Publications
A Lease Primer
Signing a lease may be one of the most important contracts a business will enter into, and it should be done with care. Many leases are often 25 to 30 pages in length, with provisions that are often only important to the lawyers negotiating the lease and of little concern to the actual Landlord and Tenant. To be effective, a lease need only include the following:
Landlord: John Lessor
Tenant: Betty Lessee
Premises: 999 Leasehold Way
Term: January 1, 2000 - December 31, 2005
Rent: $2,000 per month
Condition of Premises: John Lessor will turn over the space in a condition acceptable to Betty Lessee
Default: If Betty Lessee does not pay rent, John Lessor gets to throw her out.
This article is intended to be a primer of basic lease provisions with an explanation of what is usually important to the Landlord and Tenant.
Landlord. Today, the typical landlord is a land trustee that holds title to the property or is a limited liability company. The Tenant should be aware that in the event these types of Landlords fail to comply with the terms of a lease, the Tenant may have to look to the property itself (which almost surely is encumbered with a mortgage) if the Tenant wishes a monetary recovery for the Landlord’s default. The Tenant will not be able to sue the individual Landlord (or its beneficiaries, if a land trust) to recover its damages.
Tenant. Often the Tenant is a new start-up business without substantial capital. In such case, the Landlord will want to obtain personal guarantees from the officers of the corporate Tenant. Tenants should try to minimize their personal exposure by making such guarantees shorter than the entire term of the Lease, if at all possible.
Premises. The space being rented is called the “premises”. Because rent is often quoted based upon the size of the premises (i.e., so much per square foot of rentable space), Tenant should ask that the space be field measured. Further, many leases are based upon rentable square feet, which includes the common areas and not just the useable area. In this situation, the Tenant should ask Landlord the loss factor in the building or shopping center for common area space
Term. The lease term is the initial start date and ending date of the lease. The Tenant should make sure the Landlord can deliver occupancy when the Tenant needs the space. Because of the delays in building the space to agreed upon specifications, the Landlord may not have the premises ready for occupancy at the commencement date stated in the lease. Further, a Tenant may want to negotiate for an option to renew the term.
Rent. There are three main types of rent:
(1) Gross Rent: This type of rent includes a base component and the amount of Landlord’s taxes and operating expenses. Usually a Tenant will not ask or know what the Landlord’s taxes or operating expenses are when the Tenant is asked to pay Gross Rent, but the Landlord should always be mindful of both costs in setting a Gross Rent amount. For the Landlord there is a risk in setting a Gross Rent as the Landlord is often unable to control its expenses and real estate taxes.
(2) Net/Net/Net Rent: In this situation, the Tenant pays a Base Rent and Additional Rent, which is the amount Landlord pays for taxes and operating expenses for Tenant’s portion of the entire office building or shopping center. The Base Rent will usually escalate by three to five percent annually. With Tenants paying for all of the Landlord’s real estate taxes and operating expenses, the Landlord’s risk of large increases of these items becomes minimized. The Landlord has an incentive to carefully watch its operating expenses and seek reduction in taxes to make sure the office building or shopping center rentals stay competitive and the complex is fully leased. The Tenant should try to negotiate that the taxes and operating expenses will not rise by more than a fixed percent each year (caps).
(3) Modified Base Rent: Tenant will pay a Base Rent that includes the taxes and operating expenses as of the first year of the lease (usually called “Stops”). Tenant pays all increases in later years of the lease in excess of the Stops. Modified Base Rent will also usually escalate by three to five percent annually. This form of rent may not favor a Tenant as escalations include the component of taxes and operating expenses existing at time of lease.
Condition of Premises. Often a Landlord will want to deliver the space being rented in an “as is” condition. A Tenant, however, will usually want certain necessities for its business such as offices, sales and storage areas, wallcovering and carpeting. The Tenant will want to make sure the heating and air conditioning systems are in good order. The Landlord will need to determine its costs to build the premises to suit Tenant’s needs and compute the rent it will receive in a manner necessary to amortize these costs over the life of the lease.
Default. There are several kinds of things a Tenant can do to get itself in trouble, including:
- failure to pay rent
- failure to repair, insure or extinguish mechanic’s liens
A Tenant should insert provisions in the lease allowing the Tenant ten days to cure monetary defaults and thirty days to cure non-monetary defaults and if diligently curing the default, the ability to extend the thirty-day period.
A Landlord should always try to shorten the notice required and obtain as much security as possible to protect itself in the event of a Tenant default. The Landlord may want personal guarantees from corporate Tenants, security deposits of more than one month and the Tenant’s commitment that it will not seek a jury trial in the event Tenant is sued (a commonly used Tenant delaying tactic). Further, a Landlord should insert provisions in the lease that in the event of a Tenant default, not only is the Landlord to be paid all unpaid rents but also its unamortized costs to build out Tenant’s premises and any attorneys’ fees it incurs to enforce the terms of the lease.
The foregoing was intended to highlight some of the concerns of Landlords and Tenants in negotiating the basic terms of a lease. Many other terms need to be looked at to assure both the Landlord and Tenant are protected. If we can assist you in negotiating or understanding your lease, please feel free to contact us.