October 19, 2019
Trying to read a lease can be a total headache, but the concepts in them really are common sense, once they get translated from lawyer jargon. We are going to translate each major section of a lease into normal English and then explain what tenants and landlords motivated by. Let’s get started.
Lease Term: This is the amount of time that the tenant is guaranteeing that it will be legally responsible to pay rent. Most standard lease terms are between 3-5 years, but when there are more tenants looking than there is space to lease, landlords may demand a longer than usual term. When there is more vacancy than there are tenants, the landlord will be more likely to give flexibility on a shorter term lease just to get someone in the door.
The exception to this is in a hot market when property values are consistently on the rise, landlords may only want short term leases to give themselves flexibility to sell or keep the rents moving up with the market. Be aware of where you are in the market and negotiate accordingly.
Landlord Concessions: There are 3 typical concessions a landlord may give a tenant in extending a lease term, expanding into new space, or purchasing the property: a right of first offer, a right of first refusal, and an option.
Right of first offer: The right of first offer is the weakest commitment from the landlord of the three concessions - all the landlord has to do is offer the opportunity to the tenant before offering it to anyone else. It does not obligate the landlord to accept the offer, negotiate with the tenant, or even let the tenant know if anybody else makes an offer in the future. The right of first offer is occasionally thrown in a negotiation to make the landlord seem like a nice guy.
Right of First Refusal: The Right of first refusal is a little stronger than the right of first offer because it obligates the landlord to present any offer made by a competing entity to the tenant who can then match the offer or refuse the opportunity. the Right of first refusal is typically used as a concession by landlords or sellers who do not want to give all the power to the tenant but will give the tenant the exclusive right to step up to the most favorable terms for the landlord.
Option to purchase: The option to purchase the property, extend the lease, or expand into new space is a unilateral right given to the tenant within a defined period of time with defined terms. The option is a strong concession because it puts the landlord at the discretion of the tenant. Many landlords will not loosely grant options, and savvy tenants will always push for as many as they can get in a lease.
Property Insurance vs Liability Insurance: Property insurance is not the same thing as general liability insurance. In a commercial lease, property insurance is billed separately to the tenant as a cost of occupying the space. The purpose for property insurance is to cover any damage to the building itself while general liability covers damage or injury to a third party on the premises. Most states require tenants to carry general liability insurance.
In some cases where the tenant’s specific use presents more of a risk than a standard commercial use in a way that causes the landlord’s insurance premiums to rise, the landlord may choose to pass on the difference to the tenant whose use caused the rise in rates.
Usable Square Feet vs Rentable Square feet: Usable square feet includes anything that a tenant will exclusively occupy like office, warehouse, or private bathrooms, rentable square feet is an additional area that the landlord may add into the lease for common hallways, shared bathrooms, and lobbies typically between ten to twenty percent of the usable square feet depending on the market conditions and the building itself.
This added percentage is typical in many multi tenant office or R&D buildings with a shared lobby or indoor common area.
Surrender Clause: Surrender clauses can be tricky and are often overlooked. They outline the condition to which the tenant is responsible for restoring the space that it rented at the end of the lease. There is not necessarily a standard practice, just keep it in mind whenever reading a lease so you don’t get yourself into trouble without thinking about it.
ADA Compliance: The Americans with Disabilities Act, or ADA, was put in place in 1990 to make sure that public-facing companies do not discriminate against people with disabilities. Each building type and specific use will determine how extensive the ADA buildout will be.
Brokerage Commission: As a general rule of thumb, landlords pay brokerage commissions because they are getting the benefit of the rent. Market brokerage fees vary depending on a few factors like the property type, location, transaction size, and the difficulty level of the marketing assignment.
When it comes to reading through an actual lease, always talk to an attorney because it is their job to protect you, but you should now be able to read through lease proposals and have a much better idea of what is going on in the lease itself when you are going through it.