Welcome to “Ed Talks,” a new video series by Offit Kurman business and real estate attorney Ed Bloom. In these short, 5–10 minute segments, Ed dissects real estate-related legal topics to offer practical, easy-to-grasp advice for tenants, landlords, developers, business owners, and anyone else who may be involved in a real estate transaction. With over 30 years of experience handling real estate and corporate transactions, Ed has a broad range of legal knowledge that comprises litigation, negotiations, workouts, lending, leasing, and licensing. As a business attorney, he frequently represents clients on mergers and acquisitions, as well as corporate structure, software licensing, expansions, and succession.
A lease is one of the most important long-term investments for a company, and I use the word investment on purpose. It is also often the largest fixed liability for a company. A lease provides a physical location and a presence for a company. I am going to be talking about 10 tips on leasing.
1. Define the premises.
Carefully define the premises that you are leasing inclusive of the suite number. Suite 500 is much more impressive than Suite 550. Also include the rentable square footage that you are leasing, and it should be fixed; the landlord should not be able to change the amount of square footage during the lease term. Finally, attach a depiction of the space; that is critical; remember, a picture is worth a thousand words. There should be no dispute as to what you’re actually leasing.
2.Define the rent.
Every lease is going to have an amount of rent, and rent should be on a rentable per square footage basis. Also, almost every lease is going to provide that rent is going to go up commencing usually in year two. Set forth the amount of escalations. It is usually a percentage. 2.5% is the most common. Anything above 2.5% favors the landlord. Also, most leases have a rent abatement period or free rent. It’s usually one to 12 months. Bargain hard. The more abatement you get, the better you are. It can assist with moving costs, it can pay for a porch that you build out, it defers possibly increased leasing costs, and there should be no requirement to rebate any portion of that abatement if there is a default under the lease.
3. Maximize flexibility, include options.
Options to expand, upstairs, next door, downstairs; options to extend, 10-year lease, two five-year options; and also consider an option to terminate. You cannot determine your space 10 years from now, how much you’re going to need. If your business is going to grow, you may want to terminate your lease in this building, move somewhere else in year eight. If your business should contract, you may want to terminate your lease and save some money. Again, maximum flexibility.
4. Define operating expenses.
In almost every lease a tenant is going to pay a share of operating the building; not only the building, but operating the building. There are several different ways of calculating operating expenses. The most common is full service. That is whereby the landlord pays the first year of operating expenses and taxes, and the tenant pays the increases above the first year. The second way, it’s called triple-net, that’s used in trophy buildings or industrial, and that is where the tenant pays its portion of operating expenses from day one. There’s also something known as a gross lease whereby the tenant just pays rent. When you’re calculating operating expenses, you should only pay for the cost of operating, not owning the building exclusive of taxes. You should exclude landlord’s financing costs, depreciation, ground rent, ownership costs, and exclude capital expenditures, except those that are required to comply with new laws or to reduce operating expenses.
5. Assignment and subletting.
You need to include in your lease language that the tenant may not reassign or sublet the premises without the prior written consent of landlord, and the key words, key language is which consent will not be unreasonably withheld, condition or delay; you need all three as all three have separate legal distinctions.
6. Every lease provides for a security deposit.
Specify the dollar amount. Try to include a burn-off provision. If there is no default in year two or year three, lower the amount of security deposit. Also provide for a letter of credit. That reduces the cash outlay. Those can be obtained from your local banker. And, most important, avoid personal guarantees. You do not want to lose your home because of a default in the lease that your business operates.
Although every business believes it is going to get out of the space on time, sometimes your new space is not ready. For the first month of holdover, the rent should stay the same. Beginning with the second month, you may want to increase it to 150% of base rent. Most landlords will require that. And, most important, avoid consequential damages; that is, if the landlord loses the deal because you held over, that cost should not go to you, at least for the first month of holdover.
Although it is a word tenants never like to hear, you need to protect yourself. Include language in the lease providing for both notice and cure so you can avoid a default. If you are two days late in paying your rent, that should not be a default till you get notice and opportunity to cure.
9. The condition of the space upon lease termination should be defined.
There should be no requirement of the tenant to remove the initial alterations. You should only be required to move subsequent alterations performed following initial alteration if the landlord requires the removal at the time approval is granted for those alterations.
Every lease provides that the landlord is to provide some dollars to build out the space. This is critical. The more dollars you have, the more you can do. Specify the amount of dollars per square foot. If the landlord is to build out the space, otherwise known as turnkey, detail the landlord’s obligations so there is no surprise. What the space looks like when the tenant gets it is called shell condition. The more things that are specified in the shell, such as HVAC, lighting, electric, that is on the landlord’s nickel, not on the tenant’s dime. Put more things on the landlord’s nickel. You don’t want to have a dispute later over what the tenant is getting. Also minimize any fees paid to the landlord for building out the space. It should not be a profit center for the landlord. And, the lease should not commence until all landlord’s obligations are complete. You want to have a hammer. You want to make sure the landlord complies. If they aren’t finished on time, have them pay a holdover or possibly a right to terminate after date certain. And, finally, the landlord should assist you in obtaining your permits or your C of O. Have a question about anything I have written here, or need guidance for a real estate transaction? Please feel free to get in touch. To contact me, click here.
ABOUT EDWARD BLOOM
Edward A. Bloom practices real estate and transactional law. His practice is primarily concentrated on real estate development, real estate litigation, real estate workouts, real estate and corporate lending, leasing, licensing, corporate and transactional matters. Mr. Bloom has over 30 years of experience on all types of real estate and corporate matters. He counsels developers, owners and users on acquisitions, dispositions, financing and development projects. He has extensive experience on all types of lease matters. He regularly represents tenants in the negotiation of leases from 5,000 to 100,000 square feet in size. Mr. Bloom has drafted and negotiated numerous work agreements for tenant build-out in connection with leasing matters. He has represented lenders, borrowers and asset portfolio purchasers on loan workouts, restructurings and foreclosures.