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The Importance of a Commercial Lease Review -Part 1

The lease agreement is the binding agreement between the Lessor and Lessee. In most leases, the Lessor-Lessee relationship is known as the Landlord-Tenant relationship.  Leases are common in almost every industry as business owners often lease space to operate his or her business. The lease agreement details the terms both parties are agreeing to and includes the consequences if either party is to default, or breach, any of the material terms. It is important for your lease to be reviewed by an experienced attorney whether you are the Lessor/Landlord or the Lessee/Tenant. We put ourselves in our clients’ shoes to review each portion of the lease agreements to determine how it affects our client.  There are many terms that can be Lessor/Landlord friendly and Lessee-Tenant friendly. A few of the items we look for are below.

Is the lease a gross lease or a triple-Net lease (also known as “NNN” lease)?

A gross lease is a lease where the Lessee/Tenant pays a set amount of money or “gross” amount and the Lessor/Landlord covers all expenses, including real estate taxes, utilities, common area maintenance, etc. A triple-Net lease is a lease where the Lessee/Tenant pays a base rent to the Lessor/Landlord, which is often based on a dollar amount per square foot leased. However, in addition to the base rent, the Lessee/Tenant must pay its proportionate share of triple-Net expenses. These expenses include taxes, insurances, and maintenance expenses incurred from the use of Lessor/Landlord’s property.

Are there renewal options and how are they exercised?

A renewal option is an option of the Lessee/Tenant to renew, or extend, the lease for an additional term and outlines the terms of the extension. The Lessor/Landlord cannot exercise the option as it’s only available if the Lessee/Landlord chooses to exercise it. A renewal option gives the Lessee/Tenant comfort in knowing it can renew the lease for a predetermined term at either a set or market rate. The option gives the Lessee/Tenant the opportunity to evaluate its business and determine whether it wants to continue its relationship with the Lessor/Lessee for an additional term. The renewal option also gives the Lessor/Landlord the opportunity to extend its relationship with Lessee/Tenant and incentivizes the Lessor and Lessee to act in good faith through the initial term so it can continue its relationship.

Is the Lessee/Tenant personally liable for the cost of the lease?

A personal guarantee is a promise by an individual to repay the debt or outstanding expense owed to another party. Typically, this guarantee is issued by an individual that is a member or shareholder of the Lessee/Tenant entity. A personal guarantee is often required by the Lessor/Landlord to ensure there is an individual responsible for the contracted obligation owed to Lessor/Landlord. The personal guarantee is usually attached as an exhibit to the lease agreement and details the term in which the guarantee is valid, the extent to which the individual is guaranteeing, and the manner in which the Lessor/Landlord may collect if the Lessee/Tenant is in default of the lease agreement.

A lease agreement is often very long and important considerations are frequently overlooked. A lease review allows us to make our client is aware of the full amount they will be receiving each month or are liable to pay each month, the amount is fair and not unilaterally controlled by either party, and the terms are consistent with what has been negotiated between the parties. This article will be periodically updated to include additional considerations. If you have any questions or have a commercial lease agreement that you would like us to review, please contact our Business Transaction team at Patel Law Group.

Krishan Patel
kpatel@patellegal.com.

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