With Halloween around the corner, houses are being decorated to spook trick-or-treaters and scary movies are playing on TV - it is the season for fright and horror!
There are also several things in a commercial lease that can be scary: clauses that make landlords and tenants pull the covers over their head and just wish it was over. Here, we will highlight some of these issues.
Financial Strength of Tenant/Landlord: If you are only dealing with AAA+ companies, you can skip this one. Otherwise, the financial strength of the other party is the first stop light in any deal. If either party is concerned about the other’s ability to perform their obligations, they may be afraid to proceed with a lease.
The Unknown of Operating Expenses: Operating expenses (real estate taxes, insurance and common area maintenance) are variable year to year. In a triple net lease, the tenant is responsible for paying their pro rata share of operating expenses on a monthly basis. If these monthly payments differ from the actual yearly expenses, the parties must reconcile this difference at the end of the year. This unknown can be frightening for both the landlord and tenant.
Taxes: Taxes can be concerning for both landlords and tenants. Landlords want to pass 100% of the taxes through to the tenant regardless of any increases. Tenants want to limit their exposure as much as possible in case of a major tax increase. Most landlords want to leave the option of selling the property on the table and any cap on taxes may hinder their ability to do so.
HVAC: Landlords want their tenant to be responsible for all HVAC expenses, including maintenance and repairs. However, the tenant has no idea how the HVAC units have previously been maintained and are afraid to assume this responsibility. On the other hand, the landlord is concerned about the condition in which the units will be returned in the case that the tenant abuses them.
Parking Lot/Truck Court: Tenants fear the day they execute the lease that the landlord is going to sign a contract to have the entire parking area (lot or truck court) replaced. The landlord’s position is that the tenant’s cars and more impactful trucks are going to be causing a lot of damage to the parking areas. Depending on who is responsible for paying, this can be a scary issue.
Renewals: The tenant wants the renewal option with a stated lease rate which gives them the security of knowing they can stay in their cozy confines for an additional period of time if they want. This protects them from being exposed to the sometimes cruel market. The landlord does not want to commit to giving an option now because they fear the market could change in their favor.
These are just a few issues that often come up in lease negotiations that tend to be scary.
In reality, these are just points of contention that have to be addressed with a little negotiation. Make sure you have real estate representation and consult your attorney, or your deal can quickly go from “It’s the Great Pumpkin, Charlie Brown” to “A Nightmare on Elm Street.”