Why Landlords Need A Written Lease

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If it’s not in writing, it doesn’t exist!

During your time as a landlord, you’ve probably entered in to an oral lease agreement at some point. If you’re a new landlord, you’ve probably been tempted and have now searched the Internet asking, “Is an oral lease agreement a good idea?” While commercial real estate oral leases are enforceable in Texas , it’s always best to have a written agreement. Let’s discuss why.

When you enter into a verbal agreement with your tenant, there are definitely possibilities of uncertainty and financial loss.

Rent

This would appear to be the most simple and important aspect of a lease. It should be – and will be, if you have a signature on the agreement. Without a contract, the date and amount of the monthly rent will be up in the air. You have to rely on your tenant’s word. Wouldn’t it be simpler and safer to have that information in writing so that there is no confusion?

In the unfortunate event that the tenant does not pay rent, a lease will define your course of action. This section holds the tenant accountable and increases the likelihood that you get paid!

Finding A Tenant

You spent time and money marketing your space as well as finding and qualifying your tenant. That money isn’t recouped if there is no written lease. It’s gone. Using a broker to find a tenant costs money. If you don’t have a written agreement that determines the broker’s cost, you only have their word to base your payment on. You need proof of what was agreed on. That’s why, in addition to a broker, you also need a commercial real estate attorney.

Utilities

You could be stuck paying the cost of all the utilities. The electric, water and gas bills will land on your shoulders if your tenant isn’t held responsible with a lease agreement. This also goes for repairs, cleaning and furnishing. A commercial real estate lease should cover all of these facets. That means that who pays for what expenses under what conditions should be clearly established.

Attorneys

What if your oral lease agreement goes awry and you need to involve lawyers? You pay for that. You will be paying attorneys to help with a number of possible problems:

By working with a commercial real estate attorney, you can be sure that your lease goes into appropriate detail. It will cover issues that may come up between you and your tenant(s). This could even include who handles repairs and damages or something as simple as when the rent is due.

Possibly the worst potential loss: your mind!

Dealing with a tenant with no written lease to enforce can cause a landlord to lose his/her mind. Think about what your tenant may be doing on your property. They could be participating in illegal activities, causing neighboring tenants to complain, or not being held accountable on the insurance policy .

If you don’t have strict, enforceable rules in place, you may end up being held responsible. This can cause you monetary and mental stress.

Get ahead of your problems and losses before they happen. Make sure you’re protected and that your tenant understands what is expected of him. Let’s talk. Fill out the contact form or give me a call to create a commercial real estate lease.

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.

Tenants Need A Written Agreement

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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.

Tenant Personal Guarantee

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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.

Commercial Real Estate Leases: Changes Are Coming!

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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.

 

Retail Shopping Is Benefitting Landlords And Tenants

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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.

How to Find an AFFORDABLE Commercial Real Estate Law Firm

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What Kind of Law Firm Do I Need?

A commercial real estate law firm has a very particular area of practice. A law firm that dedicates the bulk of its practice to real estate will have more focus and experience than a law firm that lists commercial real estate as one bullet point among many. Look for keywords that match your issue: landlord-tenant dispute, land acquisition, lease negotiation, etc.

A smaller firm will generally be more affordable than a larger firm. Larger firms have more resources, including employees, but they have to support those resources with higher costs. This is a reason why hiring lawyers can seem unaffordable to the general public. However, smaller firms often have more flexibility on their fees and more affordable costs for an average small business. Commercial real estate law firms that focus on small businesses, start-ups, real estate investors or other similar niches will probably have more affordable rates. They will also have more familiarity with the common issues and challenges facing this audience and will be more prepared to help.

How Do I Find A Law Firm I Can Afford?

The Internet is a great resource here. There are lots of sites online where you can find a law firm that can help you. The local chamber of commerce or a lawyer referral service will probably offer free referrals or access to their directories. Your own business and personal network could be a great resource to find an attorney as well.

I Can’t Afford a Commercial Real Estate Law Firm

Affordable doesn’t mean cheap. You’re paying for a customized, tailored legal solution and legal knowledge. Real estate brokers and Google can’t do that. If you don’t invest in a commercial real estate law firm at the beginning of the transaction, when there’s time to understand and evaluate the consequences of the transaction, you will pay the price. The opposition will have knowledgeable legal counsel that will protect them and advocate for their interests. If you don’t get help at the beginning, you will need a lot more help to navigate the legal and financial consequences of the poor deal you are trapped in.

Call several law firms and ask for a fee quote based on the transaction. Have all of the transaction information ready so you can answer the questions to get an appropriate quote. Be candid with the law firm. They may have some creative solutions regarding the fee.

If you feel you can’t afford a commercial real estate law firm to assist in your transaction and you’ve gotten fee quotes from several of them, then you are probably not ready for the transaction. Commercial real estate is an investment transaction, whether you are buying, selling, or leasing, and the transaction needs to be capitalized properly. Your commercial real estate attorney will require an investment up front, but you will reap the benefits in a properly negotiated transaction where you understand your legal and financial rights and obligations. 

Jenna Zebrowski focuses on affordable, tailored legal real estate solutions. Reach out today to set up a consultation or to receive a no-obligation fee quote.

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 Lease Terms – SNDA and Estoppel

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Maybe it’s an exhibit at the back of the lease, or maybe it’s something you received in the mail that you are told to sign and return right away. Either way, your commercial real estate attorney should review it. That signed document could drastically change your commercial lease terms.

An estoppel is basically a short lease summary. It’s a legal document that summarizes key points the lender or purchaser of a property wants to confirm. By signing it, you’ve agreed to the terms – even if they don’t match the lease terms! 

The SNDA is the subordination, non-disturbance and attornment agreement. The purchaser wants to know that the tenant will treat the new owner like the previous one, that he/she will attorn and subordinate his/her rights. The landlord can sell the property and the tenant doesn’t get any say in the matter.

Subordination

The rights of the tenant greatly depend upon whether he/she has priority over the landlord’s mortgage, which is held by the lender. In many leases, the tenant has agreed to a provision where it subordinates its rights to any present or future mortgage the landlord places on the property. This automatic subordination clause, without corresponding non-disturbance language, could severely undermine the tenant’s rights if landlord defaults on its mortgage loan. 

Non-disturbance

When faced with either subordination requirements in the lease or any landlord requests, a tenant should request a non-disturbance agreement. 

It is prudent for the tenant to obtain a non-disturbance agreement from any existing mortgage lender when the lease is executed. The tenant should avoid agreeing to automatic subordination clauses that could undercut his/her priority, or negotiate such provisions to provide protections if automatic subordination is triggered. 

Attornment

Upon a loan default and enforcement by the lender, which usually involves replacing the landlord, the tenant agree to treat the new landlord just like the previous one (including rent payment obligations). 

In a soft leasing market, the new landlord wants to keep the current tenant. The lender should ask the tenant to attorn to the new landlord under these circumstances. Attornment would consequently protect the lender from the risk of the tenant vacating when the tenant has been paying above-market rent for the leased property. A well-drafted attornment clause will include an obligation of the tenant to attorn to any successor in title including any purchaser the lender might sell the property to following or as part of the exercise of the lender’s loan enforcement remedies.

There are two things that will be an advantage to any tenant – especially a tenant with a long-term lease or which has made a substantial investment in its tenant improvements (i.e. expensive buildout or ground lease with construction of the tenant’s own building).  

#1: To have the right to secure a SNDA from all existing mortgagees of the property 

#2: A commitment by the landlord to obtain such an agreement from future lenders as a condition to granting subordination to future mortgagees. 

How do you know if this language is in your lease?  Or should you sign that document that came in the mail from the landlord?  A commercial real estate attorney can help you understand and protect your rights and obligations under these documents.

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.

Subleasing A Commercial Space

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Commercial sublease obligations can make or break your company financially. When subleasing a commercial space, the sublessee is motivated to reduce expenses, so the rent price can be attractive, but the sublessee will probably make some business concessions, including being bound by the original lease that may not have been negotiated properly or reviewed by an attorney. When negotiating a sublease, there are some important questions to ask. 

Q: Does the landlord need to consent to sublease?

A: The answer is almost always yes, but refer to the original lease agreement confirm.  Get the landlord’s consent in writing! 

Q: What is the landlord’s ability to terminate the lease or kick out the sublessor out of the space if the sublessee defaults?

A: It should be in the master lease, but a sublesse can modify these rights in the sublease, with everyone’s agreement. Negotiate so that the defaulting party is responsible for the costs and any damages incurred because of a default or eviction. 

Q: What is covered in the use clause? 

A: There may be restrictions on business terms, or what the space can be used for.  Make sure the landlord waives any of these restrictions that apply to sublessee’s business before signing the sublease!  Think about anything that is specific to your particular business, such as 24-hour access to and use of your space, parking access, delivery times and climate control.

Q: Why does the sublessor need to provide financials? 

A: When subleasing, the sublessee is essentially taking over the commercial real estate lease from the sublessor. The sublessor is usually required to prove to the landlord that the sublessee is a good business risk, because they are taking on the financial responsibility for the lease.  A traditional way to prove this is for the sublessee to provide financial information to the landlord to demonstrate that he or she can afford the rent.

Q: What about the section on attornment, right to cure and right to notice? 

A: Attornment means that if there is a new landlord, because the building ownership is transferred, then the sublessor and sublessee will agree to treat the new landlord like the old one, including paying rent. 

If the sublessor or sublessee does something wrong, whether it be monetary, such as not paying rent, or non-monetary, such as not fixing something, the right to cure comes into play. They defaulting party should receive legal notice about the issue and then be given a chance to fix the issue – the right to cure. 

How the landlord will tell the sublessee that something is wrong is typically described near the end of the lease. This is known as the right to notice.

The sublease might be a shorter document, but it’s important that it is drafted properly, or the sublessee might lose valuable legal rights upon signature. It doesn’t matter what’s fair, it matters what is in the lease. A smart sublessee will make sure that all of the documents that are needed (it might be more than one!) to make the sublease legal are reviewed by a knowledgeable commercial real estate attorney. Give me a call to set up an appointment today to discuss your sublease concerns!

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.

Office Lease Agreement: How Do I Get a Good One?

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An office lease agreement is a contract between the landlord and tenant to rent space. The tenant pays the rent and uses the space to conduct business ,and benefits because there is no capital expenditure to purchase the property. The landlord benefits because there is a steady stream of income.

About the Office Lease Agreement

A standard multi-tenant office lease agreement will either be a triple net (NNN) lease or a gross (all -inclusive) lease. If there are lots of smaller tenants in the office building and there is only one rental payment, it’s probably a gross lease. 

All of the operating costs of the building, like taxes, insurance, and common area costs, are included in the rental payment. If there are additional payments beyond rent and utilities, it’s probably a triple net lease. The tenant will pay its proportionate share of the costs of operating and maintaining the property in addition to the lease cost.

The office lease agreement draft is usually provided by the landlord and contains language that favors the landlord. It may be a standard office lease agreement or a boilerplate contract, but it still needs to be read and understood. It’s important that all of the negotiated changes are in the document and that the tenant understands what he/she is agreeing to. 

The landlord may state that the lease contains common or standard language, but that doesn’t mean the tenant has to accept it as-is. The landlord has a team representing his/her interests, so the tenant should have a team in place, too. A good commercial real estate attorney with experience can read the lease document and make sure the negotiated items are there, that you are protected both financially and legally, and that you understand the rights and obligations you are taking on when you sign the lease.

Single-Tenant vs. Multi-Tenant Locations

One thing to consider is if there are many tenants in the building or just one. If the tenant is the only occupant, then there is only one source of income for the landlord. The landlord will want to protect against the tenant’s default because mortgage, tax and insurance obligations don’t go away just because the building is vacant. 

A multi-tenant building means the risk is spread out, so there’s a diversification of income sources. The landlord might be willing to make concessions about the creditworthiness of the tenant, but that will probably mean a higher rental rate for the tenant.

You’ve got your team in place and they’ve got your best interest at heart. Your commercial real estate attorney should understand the tenant’s side and have experience dealing with the landlord, meaning they know what to push on and how to get the best deal without tanking the deal. Your attorney should also economize on legal fees and protect the relationship, too.

Getting a Good Office Lease Agreement

It can seem like there’s a lot of lease document for a simple office transaction. A simple transaction usually doesn’t mean a short lease, however!  Your commercial real estate attorney will help you understand the risk, rights and responsibilities of each party, and negotiate to protect your interests.

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.

Operating cost exclusions in your commercial real estate lease

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  1. General Exclusions

The tenant needs to understand what he or she is paying for to ensure that he/she is not being overcharged by a landlord who is trying to turn operating expenses into a profit center. Landlords might put language into the lease allowing for: 

  • Charging the cost of capital expenses and improvements when they occur
  • Including charges specific to one tenant through to all tenants
  • Charging a management fee or administrative fee (or both!) that are not market rate

Here are some areas where a reasonable landlord will negotiate in a commercial real estate lease:

  • Leasing commissions, legal fees, promotional costs, etc.
  • Charges relating to sewer or water connections
  • Entertainment or travel expenses
  • Cost of repairs, replacements, etc. covered by insurance
  • The cost of any alterations or improvements due to construction defects or compliance reasons
  • Repairs due to condemnation or casualty
  • Costs related to lease negotiations or disputes
  • Correcting a tenant violation of a lease
  • Depreciation 
  • Costs of renovating, redecorating or improving a space
  • Amounts paid to landlord-related parties for services that are above the market rate
  • Salaries of landlord employees that are mangers
  • Landlord’s general overhead and administrative expenses
  • New or additional structures
  • Capital expenses
  • Income, excess profits, franchise, transfer, estate or inheritance taxes 
  1. Capital Expenditures

Capital expenses are not capital improvements.  A new roof or air conditioner are not repair or maintenance items, but are capital improvements that benefit the project. These capital expenses often have a useful life beyond a tenant’s commercial lease term. Landlords like them because they are needed and it may increase operating expenses on a go-forward basis. Tenants don’t want to pay for more than their share of these expenses. A typical example is a replacement HVAC unit. 

The best way to resolve this is to compromise.  The tenant will pay for capital expenditures that reduce overall operating expenses, but those costs are amortized over the useful life of the improvement. 

  1. Management Fees

Another potentially expensive section is the issue of the management fee for the project. Landlords may hire an affiliated party to manage the property. There’s no guarantee that the rate being paid to the property manager is market rate, or that the landlord isn’t padding operating expenses and keeping the difference.

There are a couple of different ways to address this.  One solution is to specifically state that whoever the landlord hires as the property management company, that entity will not be paid more than the market rate.  Another solution is to simply to cap the cost of the management fee, usually as a percentage of the gross rent for the building. 

 

NEGOTIATION TIP: Watch out for a commercial real estate lease that charges an administrative fee AND a management fee!  It doesn’t matter how it’s calculated, it’s usually a landlord attempt to collect twice on the same charge. A good commercial real estate attorney can help the tenant negotiate to control this cost.

 

  1. Controllable Operating Expenses

Finally, another way to avoid overcharging for operating expenses is to cap the increase for “controllable” operating expenses. Controllable expenses typically excluded insurance, real estate taxes, and specific other items that are beyond the landlord’s control.

How do you know what other controllable expenses are?  Need help understanding the different fees and how to negotiate them?  Hire a commercial real estate attorney, who knows what to look for and will advocate for your best interests.

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.