Lease Review – What should you focus on outside of the major lease terms?

Do landlords go into the unreasonable “gray area'” when it comes to measuring tenant spaces and common areas? Do they include building overhangs, exterior sidewalks, balconies and patios?  It is not easy to find these items as they are buried in the lease. And tenants sometimes do not realize the impact that each of these clauses can have on overall cost of occupancy.

What clauses outside the major lease terms should you and your attorney be looking at? Here are some thoughts recently discussed in a LinkedIn Discussion Group.

• Many landlords will negotiate the square footage numbers down once you label their methods as unreasonable, but this is a complicated area to understand as there are many crafty ways for landlords to get this past a tenant and their broker unless they have a good understanding of BOMA, how buildings are measured, and have measured buildings many times.

• Look at the occupancy cost language such as Common Area Maintenance (CAM), Insurance, Utilities, Real Estate Taxes, Percentage Rent, Late Fee/Penalty, Condemnation, Exclusive Use, CPI or any other type of landlord pass-thru obligations.

• Audit language is extremely important. This is your one time to ensure that you have the best language that you can get. Even the slight twist of a word can mean thousands – even hundreds of thousands – of dollars to if not presented correctly.

• Look at how the premises are turned over to the tenant for construction such as plan approvals from the landlord and governing entities. If there is an exclusive, look at the definition of the exclusive and the penalties in case of default by the landlord.

• The sublease clause gives the client the ability to leave a building/space that is no longer working for them. Make sure that the language is flexible and includes the landlord not unreasonably withholding consent, subleasing 20 to 50% of the space without landlord approval, etc.

• View the tenant’s rights to expand, contract, and Assign to allow the tenant the greatest flexibility within their business location. Pay particular attention to the exhibits including work letters, regulations, plans, confirming the financial obligations, definition and terms are directly aligned with, and functioning in concert with the lease instrument to help assure “no surprises” as they create and then operate in their leased business environment.

• Carefully scrutinize operating expense history and projections, Base Year of the language surrounding operating expenses content and exclusions, methods of calculation, right to audit, all integral toward a comprehensive lease review.

• Often overlooked is a non-disturbance clause that protects the Tenant from a Lender who may want to void the Lease when they foreclose from a troubled Landlord. If a Landlord is defiant about this issue, suggesting he is insulted at the inference that he might lose the property, let that be a red flag indicating a problem may already exist between Landlord and his Lender.

• Many Landlords “claim” to use the BOMA Method and this seems to end most Brokers’ and Tenants’ questioning there. BOMA allows a 2% variance between architects for measuring a project or building.  But often, Landlords measure however they please, put “BOMA” on the front of the method and call it legitimate and beyond reproach. Unless it’s a for a full floor or larger Tenant, what ways do you go about obtaining a different measurement that might benefit the Tenant? Do you personally hire an architect to field measure the common areas of the entire building, plus your Tenant’s proposed Premises? Do you get the Tenant to pay for the remeasurement? Do you do it yourself off of a set of scale drawings? Asking the tough and very unpopular questions of the Landlord is only a first step in investigating the accuracy of the Useable and Rentable square footage. How do you move into the execution of actually doing something ACTIONABLE about it? What size of Tenant can truly make a challenge of the size measurement of its proposed Premises and hope to win the battle? How often can you win such USF or RSF challenges? See more on https://ownersrepny.com/2012/07/19/warning-ascertaining-the-correct-real-estate-square-footage-can-be-a-minefield-fraught-with-peril/

• Read the entire document to make sure the small print does not take away what the big print gives the tenant. Examples include Size, commencement date, occupancy date, Tenant Improvements (TI’s), notice time line, expenses, services, who provides and pays,  renewal dates, insurance language, any peculiar area not normal for your area and type of use/etc. Review the use clause and any public sector requirements, etc.

Focusing on what’s wrong takes a little longer but pays out in spades!

The following additions were provided by readers after the initial posting:

11/27/12 by Fred Dielwart, Director at ReVamp Consulting – Your VOO via LinkedIn Office Relocation Network Group
• Car parking spaces – not clearly understanding the location of the car spaces – on-grade, under cover, behind access barrier and worst of all tandem spaces – all too late once the client has moved in
• Make good clauses – unclear, poorly specified works which results in a substantial liability at end of lease – overlooked as it does not affect “here and now”

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3 Comments on Lease Review – What should you focus on outside of the major lease terms?

  1. I agree with most of your comments except one and that is the non disturbance clause. I am now on the tenant side but was on the landlord side for 15 years. Landlords fight this when there is no debt because if there is a requirement for non disturbance in a lease, it can limit what options the landlord may have for when they want to finance. In addition, I am not sure of the value of NDA unless the tenant has made substantial capital improvements in the property because typically in a strong market, the landlord will have the capital to pay the debt and is most likely to fail to pay debt in a weak market and in that case the lender will keep anyone who is paying rent.

    • Jeff, in what circumstances would you see the landlord acquiesce on the non disturbance? Is it a make or break or something negotiable? Where do you see the parties reaching a mutual agreement?

      • The only type of language that can typically work for a landlord is that it can use “reasonable efforts but on the lenders form” and any cost of negotiating it are the tenants responsibility as it has no value to the landlord.

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