Five clauses to look out for in a lease
Writing a multiyear contract can be a great opportunity for a landlord or tenant to shield themselves from risk and open up additional upside potential. If you’re looking to revise the form lease for your property, or redlining a contract for a space with a new landlord, make sure to check these clauses:
Exiting a lease early is unlikely to be painless, the best option for lessees is usually to build in generous sublease terms that give them the ability to put the remainder of their term into someone else’s hand’s, preferably even making a little extra to boot. For a landlord, this is money that should be in your pocket. In addition to making sure assignment and sublease does not open you to liability, check to make sure you establish profit sharing terms for any amount above the original rent.
Tenants should always look to ensure they are not facing direct competition in the space they occupy. The best way to do so is to create highly explicit exclusivity conditions that cover as wide an area as possible. Ideally, they’ll be fully prohibitive of leasing to any business with the same permitted use, an excellent alternative to bake in reductions to base rent commensurate, or greater than, the potential loss ensuing from competition in the same business.
Financial statement conditions
Virtually every retail store, from a pretzel kiosk to a department store, will be sharing a percentage of revenue as part of the conditions of the lease. The size and timing of revenue share depends on how you measure it, and this is why financial statement clauses are so valuable. For a landlord, we’d recommend trying to make statements as incremental as possible, so you can easily look back and audit to make sure you’ve received the full amount you should be getting from these agreements.
In the era of #retailpocalypse, you never know when a mall will flip from thriving to full on ghost town. This is where co-tenancy comes in. For many traditional leases, we’ve seen that there was an expected floor on the number of business that would close, and therefore that the terms defining a default in co-tenancy could be as liberal as a single anchor tenant closing. After Sears, the risk here should be apparent to anyone in retail. For landlords, consider making co-tenancy contingent less on anchor tenants than a occupancy percentage, which will allow you to quickly and easily bring in additional, smaller tenants should some stores look threatened. For Lessees, make sure to identify the stores that provide the highest value foot traffic, and get all of them listed in the co-tenancy terms.
Common Area and Utilities
Gross leases seem on the road to extinction, in most cases a contract will include associated charges to the lessee for the services they use and maintenance of the facilities. Since the landlord is unlikely to understate costs, it’s important for a lessee to exercise a good degree of autonomy in bill payment. Those leases where the tenant pays directly, rather then through the landlord, are well situated to understand their operating expenses better and will be able to perform a more fully considered analysis of their costs and profits.
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