CREJ - Property Management Quarterly - February 2015
One of my favorite colloquialisms that I apply often to the world of property management stems from a prison term declaration of,- “You know it’s a Thursday when …” (Call me if you want me to explain it in terms you’ll never, ever forget.) For example, you know it’s a Thursday when you receive a call from a tenant or an owner asking you, as property manager, this taunting question: “Have you read the lease?” This simple question cuts right to the quick and clearly separates the “wheat” from the “chaff,” or in other words, great property managers from the mediocre/soon-to-be unemployed property managers. You know it’s a Thursday when you receive a call from a tenant commenting on recent construction occurring in the space adjacent to his offices. “Have you read my lease, specifically paragraph 17, which sets forth my first right of refusal on this space?” I am so allergic to these devastating lease provisions that seem to lurk in the lease document and often are forgotten. They have “teeth,” which can cause much financial hardship for all parties concerned. A great property manager would have personally abstracted all of the leases in the building, noting any first rights, options and early termination rights, and would have satisfied any notice requirement. You know it’s a Thursday when you receive written notice from a tenant exercising his “early right to terminate” upon 30 days’ written notice, for his current lease, which expires June 2019. Regardless that this “right” was hidden and buried in the Miscellaneous Provisions of the lease, specifically 37z, a great property manager would have thoroughly read and abstracted the lease, noting this early out option, and advised the landlord, brokers, attorneys and even their mothers of this terrifying provision. Missing this provision during due diligence or transitioning the building from another property management company will cause early heart failure! You know it’s a Thursday when you receive written notice from a tenant via his attorney that the “operating expense reconciliations” for the past three years were not calculated correctly. They are now making a demand for reimbursement for all past year’s overpayments. A great property manager would never rely on the calculations made by previous property managers. Rather, he will carefully analyze and read the lease provisions regarding operating expenses and make his own determination as to the proper and accurate way to reconcile. And if there is any question, whatsoever, regarding the proper calculation, great property managers will seek other competent professionals to read, understand and verify the correct way to calculate this provision. There must be consistency and a meeting of the minds between all the parties to the lease. Sadly, what is of greater concern is that in many buildings there are several different lease forms, rather than just one. These forms are often drafted by who knows, and each contains completely different operating expense provisions. It is an absolute nightmare. I am also completely allergic to “caps” on operating expense provisions. It’s amazing to see the audacity of anyone wanting to differentiate between controllable and uncontrollable expenses and then throwing a cap in the mix. In my opinion, caps should be banned forever!
• First right of refusal • Early right to terminate • Options to renew • Caps on operating expenses • Notification rights • Maintenance responsibilities • Constructive eviction You know it’s a dreadful Thursday when you receive a letter from the attorney for the “guarantor” notifying you that his client was not properly notified of previous lease amendments and is therefore no longer bound as guarantor under the lease. A great property manager and owner’s legal counsel would have properly notified the guarantor and all parties of concern, with each lease amendment, thus eliminating this costly error, aka heart failure. You definitely know it’s a Thursday when your owner calls your attention to the invoice for heating, ventilating and air-conditioning maintenance that you approved, which is actually the tenant’s responsibility under the lease. There is an awkward silence that is deafening when asked whether the manager had read the lease before stepping into the shoes of the tenant and assuming the tenant's liability. And again, many buildings have many different lease forms in place. In these situations, there can be one instance in which the landlord is responsible, and in another, the tenant is responsible and accountable for the maintenance and repairs of the HVAC. You know it’s the last Thursday of the month when you receive written notice from your largest tenant’s attorney claiming “constructive eviction,” and that the tenant is in process of vacating the premises, with four years and six months remaining on his lease. Can there possibly be a worse scenario? I don’t think so. The doctrine of constructive eviction strikes fear in every great property manager. I willingly share this wise counsel received many years ago from a trusted attorney: He who reads the lease wins. It is such a short phrase, but such wise counsel. I have been running on this for the past 25 years. And I have never forgotten it. In fact, I am contemplating having the following words carved on my tombstone: “SSS Read the Lease[s]!” There are no shortcuts nor an alternative path around reading every lease, and raising and noting “red flags” regarding any provision that is unclear or subject to various interpretations. Great property managers will readily seek competent assistance from other real estate professionals to identify and determine the correct interpretation. And when there is a misunderstanding, it is wise to encourage the owner to have his legal counsel draft a lease amendment to clear up any misunderstanding between the parties. This is a great business practice to which all great property managers should adhere. And now the final question that all great property managers need to ask themselves: Now that I have read the lease[s], do I really understand what each lease provision means and conveys? I will answer for myself that often I do not know what certain provisions are trying to articulate and set forth. Therefore, I seek competent legal and accounting assistance to instruct me, which adds to my knowledge base. Then I can proceed with the tenant and owner to reconcile any lease issue so that both parties are satisfied and happy, feeling that they are being treated fairly and competently, pursuant to the lease. Now that’s livin’ the dream!