A handy guide to understanding lease proposals
Cliff Hockley, President
Bluestone and Hockley Real Estate Services
The Lease Proposal is the first step to making sure all your bases are covered when you are negotiating a lease.
As a Landlord or a Tenant, it is critical to have a well-developed plan that both sides can rely on in the negotiations that lead up to a signed lease. This plan is outlined in the lease proposal.
Many leases have the key variables located on the first few pages. A majority of these are reflected below:
The standard participants in every lease are the Lessor and the Lessee. Their points of contact (i.e. mailing address for the rent and whom to contact when there is a problem) are normally included. The location of the property should be identified at the beginning of the proposal, and include the address of the space to be leased, including suite number, if applicable. If there is a management company, it is mentioned here.
If the building is a multi-tenant building, the total square footage of the building is usually tied to the square footage of the space being leased. It is important to establish the proportionate share the leased space.
Spelling out the use of the space in detail is mandatory for the Landlord and the Tenant. For example, if you simply allow “retail use,” that leaves you open to the sale of any retail item, including pornography, drug-related paraphernalia or goods that might not fit in with the tenor of the building. Suppose you have a retail building on the beach. You might be okay with a candy store or a clothing outlet, but would you want the Tenant to be selling guns? As a Landlord you want control of usage. As a Tenant you want to make sure that your use is authorized. The same principles work for an industrial park. What Landlord would want a chemical manufacturing tenant in the same building with a food distributor? An office building has similar issues. Do you really want a child-care program in the same building with CPAs or Attorneys? In a large building this may work, but in a 20,000 square foot building, the sound of kids playing could definitely create a problem for your conference calls.
Lease Term and Lease Commencement
The term of the lease is most easily expressed in months rather than years. For example a 60-month lease is clearer in terms than a period of 5 years. Identifying possession date (the date the common area charges start), the date of move in, and lease commencement all need to be addressed in the early part of the lease form. For example, an art gallery leases an industrial building. The building needs a new roof before the Tenant can move in. The Landlord and the Tenant agree that the Tenant can have possession of the building upon completion of the roof. The Tenant also needs two months getting the building ready with Tenant improvements. Does he want to pay rent during this time? Of course not! He will, however, be using electricity, water, sewer, rubbish and incurring other building-related costs such as property taxes, insurance, and property management. Those costs should be paid while the Tenant improvements are being completed, but the rent might not start until the property has been approved for occupancy and inspected by the Landlord and city officials. It is therefore important to keep in mind all of these dates in the Lease Proposal as well as the Lease itself. If these dates are not met, one should execute a letter that will confirm the occupancy date for later referral as annual common area maintenance charges are calculated.
This is the item most negotiated in a lease. The Tenant wants low rent and many build-out (Tenant improvement) concessions. The Landlord wants a high rent and no concessions. The Tenant wants a gross lease with all of the expenses included; the Landlord wants a net lease and the ability to pass back all of the costs. In this section it is important to spell out the rent levels, annual increases (if any), if there are tax pass-through increases, CPI (Consumer Price Index) increases, or CAM (or triple net) costs.
Responsibilities of Tenant and Landlord
Each property is different and each lease must address the key issues as to who is responsible for:
- Building roofs, foundation, exterior, painting
- Gutters and downspouts
- Interior building maintenance
- Broken glass windows
- Landscaping/ parking lot
- Real estate taxes and property management
- Liability and property damage insurance
- Water and Sewer
- Gas and Electricity
- HVAC maintenance
- Tenant Improvement costs
- Architectural and permit expenses.
Other Key Issues:
- Signage – where, how big, who is going to pay for?
- Parking – Where, how many spaces, is it included in the rent or is there an extra charge?
- Renewal options – If you want to renew, how much notice should be given? Is rate negotiated now, or in the future when exercised?
- Right to expand or contract – Are there options for growth or shrinkage?
- Right of first refusal to purchase – If property is listed for sale, and if an offer comes in, the Tenant has the right to purchase the property first by matching the offer price.
- Right of first offer to purchase – Property must be offered to the Tenant first before going on the market for sale.
Late fees and failure to meet terms of lease default provisions
It is important for both sides to agree on late fees and non sufficient fund fees as well as time frames for late payments and when rent is due. Is a payment late after 5 days, 10 days, or 15 days? Must the Landlord notify a Tenant in writing if a payment is late? How soon after a rent payment is not received must a Landlord send a notice to the Tenant? What happens if a Landlord does not pay a bill (like electricity) for instance? How does that impact a Tenant, does he need to pay the rent? What are his remedies?
If a real estate brokerage company is negotiating the Lease Proposal, it should be identified in the Lease Proposal and the Lease. The amount of commission due at the beginning and upon extension of the lease must be included.
As you move forward with your negotiations, remember to detail your issues in writing to make sure that there are no communication breakdowns once a lease has been executed. Using a written Lease Proposal will help you reduce the number of miscommunications that might occur over the lifetime of a lease and set the stage for a successfully executed lease.