A company’s business premises lease may represent its highest monthly expense. It also represents one of the most important commitments a business owner can make . A lack of careful consideration can result in serious financial consequences.
To avoid missteps, consider these due diligence questions to gain clarity and confidence before signing.
The Parties Involved in the Lease
Who owns the property? First, identify the owner of the property. Whether it’s a single-owner property or there are third parties involved, approval for improvements, concessions, tenant improvements, subleases and extensions is needed.
If it’s an ownership group, there may be a managing member able to negotiate on behalf of the co-owners. Occasionally, commercial properties are owned by dozens of owners; this arrangement can make it incredibly difficult to get all owners’ approval of even simple changes in a lease.
Further, ensure the owner of the property is contractually responsible for performance under the lease. Sometimes, the landlord named is a property management company that does not own the property. If the owner fires the leasing company, the tenant might not be able to enforce its lease.
What are the terms of loans against the property? A foreclosing lender can invalidate a lease. Even if a loan is not invalidated, the terms of the loan may block certain lease provisions, amendments or concessions. So, before committing, find out if there are other lenders or parties who have the power to invalidate a lease or prevent the tenant and/or the owner from adjusting it.
Do the premises, facilities, amenities and land-use provisions meet the company’s needs? Prior to signing a lease, confirm the property is fit for the company’s business and aligns with all its foreseeable needs.
Review the zoning to make sure the company can operate at the location. Hire an expert to inspect the property for defects. Ensure the property’s mechanical, plumbing, electrical and technology are in working condition before moving in. Failing to do so can result in maintenance repair and structural change issues.
The Lease Terms
What square footage is the company leasing? Verifying the premises’ square footage is correct seems like common sense, but this small detail can be overlooked. At times, landlords will list more square feet than what is usable, which can lead to a company being financially obligated for space it isn’t occupying. Examples of unusable space range from common areas to elevator space, riser rooms and support columns.
Moreover, if the landlord says share of the common area expenses is a certain percentage, does this include only rented space, parking spaces, easements and the like? If the company pays a common area charge or percentage of the building expenses, go for a smaller percentage to minimize its space and maximize the total space of the building or complex. Make sure the company pays only its fair share.
What are the CAM charges? Tenants are typically responsible for common area maintenance (CAM). Before committing to a lease, ask the landlord for copies of last year’s charges to estimate what the company could be charged. Review the types of items that are charged, be aware of any unlisted costs for which the company may be liable and ask if the landlord is collecting reserves for large items. If not, the company may be burdened with a large expense for a new roof or repaving the parking lot.
What does the insurance cost? Business owners should determine their insurance cost before signing a lease. For the most accurate estimate, provide the company’s insurance broker with a copy of the lease.
Add-On and Default Provisions
What provisions are not boilerplate items? Ask the landlord what provisions are included in the lease. This might include sublease provisions, exclusivity clauses (prohibiting the landlord from leasing space to a direct competitor) and escape clauses (can the company get out of the lease if occupancy falls below a certain level or if an anchor tenant leaves?). These are all critical considerations that play into a business’s future.
What are the lease’s default provisions? What happens if the company has a business reversal? Business owners should understand what circumstances may lead to them being locked out. In that case, what would happen to the office contents? Plus, find out if remaining payments accelerate if the company misses a payment.
Commercial leases are complex and deserve adequate due diligence before making a commitment. Consulting an experienced real estate attorney helps companies identify significant issues to resolve before they are locked into something they regret.
An attorney with Guidant Law Firm, J. Phillip Glasscock has more than 35 years of experience in business transactions, real estate, litigation and estate planning. He has worked with manufacturers, international distributors, professional services firms and family-owned businesses. His mission is simple: help clients make money and keep it.
Did you Know? Demand for office space in the Valley is strong; vacancy has declined for seven straight quarters and is at its lowest since 2007. Average Class A space is $35.52 per square foot, and Class B average is $26.28 per square foot, according to CBRE’s Office Market View Q4 2019 report.