Taking Out a Lease: Don’t Get Stung by Buried Obligations
By Nancy A. Park
When business owners prepare to sign a lease to move into a new space, they worry most about the rent amount, location and the disruption to business from moving. However, a lease is one of the most important contracts a business owner will sign, because it is often a long-term financial obligation that can either be a boon, benefit or an expensive blunder. When presented with a lease, business owners should avoid the inclination to just sign on the bottom line after checking the rent amount, term and address. Take the time to read the entire lease to avoid the blunders hidden in the fine print. Otherwise, you may get stung by unintended charges or costly repairs.
Be sure to start your search for a new business space with a knowledgeable real estate broker who can find the best deal for a space that suits your business needs. Your broker also can help you be realistic about the market before you sign an overpriced lease that puts you underwater. Your broker will help you enter into a non-binding letter of intent that summarizes the key terms such as rent, term, and who pays for expenses, as well as any improvements to be made to the new space.
While the length of the lease can be intimidating, reading the fine print will pinpoint the areas that contain hidden expenses. Almost every lease issue boils down to expenses that either the tenant or landlord must pay. Be sure that you only pay the expenses you have bargained for, and no more. If you miss the key issues, you may be presented with a huge expense invoice in the first month, be faced with large repair bills because of deferred maintenance, or pay additional expenses every month for services you thought were included in the rent. One caveat: If the lease is short and sweet, rather than thanking your lucky stars, look for important terms that may not be included.
Here are the top five areas to be aware of when reviewing that mind-numbing lease:
1. Check the facts: Are all the key terms from the letter of intent or other summary of terms included in the lease and are they correct? Often some terms are left out, misstated or changed. If so, ask why and request a correction. Double check the math on rent and lease term, and verify that the dates are realistic for move-in and payment of rent. Usually rent does not begin before moving in.
2. Expenses: There are usually several sections that deal with expenses, and what is or isn’t included in rent. The lease should clearly state who is paying for utilities, janitorial, landscaping, taxes, repairs and tenant improvements. Be sure each expense that is included in the rent or paid by the landlord is clearly noted. If there are agreed upon limits on certain expenses, be sure these are noted. Any verbal agreement should be included in the lease.
3. Compliance with Laws: Most buildings aren’t brand new when you move in, and often laws have changed since the space and/or building was constructed. Who is responsible for bringing the space, the lobby area and/or building into compliance if the laws have changed or when future laws change? As a tenant, you should not have to pay for this expense or, if at all, the large expense should be amortized (spread out) over many years, like 15 or 30 years. You want to encourage the landlord to bring your building into compliance with laws, as these could be important safety items like fire sprinklers or handicapped access, but not foot the bill in one month.
4. Building Systems and Premises: All the heating, air conditioning, ventilation and electrical systems of the building and space should be in good working order and in compliance with all laws at the start date of the lease, and the lease should reflect this fact. If a landlord is not willing to state this fact, then you need to ask why not and who will pay for it to bring it to acceptable condition. If you have negotiated that this is your expense, be sure you (or your friendly HVAC service person) have a chance to inspect and test these systems so you know what the dollar exposure might be. These can be significant costs, so beware.
5. Repairs and Maintenance: Be sure you know who must actually call the repair company, and who pays for repairs if breakdowns occur. Often the landlord is responsible to make the call and contract for repairs, but passes the expense through to tenant to pay. The arrangement on this issue should be very clearly stated, as well as your remedy if a landlord fails to make repairs, such as a right to repair and deduct from rent, or notice to landlord.
With a careful eye to the issues, you can avoid the painful sting of unexpected expenses. There is, of course, no substitute for a concise legal review by a knowledgeable real estate attorney familiar with the usual and customary terms and compromises.
About the Author
Nancy A. Park is of counsel at Best Best & Krieger LLP in the Sacramento office where she works with clients in both the private and public sector, focusing on real estate transactions, finance and business contracts. Ms. Park represents private and public real estate entities, lenders and
borrowers, landlords and tenants, and large and small businesses.
She can be reached at email@example.com or 916-551-2849.