Founder and CEO, Visible Lease.
Poor administration of your actual property leases exposes your corporation to a variety of dangers together with sudden terminations, defaults and overbilling by lessors. And with new lease accounting guidelines requiring leases to be reported as property and liabilities on the steadiness sheet, poor lease administration may end in inaccurate monetary reporting. With 62% of firms anticipating audit charges to extend this yr, not protecting tight management over your leases can lead to vital extra prices.
To guard your credibility and keep away from pointless charges, it’s essential to preserve observe of your leases’ main clauses and danger objects. This isn’t straightforward and turns into exceedingly tough the extra leases you could have. Leveraging a lease administration system can streamline processes and decrease the danger of human error, leading to decrease audit charges. Following are the highest eight danger objects I see inside a industrial actual property lease:
1. Fee Phrases (Hire And Extra Hire)
Keep away from the danger of shedding your lease or overpaying your lease by understanding the fee phrases of your leases. In case you default in your lease, your landlord can terminate the lease and evict you. Be conscious of the main points of your lease and extra lease obligations, as they’ll seem in a number of locations in a lease.
Moreover, most leases require tenants to maintain the property in good order and restore and handle nonstructural points that will come up. Leases may require you to pay a share of working bills, taxes and different prices for widespread areas (typically known as widespread space upkeep or CAM fees). These clauses may be very complicated and nuanced. We’ve labored with many firms that misinterpreted their leases — a fantastic instance being a significant insurance coverage firm that was overbilled $185,000 as a result of it didn’t understand its lease required will increase in working bills to be offset in opposition to decreases in taxes.
2. Possibility/Renewal Interval Phrases, Discover Deadlines And Necessities
In case you have been in a position to construct flexibility into your lease by securing an choice to increase, renew or terminate your lease early, or increase or contract your area, be vigilant. These choices are time-sensitive. Know and thoroughly handle the dates by which it’s essential to give discover to your landlord and the precise phrases of the choice. In case you miss a date or ship the discover to the fallacious place, your landlord won’t be obligated to honor your choice and might power you right into a place the place you danger enterprise disruption or need to pay considerably greater lease.
3. Early Termination Penalties
As talked about, one of many choices you might have is the proper to terminate early. Business leases can permit early termination with out penalty or by paying a prenegotiated quantity. Even when you don’t have such an choice, with the introduction of the Coronavirus Assist, Reduction and Financial Safety (CARES) Act of 2020, your landlord might have acquired monetary reduction and might be extra keen/in a position to work with you if you have to exit your settlement earlier than it expires.
4. Task/Subletting Restrictions
Some leases permit for a tenant to assign their lease or sublet their area to a 3rd get together. There’s a huge distinction between the 2. In case you assign your lease, the brand new tenant steps into your footwear. You might be out of the image and the brand new tenant has a direct relationship together with your landlord. If as a substitute you sublease the area, you’re nonetheless on the hook for complying with every little thing in your lease, together with paying lease and charges. The subtenant has a relationship with you, not together with your landlord. It’s your duty to make sure that your subtenant complies with each its sublease with you and your lease together with your landlord.
5. Upkeep And Restore Obligations
Your lease may embody what you can’t do concerning upkeep and restore, similar to rip down partitions or restructure the format. It would include phrases round tenant enhancements, that are agreed-upon adjustments to the area to suit your wants. Regardless, ensure you’re solely paying for what you’re chargeable for and are consulting together with your landlord for the remaining.
6. Drive Majeure
Drive majeure clauses excuse the efficiency of a contract as a consequence of unforeseeable circumstances, similar to authorities laws or “acts of God.” Watch out, nevertheless, as a power majeure clause will solely go into impact if these circumstances stop you from fulfilling your obligations below your lease. For instance, the Covid-19 pandemic might qualify below a power majeure clause if there’s a government-imposed ban or restriction that impacts your capacity to satisfy your phrases.
7. Limitation Of Legal responsibility
A limitation of legal responsibility clause outlines particular circumstances below which a celebration could also be held accountable for loss or damages. Sometimes, in industrial leases, a tenant will discover a number of sections that restrict the owner’s legal responsibility, similar to provisions concerning tenant alterations and buildouts, brokerage charges and indemnification obligations. A tenant will need to preserve observe of those limitations that shift danger again to the tenant, together with any helpful limitations the tenant was in a position to negotiate into the lease. However, just like early termination penalties, whether or not or not a celebration can implement these particular clauses might depend upon location.
8. Conduct-Associated Phrases/Restrictions
Does your lease limit you to sure hours of operation? Are you sharing widespread areas with different tenants? Know what habits is predicted of you — additionally, perceive how your fellow tenants’ companies and habits might affect your day-to-day and any CAM bills you may share.
The data supplied right here is just not authorized recommendation and doesn’t purport to be an alternative choice to recommendation of counsel on any particular matter. For authorized recommendation, it’s best to seek the advice of with an lawyer regarding your particular scenario.