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:

Additional Charges

  • 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)

 

Security Deposit

  • 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.

 

Contingent Expenses

  • 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.


Disclaimer:

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.

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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.