in case the loan can’t be paid off from the assets or cash flow of the business.”

This  means that the tenant is personally responsible for paying the debt. The landlord or franchisor can hold the person, not just the business, accountable by accessing personal assets or bank account. Before signing a personal guarantee, which is required in order for the personal guarantee to be enforced, definitely consult an attorney focusing on commercial real estate. Although the following tips are helpful, setting up a meeting to discuss your options can prove to be extremely beneficial before signing a personal guarantee and entering a lease.

Tip #1: When negotiating a lease, try to suggest a larger security deposit or share the entity financials. This makes the entity responsible – not the tenant personally. It is suggested that a security deposit be made with a letter of credit. This is a transferable asset and has value. This helps to protect against bankruptcy, as the letter of credit becomes part of the bankruptcy estate.

Tip #2: Remove a spouse if there is one. Should a problem arise, the spouse’s assets will not be attached to the tenant’s if the spouse is not part of the business. The landlord or franchisor will only have access to the entity. This can only be done on a go-forward basis, however. Removing the spouse probably won’t have an effect on a personal guarantee that is already signed.

Tip #3: Limit the time period. The tenant can sign a personal guarantee and require that it expire at a certain date. Landlords can require that the personal guarantee last for a certain amount of time (sometimes referred to as a “burn-off period”), a time that shows that the business are profitable, reliable and trustworthy. The landlord may just want to see a proven track record of success. This is a place where working with an attorney really benefits the tenant. Personal guarantees are common in commercial real estate. While this may be a new concept for you, attorneys are used to negotiating these terms and keeping your finances as safe as possible.

Tip #4: Limit the personal guarantee. When a tenant – along with a commercial real estate attorney – negotiates the lease, an amount can be set on the personal guarantee. This sets the maximum dollar amount that the tenant is personally liable for. You can limit the dollar amount if you sign a limited personal guarantee. This is often used when multiple business partners are signing the guarantees.

Personal guarantees are just that – personal. When a tenant enters into a lease, the attorney should take every precaution to protect the tenant. A personal guarantee is often a document that is separate from your building lease. Regardless, a good commercial real estate lawyer can help you make sense of it and negotiate better terms. Understand the effect that a personal guarantee could have on your lease, and most importantly, your life. Want to discuss how this affects you? Set up a no-obligation consultation today!

Disclaimer
The transmission and receipt of information contained on this website does not constitute an attorney-client relationship. Persons should not act upon information found on this website without first seeking professional legal counsel.

In commercial real estate, tenants are usually required to carry some form of insurance. This protects tenants from losses due to injury, natural disaster or expensive repairs. It also helps define responsibilities  to landlords, and other third parties, like customers and employees. While commercial real estate insurance may seem like a simple aspect in a lease, it’s crucial that landlords and tenants truly understand what is expected of one another.

Commercial Real Estate Insurance Truths

Simple Truth #1: Landlord and tenant should carry insurance.

Simple Truth #2: Landlord and tenant should insure their own interests.

Simple Truth #3: Tenant has an interest in having the landlord insure the tenant’s interest.

Huh? Let’s break those down.

In commercial real estate, the tenant is required to have insurance. The landlord should have insurance, but that’s not always the case. There have been many instances when the landlord does not have adequate  .

Let’s look at an example. The lease states that the landlord doesn’t have to carry insurance. However, there are seven paragraphs about tenant insurance, including that if the landlord doesn’t have insurance, the tenant’s insurance will be primary. In this case, the tenant ends up paying an extra premium to get the coverage that the landlord required under the lease.

Building Insurance, Repairs and General Liability

The building shouldn’t be the only thing that the landlord insures. He/she should insure the land that the building occupies and any other landlord-controlled items, like parking lots or the lobby area. This is called property insurance. Property insurance protects the area if there is damage to the building or the land. Think about a fire, a flood or if someone crashes a car into the building. Of course, there are a number of things that can affect the property, and whether an event creates a small or large impact, insurance is crucial.

As a tenant, there are bound to be times when your space needs repairs. If there is a leak due to a broken pipe, you may not be able to work in your space during that time. Even though you’re unable to use your space during repairs, you are still required to pay rent. That is where renters insurance  comes in.

Another form of insurance needed in commercial real estate is general liability. This type of insurance covers injuries and property damage. This covers situations involving a customer, invitee, contractor, employee or someone else who is injured on the property.

Proportionate Share of Insurance

When it comes to insurance, both parties need it. The tenant needs to insure his/her own interest, but the landlord also needs to insure what he/she owns. The only place the landlord gets revenue to make that sort of payment is from the tenant, so the landlord will usually charge the tenant for a share of the insurance cost. Each tenant should pay their proportionate share of the insurance cost.

What ensures that the landlord carries insurance?

The lease!

Remember: The lease could also require the tenant to carry the insurance that the landlord requires, without taking into account what insurance the tenant already has!

Does that sound reasonable? Of course not!

Insurance can be tricky and downright confusing when you’re entering into a commercial real estate lease. That’s why it’s so important to have a commercial real estate attorney work with you to create a lease that’s fair.

When you’re not sure what your lease requires of the tenant and landlord in regards to insurance, let’s set up a time to figure it out!

Disclaimer
The transmission and receipt of information contained on this website does not constitute an attorney-client relationship. Persons should not act upon information found on this website without first seeking professional legal counsel.

A commercial real estate attorney should have one goal: protecting you.

When creating or negotiating a commercial real estate lease, the attorney will ensure that nothing is left up to chance. If it’s not in writing, it doesn’t exist.

Disputes arise between the landlord and tenant when there is a lack of communication, especially if the basis is an item that isn’t explained in the lease. For example, who is responsible for a faulty HVAC system or unexpected repairs?

That’s why a proper lease is so important. If these items are not addressed in the lease, it can lead to litigation, which means more of your time and money.

Purchase agreements

A purchase agreement is an in-depth document that contains conditions and disclosure forms. These documents contain deadlines for things such as earnest money deposit, inspections, contingency removals, as well as the condition of the property that is sold. This is signed by and agreed to by both parties.

If either party needs more time, it is imperative for the party to notify the other one well in advance. This maintains a smooth relationship between the landlord and tenant and allows time to create an extension.

Similarly to a lease, you want to know what exactly you are getting into. A commercial real estate attorney will help you know and understand your obligations and understand what you are getting into what your options are for getting out if it if necessary.

Get it in writing.

If you rent a commercial property, you need to have all of your terms written in detail and agreed to by landlord and tenant. Oral lease agreements are often thought of as being an easy way to create an agreement. However, that creates opportunity for confusion and misinterpretation.

Do you have a personal relationship with your landlord? That’s great – but you still need to have an agreement that holds each party responsible.

When you work with a commercial real estate attorney, she will discuss your concerns and your documents. Consider these questions:

With an attorney and a well-crafted lease, these questions will be answered in detail.

Option Agreement

A long-term lease locks you into the agreement for a certain amount of time. It could be one year, five years or even more. During that specified time, you are, of course, obligated to the terms of the agreement.

In the unfortunate event that your business becomes unsuccessful, you would be obligated to continue your five-year lease, paying 60 months worth of rent/lease. That’s a large amount of money! With the option agreement, the tenant has a pre-negotiated lease term once the original lease ends. That means the tenant knows the amount of time and rent that will be set going forward.

Avoid Conflict

No matter the lease option that you partake in, a commercial real estate attorney is key. She looks out for your best interests and makes sure that your lease is detailed and fair.

Call me to discuss your lease options and learn how to protect yourself and your business!

Disclaimer
The transmission and receipt of information contained on this website does not constitute an attorney-client relationship. Persons should not act upon information found on this website without first seeking professional legal counsel.

As the end of 2019 approaches, there will be a few things in commercial real estate leases that will change in 2020 that you need to know about.

Short-term Lease

Lease accounting standards will be changing for private companies. Lease costs will be accounted for differently, which means short-term leases will be more popular than ever.

Currently, long-term leases (longer than 12 months), have a large amount of bookkeeping that is required with ASC 842. The shorter-term leases will affect their balance sheets, but in different ways.

Short-term commercial real estate leases are becoming more popular. Tenants appreciate these leases due to the benefits such as:

  • Flexible space
  • Co-working
  • Pop-ups
  • Shared space
  • Changing demands

Tenants will experience more flexibility, which gives landlords less certainty with budgeting and planning and their tenant mix.

If the landlord is using a discounted cash flow model, the short-term lease could cause him/her to change to a valuation model. There are a few factors that carry weight in the valuation model:

  • Higher expenses
  • Shorter leases
  • Lease commissions
  • Marketing costs
  • Change in vacancy rate
  • Rental premiums to offset expenses
  • Replacement building costs

Tenants may consider entering a short-term lease and reassessing annually. Reassessing can save him/her money if there’s a better economic leasing option available.

Landlords may provide incentives to tenants in order to agree on a long-term lease. This guarantees a fixed rental income for the Landlord each month for a longer period of time, as opposed to the short-term lease.

Short-term leases affect the tenant, landlord, and both parties in their capacity as a borrower. This shorter commercial real estate lease may affect a borrower’s access to credit. Initial direct costs and disclosures will be required on the balance sheet, instead of as a footnote. All lease types cover the possibility that the borrower may default. The good news is, for the most part, the rate of defaults has stayed low.

Recourse Loans

The borrower is personally liable for the loan due if using a recourse loan. Recourse loans “can help a lender recoup its investment if a borrower fails to pay the liability and the value of the underlying asset is not enough to cover it. A recourse loan lets the lender go after other assets of that debtor that were not used as loan collateral.

For example, if a tenant stops paying rent, files bankruptcy and is eventually evicted, the landlord may have a lien on the tenant’s equipment. This may allow the landlord to sell the equipment in order to recoup the unpaid rent- of course, it depends on what the lease says, it will ultimately control. With recourse loans, the landlord cannot exercise that lien.

Recourse loans and landlord liens greatly reduce bankruptcy filings. Borrowers often use bankruptcy to avoid receivership and stop foreclosures. This is a pain to lenders and can take years to resolve.

Non-recourse Carveout Guarantees

With short-term leases, there are also non-recourse carveout guarantees.  This means that the guarantor is either partially or not liable for repayment of the principal and interest on the loan. It’s important to have a commercial real estate attorney that will negotiate the wording in this area. Non-recourse carveout guarantees are imperative. It ranks right up there with rate, proceeds and terms.

Texas has a quick, non-judicial process when dealing with foreclosures.

Learn more about how a short-term lease can benefit you by filling out the contact form at the bottom of the page today!

Disclaimer
The transmission and receipt of information contained on this website does not constitute an attorney-client relationship. Persons should not act upon information found on this website without first seeking professional legal counsel.

 

Tenancy

As a tenant in commercial real estate, you need to be aware of the different kinds of tenancy, what they mean and how they affect you. By working with a commercial real estate attorney, you can be sure that you are entering into a commercial lease that benefits you.

Tenancy at will

This type of tenancy can be terminated at any time. It can be terminated by the tenant, owner or landlord. There is often no written lease or contract and no specification about how long the lease is or how rent is paid.

Tenancy at sufferance

Generally, the tenant is legally permitted to remain on the property after the lease has expired but before the landlord demands the tenant to vacate. The original lease conditions must be met, including the rent payment. Otherwise, the tenant can be evicted at any time without notice.

Month-to-month

The easiest and most beneficial for many tenants is a month-to-month rental. This lease does not tie the tenant down as a long-term lease often does. It allows for flexibility and is particularly favorable for a new business.

Holdover

A holdover tenant remains in a property after the lease expires. If the tenant continues to pay rent and the landlord accepts, the tenant can continue to occupy the property. State laws and court rulings determine the length of the new rental term after the lease expires. This is common law and avoidable. Month-to-month is preferred, as it will not cost additional legal fees to determine the rental term.

Option to Extend

At the end of your lease, you may have an option to extend the lease. This is a pre-negotiated agreement that allows the tenant to continue renting the property at a set rate and set term. The tenant and landlord agree on the option terms when the lease is signed.

Fair Market Value

Sometimes, the landlord and tenant can’t agree on the rental amount in an option, but they agree that the amount should be determined fairly. This is know as setting fair market value, and the method for the determination should be included in the lease. Some of the more popular methods are:

Two-Broker Method: The landlord uses a broker and the tenant uses a broker. The brokers determine the fair market value of the property and, that becomes the new rental amount.

Three-Broker Method: If the landlord and tenant brokers cannot make a decision, they bring in a third broker. The third, neutral broker determines the fair market value based on the information provided from each broker.

Option to Negotiate an Amendment

This isn’t a true option, but it’s an agreement that the landlord and tenant will extend the current lease, but negotiate the terms of the extension, not at lease execution, but sometime before the lease expires. Tenants need to be cautious- sometimes the landlord will require the tenant to agree to the rent before telling the tenant what the new rent is!

A commercial real estate attorney understands these tenancy terms in full and is familiar with working in each area. By partnering with an attorney, she will make sure that your lease works best for your particular needs. It is crucial that your tenancy be feasible. After all, it is a commitment, whether it’s 30 days or three years.

Call me today to discuss which type of tenancy is best for your business!

Disclaimer
The transmission and receipt of information contained on this website does not constitute an attorney-client relationship. Persons should not act upon information found on this website without first seeking professional legal counsel.

Did you know?

Contrary to the online shopping craze, 85% of consumers prefer to shop at a physical store. Timetrade found that:

  • Consumers prefer brick and mortar stores
  • In-store expertise drives purchase volume
  • In-store purchasing preferences span generations
  • Mobile purchasing

Shopping In-store

A major reason shoppers are still physically going in stores is because of the experience. When walking into the location, shoppers use their senses. They see the patterns, feel the fabrics, and smell the fragrance. It’s all about creating an experience. This doesn’t only fall on the retail tenant. It also falls on the landlord – making sure there is adequate parking, clean restrooms and welcoming common areas all play into the experience.

Ripen cited the reasons people shop in-store as opposed to online:

  • Want items right away
  • Protects privacy
  • Save on shipping costs
  • Easier returns
  • See products in person

Think about how you shop. Do you plan a specific day and time to go to a specific store? Sure. Do you walk around a local shop after your date on Saturday night? Yes. You are taking part in impulse shopping – which is a large reason that retail locations are flourishing.

So what?

This is all good news for landlords, tenants and investors. More in-store shoppers mean more money in the tenant’s pockets. A building full of tenants means more money for the landlord. Successful landlords mean new investment properties.

It’s a ripple-down effect. In order to remain successful, all parties must keep up with the ever-changing industry. While name brand and national stores are closing, many retailers across the country are thriving. Through a mixture of tenants including discount retailers, service-oriented businesses and tech shops, commercial real estate is booming.

Warehouses

The explosion of e-commerce has benefited investors and landlords alike. All of those packages that are dropped off at shoppers’ doorsteps each day have to be packaged somewhere. Warehouses and packaging facilities are popping up all over the country. Texas specifically has seen growth in the area of warehouses due to an increase in online shopping.

The Houston Chronicle stated, “Commercial tenants in distribution and consumer goods leased more than 6.7 million square feet of space over the last two years in Houston, a 60 percent increase over the two years prior, real estate service firm JLL reports. Of 27 industrial facilities completed in Houston in the fourth quarter of 2016, 25 were warehouse and distribution spaces, according to market research by CBRE.”

Changes

  • Commercial real estate properties are now including multiple tenants in their property instead of just one.
  • Lease terms are evolving as the type of stores that come into the property are evolving. Month-to-month has become popular for pop-up shops.
  • Knowing how people shop and why they shop that way is beneficial to everyone involved in commercial real estate.
  • While e-commerce is continuing to grow, retailers are realizing the need for a physical location to please their customers and provide a pleasurable experience.

Being flexible and growing with the changes is essential. Call me to learn more about creating a unique commercial real estate lease that works for you.

Disclaimer
The transmission and receipt of information contained on this website does not constitute an attorney-client relationship. Persons should not act upon information found on this website without first seeking professional legal counsel.

commercial real estate leasing, commercial real estate lawyer, lease, firm, office

Do you need a commercial real estate lawyer for your lease transaction?

Choosing your commercial real estate lawyer before the transaction is the key to success.

Choosing the right commercial real estate lawyer for your transaction involves a lot of factors. A wise client will ask about the lawyer’s commercial real estate transaction experience and the costs of the lawyer’s services. This should be done BEFORE the commercial real estate lease contract has been signed. The time to negotiate and ask questions about the commercial lease terms and agreement is before you sign!

Commercial Real Estate Transaction Experience

The commercial real estate lawyer should have lots of experience and focus on your particular business space, so he or she can advocate for you and protect your interests. The lawyer needs to be familiar with the type of property (the “asset”) class and the client base. A retail client will have different needs than someone purchasing raw land or leasing an office or industrial space.

Ask what kind of experience the attorney has in reviewing and drafting documentation, like commercial office leases or triple net leases. Find out what percentage of their practice is commercial real estate leasing. You don’t want someone who lists this as one bullet point among many- commercial real estate is complex and evolving, and a general practice law firm won’t have the experience necessary to negotiate in your best interest.

How many commercial real estate leases has the attorney negotiated? You want someone with enough experience to make sure you’re not leaving anything on the table at negotiation, and who can give you an unbiased view of the deal. The deal must be evaluated for risk appetite from a financial and legal perspective.

Commercial Real Estate Lawyer Costs

Contact your commercial real estate lawyer BEFORE you sign!!

Don’t try to save money by using a family or friend’s lawyer or Google to help you negotiate your lease. The intricacies of commercial real estate leasing and negotiations are not taught in law school. Only a commercial real estate lawyer, practice and experience, will be advocate for your interests. A web search will not substitute for a lack of knowledge. Commercial real estate is a complex and expensive transaction, and it’s worth it to invest in a knowledgeable lawyer.

Hopefully, the commercial lease transaction goes smoothly. The real estate lawyer will be working behind the scenes with Landlord’s representatives and brokers to secure your legal assets and your peace of mind. A real estate broker can’t provide legal advice, and the more complex the deal, the more legal items there will be. The broker is only paid if the transaction is completed, but the commercial real estate lawyer will advocate for your interests first.

Your Commercial Lease Transaction Is Unique

The commercial lease agreement is Landlord’s first offer, not an agreement uniquely tailored to your specific business. The commercial lease terms need to reflect the exact agreement between the Landlord and the Tenant. A good commercial real estate lawyer will take you through the lease document and explain the risk and reward of the negotiated lease agreement to you.

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.