CREJ - Property Management Quarterly - January 2018
It is so important that property managers have a thorough working knowledge of their respective leases, understand each provision, and know the effects and why the lease provision exists. As the lease document is such an important component in establishing the value of the property, each lease must be carefully negotiated to get the best rents and terms for the property. From a property management viewpoint, a well-negotiated lease clearly establishes the rights and obligations for both parties and should minimize misunderstandings and disputes in the future. Following is a discussion with Amanda Halstead about the best way to protect your property’s interests in lease negotiations. • Sessions: Which lease provisions are most heavily negotiated between the parties? • Halstead: The list is endless. That said, commencement dates versus rent commencement dates, the scope and timing of any landlord improvements, tenant improvement allowances and abated rent seem to be the primary focus of most tenants. A well-represented tenant also likely will push back on landlord liens, relocation provisions and radius restrictions, and often request a laundry list of exclusions from operating expenses. Permissible capital expenditures that may be passed through to a tenant and the methodology for calculating the tenant’s share thereof seem to be of primary concern. A landlord also should expect a tenant to request that any changes in use or assignments or subleases be approved in a landlord’s “reasonable discretion” as opposed to “sole discretion,” as these items can be central to a defaulting tenant’s exit strategy. • Sessions: What lease provisions come back to “bite” the owner? • Halstead: There really are no specific provisions that I can recall that come back to “bite” the owner, but I can tell you that an ambiguous provision is no friend to a landlord. Ambiguity only leads to litigation and additional expense. An ounce of prevention is worth a pound of cure. In order to avoid ambiguity, it is particularly important to have your attorney involved on deal specific provisions like caps on operating expenses, expansion rights and early termination rights. • Sessions: Are you an advocate of capping operating expenses? • Halstead: In life, no one has a crystal ball. That said, as a landlord you cannot predict with certainty what expenses will be incurred from year to year. With that in mind, any cap on operating expenses attributable to a tenant is a source of potential risk for a landlord and should be avoided where possible. There may, however, be circumstances where a landlord is willing to take on that risk in order to fill a space that has been vacant for an extended period of time or in order to put a strong tenant in place. If a landlord agrees to a cap on operating expenses, language can be incorporated in an effort to limit the landlord’s exposure. For example, language indicating that the cap will not apply to uncontrollable expenses such as taxes, insurance, utilities, snow removal or other expenses that vary significantly year to year might be incorporated into the lease. • Sessions: Are you seeing a trend of owners offering concessions? If so, what types of concessions? • Halstead: Concessions vary widely from property to property and depend greatly on market conditions. The most typical concessions I come across are improvement allowances and abated rents. Currently, I am seeing both being offered by landlords in the Denver metro area. Abated rents often are provided to new businesses to give them a chance to complete improvements, open for business and generate an income stream before rents are due and payable. A landlord should, however, be careful not to “put a tenant into business.” In other words, it’s not wise for a landlord to fund the startup of a new business by fully funding improvements and abating rents. In my experience, the likelihood of a successful tenant is stronger where that tenant invested in his own business at the outset, thereby assuming some monetary risk. • Sessions: Are you an advocate of options and first right of refusals? • Halstead: As a general rule, in the legal world, an attorney’s most likely response to any legal question is “it depends”; however, that’s not the case with respect to first rights of refusal. My primary concern over first rights of refusal to purchase or lease additional premises is that the landlord may forget or overlook a tenant’s rights, sell or lease a property, and find himself exposed to a claim for damages. Moreover, the delays associated with the time required for a landlord to provide notice to the tenant of the terms of a prospective lease or sale and await the tenant’s response can put a chill on a prospective sale or lease to a third party. As for options to extend a lease term, there are pros and cons. An option to extend can be quite valuable to a tenant who is making a significant initial capital investment into a space or trying to build the goodwill of her business. An option to extend can be equally valuable to a landlord who is able to avoid any period of vacancy, paying commissions or improvement costs in connection with a new tenant. If the business terms of the extension are agreed upon in advance, a landlord may have missed an opportunity to obtain rents in line with potentially more favorable current market conditions. Where the business terms of the extension are to be agreed upon at a later date, the parties might incur costs and expenses in negotiating, determining and litigating those terms. At the end of the day, a landlord and tenant can, in most cases, find their way to mutually agreeable extension terms.