Forewarned is Forearmed: Read Your Lease
By Darren Fleming
It may seem like simple advice, but reading their lease is something that a disturbing amount of tenants just do not take the time to do prior to signing, or resigning, their office lease. In fact many of our clients are not the same person who handled the last transaction on behalf of their organization. As a result, they do not possess any of the historical context that was at play five or ten years ago when the current contract was signed.
That’s why it is so important that before any action is taken that you read the lease – thoroughly. This means cover-to-cover, all the schedules, and any amendments that might have been made. Take notes and call an expert you trust if you have questions. There are potentially many hidden costs in a commercial lease and several of them come into play only at the end of the contract. So before you decide to talk to your landlord you had better be up to speed on your rights and obligations in order to avoid any nasty surprises. In this entry I will discuss two of the more common lease clauses I have seen that can cause problems and offer some tips and strategies to deal with them.
Protect your option to renew
The majority of tenants do not understand the purpose of an option to renew, or why it is a must-have in any lease. These clauses, which usually carry a requirement to give the landlord six or nine months’ advance written notice if they are to be exercised, are not just there to provide a reminder to talk to the landlord. Their sole purpose is to prevent a landlord from leasing your space out from under you in the event a more attractive tenant comes their way.
You may have spent major dollars retrofitting your 5,000 SF office when you moved in five years ago, only to have the property’s anchor tenant negotiate to take your beautiful space should you forget to exercise your option to renew. That is why it is essential to be aware of your notice obligations at all times. If you miss your notice window you have likely lost the option forever.
Restoration/reinstatement obligations
Unbeknownst to most tenants is that at the end of the lease term most standard commercial leases require a departing tenant to return a space back to its base building condition. This usually means bare concrete floors and the demolition of all interior walls. In most cases the landlord also has the right to insist on doing the work on the departing tenant’s behalf and all at the tenant’s expense. What’s worse is that many leases state that even if you were not the one who did the construction in the first place, you can still be on the hook for the removal. This particularly nasty surprise can be hard to spot and if you suspect you might have this type of clause in your lease, call an expert for advice on how to handle it.
Many uninformed tenants have had their negotiating leverage eliminated in one stroke when informed by their existing landlord that they would be charged thousands of dollars should they fail to renew their lease and leave. In some cases a tenant may then find themselves in the position of being unable to move and they typically renew at a higher rental rate than they might otherwise have been able to negotiate. The best defense is of course to strike this clause from the document before you sign but since time travel isn’t an option, when faced with a potential restoration obligation, you will likely have to get creative to avoid writing a big check.
It is vital to ensure you are aware of any potential pitfalls in your lease that could affect your company at the end of the term. Failure to do your homework and take preventative steps will undoubtedly cost you money. Forewarned is forearmed.
Tags: corporate real estate, landlord, lease
This entry was posted on Wednesday, November 17th, 2010 at 3:49 pm and is filed under Transaction Management. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.