Commercial Lease (“Five Ws”) Checklist

“A good reporter must cover the ‘five Ws’ (who, what, where, when and why) in every story”- Perry White.

A good real estate attorney (and landlords, tenants and their brokers) must be cognizant of the answers to these seemingly simple, but sometimes overlooked questions in every commercial lease transaction:

a) Who are the parties to the lease? If your answer is landlord and tenant, you only get partial credit. Who is the tenant? If it is an undercapitalized subsidiary of a larger corporation, for example, the landlord and its attorney should ask for a guaranty from the parent company. Additionally, a prospective tenant’s financials should always be requested. If you are or represent the tenant, knowing the landlord and its track record, experience and financial strength is equally important.

b) Who do you represent? If it is the tenant, for example, a landlord-oriented form lease should not be utilized without modification.

c) Where is the property located? The more information, the less potential for dispute. A legal description, street address and auditor parcel number(s) should be incorporated in the lease to accurately define the property and where it is located.

d) What type of property is being leased? In a retail lease, for example, landlords will be expecting continuous operation, radius restriction and percentage rent provisions. Tenants will be expecting exclusive use and co-tenancy clauses. In an office lease, the type of services offered, and the concept of “usable” vs. “rentable” square feet and “load factors” must be understood and evaluated. In industrial leases, particular attention should be given to the availability of “industrial amenities” (e.g. high pressure gas lines, cranes, loading facilities and electric capacity) and environmental protections in the lease.

e) What exactly is being leased? Especially when the leased premises is only part of the property owned by the landlord, site plans should be added as exhibits to the lease to clearly delineate the leased premises, any exclusive parking and common areas. Often, in practice, lease exhibits are attached at the end of negotiations and tenants are unpleasantly surprised to see, for example that they do not have adequate parking, or that the premises is configured differently than that discussed early on. What is the square footage of the premises? Tenants, at the very least should independently measure the space and verify its rentable area. Especially when a space is not yet built at lease inception, a right to re-measure provision can protect both the tenant and landlord with “not less than and not greater than thresholds”.

f) What is the price (rent)? The lease should clearly specify: the rental rate; if the rental rate is not to be a “gross” rate, the additional charges or “additional rent” (typically, some combination of taxes, common area maintenance charges, insurance and reimbursements for building improvements/maintenance); any rent escalations (Note: an agreed percentage increase is now preferable over CPI adjustments [from a landlord’s perspective] as inflation and CPI increases have been negligible the last few years).

g) What other charges is tenant to be responsible for (e.g. utilities)? The lease should clearly specify who pays for what utilities and services (e.g., gas, electric, water, janitorial services, trash dumpsters); how utilities are measured (e.g., by direct meter from the utility company, by sub-meter from the landlord or by proportionate share); and how they are billed (e.g., by the utility company or the landlord).

h) What build-out (if any) will be required? For example, is the premises to be delivered in “as-is” condition (more common for storage facilities), or in “Vanilla Box” condition (more common in retail leases). A landlord delivering a “Vanilla Box” typically demises the premises with firewalls/tenant separation walls, provides a concrete floor, and “stubs” utility lines to one location in the premises, with the tenant assuming responsibility to distribute same within the space. Details such as preparation, approval and submittal of plans; definition of “Landlord’s Work” and “Tenant’s Work”; and identifying who will physically perform the work, and who pays for same must be clearly specified.

i) When will the lease be in effect (Term)? Obviously, the number of months (or month to month) or years of the Term needs to be specified. Additionally, commencement, interim and expiration dates should be identified so there is no question regarding same. Specific dates typically identified are: Effective Date (the date the contract rights and obligations of the lease are put in effect-usually the day the lease is signed); Commencement Date (the date the first day of the Term is to begin-this date often coincides with the “Delivery Date”); Delivery Date (the date landlord is to deliver possession of the premises to tenant); Expiration Date (the last day of the Term).

Option periods/dates, if applicable must also be specified, and a notice (of exercise of the option) date (typically 4-6 mos. prior to the expiration of the Term) specified.

j) Why is the space being leased/what is the premises being leased for (Use)? Tenants and landlords (and their attorneys) will need to know the specific nature of tenant’s business and exactly what the space is proposed to be used for. Tenants will need to review zoning laws to make sure their planned use is permitted by the municipality in which the premises is located. Additionally, there may be private lease restrictions or covenants recorded against the property preventing or restricting a particular use. Violating such restrictions and zoning laws could create litigation and un-budgeted for expenses (for the landlord as well as the tenant), so investigating use restrictions is strongly advised for both parties, prior to signing a lease. In fact, landlords should make such restrictions part of the lease, to ensure its tenant has notice of the same. Additionally, a particular tenant’s use, for example, an industrial tenant’s manufacturing process (or a warehouse tenant’s storage of flammable items) might trigger an increase in insurance premiums. Accordingly, conferring with one’s friendly neighborhood insurance agent is also strongly advised.

Determining and agreeing upon the “commercial lease five Ws” will always help ensure your “lease story” has a happy beginning, middle and ending.

No comments :