Have you read your lease lately?
It’s important to know the terms of your lease because they play an important part in your long-term space planning needs. Unfortunately, it has been our experience that most tenants, and even some landlords, don’t know their lease’s basic terms. They are very focused on them at the time of the transaction, but the lease often ends up in a drawer somewhere, and the parties don’t think about it again until one party contacts the other about renewing or leaving.
Here are some very basic items landlords and tenants should be aware of.
• Is there a lease? On its face, this seems like an odd question, but we run into this situation more than you might think, and parties often don’t even realize it until we ask about it. It could be that there was no lease in the first place, or that a lease was never signed, or that a lease expired months or years ago and nobody bothered to prepare a new one. In such cases, the tenant is known as a tenant at will, or TAW. There are pluses and minuses for both sides in this situation, but that is a discussion for another column.
• How is the rentable space and rent calculated? This question touches on two issues. First, what is the difference between rentable and usable space, and is the rent triple net (NNN) or gross?
Usable space is that which is directly used by the tenant. Rentable space includes usable space, plus common areas of a building, like foyers, hallways and staircases. Most landlords want to make sure that tenants pay for the space they use as well as the additional space in the building that all tenants have access to. Tenants are generally assessed for their share of the common areas by something called a “load factor,” which is based on the tenant’s proportion of the total building square footage.
In a triple net lease, tenants pay a base rent amount on the rentable square footage and pay additional amounts for their share of the building’s operating expenses like property taxes, insurance, management fees, snow removal and landscaping (sometimes called CAM charges). In a gross lease, all of these items are included, but tenants are still responsible for their own utilities. There are variations on this, and we call these modified gross leases.
• What are the renewal option terms? This issue presents traps for both landlords and tenants. Most leases include a right on the part of the tenant to renew for another term. What differs from one lease to another is the method by which the renewal option is triggered. In some cases, a tenant is required to notify the landlord within a certain time period prior to the expiration of the initial term that it intends to renew. In other cases, the lease automatically renews unless the tenant notifies the landlord by a certain date that it does not wish to renew the lease.
We have seen many cases where notice was not given, to the detriment of a tenant.
• How are annual CAM charges reconciled? Many triple net leases require the landlord to submit an annual statement to the tenant setting forth the basis for adjustments to the charges that are passed on to the tenant. Tenants seem to forget about this requirement and will simply accept the new NNN figure provided by the landlord without the required reconciliation statement. In our experience, most landlords are honest and well-intentioned, but occasionally, errors in calculations occur that are to the detriment of one or the other party.
We also have seen many cases in which the landlord doesn’t bother to submit a statement and does not adjust the NNN charges. This generally hurts the landlord more than the tenant, unless the NNN items are decreasing.
• Are there use restrictions in the lease? In general, restrictions as to how leased space can be used are found in leases for larger retail centers, so that tenants don’t have to worry about competition from other similar users. But it is not uncommon to find restrictions in other types of leases.
Tenants should carefully review their leases to make sure such restrictions will not inhibit their growth plans, and should be aware of such provisions in the event that another tenant is engaged in similar activities. In some cases, landlords impose restrictions simply because they don’t want certain uses in their property. I have a client, for example, who owns a multi-unit contractor plaza and who does not want any auto repair users because of concerns about hazardous wastes.
The next time you have a couple of minutes, pull out that lease (if there is one!) and read it. You may be amazed at what you find.
<font size=1>Dan Scanlon, an adviser with Grubb & Ellis/Coldstream Real Estate Advisors Inc., Bedford, can be reached at 603-206-9605, or firstname.lastname@example.org. </font size>