The Elements of a market Lease - A Tenant's Perspective

A lease is an business transaction granting use or vocation of real asset while a singular period in exchange for a specified rent. At base law, the lease was traditionally regarded as a conveyance of interest in land, subject to the philosophy of caveat emptor ("let the buyer beware"). The landlord was only required to deliver ownership to the tenant; the tenant, in return, was required to pay rent to the landlord. Davidow v. Inwood North pro Group, 747 S.W. 2d 373, 375 (Tex. 1988). The modern industrial lease, however, is a complex instrument that spells out many aspects of the association in the middle of landlord and tenant, together with tenant's use of the property, services that will be provided by the landlord, allocation of costs connected with maintenance of the leasehold, responsibility for utilities, improvements to the premises, insurance, assignment and subletting, events of default, remedies of the parties, expansion rights, and options to extend the lease term.

Commercial leases can be described in four categories: gross, modified gross, triple net, and absolute net. A gross lease does not need the tenant to reimburse the landlord for any of the expenses that the landlord might incur in performance of the premises. Under a gross lease, the tenant pays base rent and the landlord absorbs all costs for base area maintenance ("Cam"), real asset taxes, landlord's insurance, and other charges connected with the performance and maintenance of the property. A modified gross lease typically requires the tenant to reimburse landlord for "pass through" costs over a stated expense stop or base year. For example, the tenant may be required to reimburse landlord for all Cam over .00 per quadrilateral foot, or alternatively, the tenant may be required to reimburse landlord for all Cam in excess of base year 2005. In most situations, the industrial tenant will be asked to sign a "triple net" lease, which requires the tenant to reimburse landlord for Cam, real estate taxes, and landlord's insurance. The "pass through" costs included in a "triple net" lease can vary, and can comprise added items other than just Cam, taxes, and insurance. Thus, a prospective tenant will be well served to describe a proposed lease with counsel to ensure that tenant understands the nature and type of pass through costs it will be unbelievable to absorb under the lease. Also, in determined circumstances, a landlord may utilize a "net" or "absolute net" lease, which requires the tenant to absorb All costs of maintenance and performance of the property, together with capital expenditures and major repairs. Typically, an absolute net lease is utilized where the tenant is the sole and 100% occupant of the building - for example, a cafeteria or an office building occupied by one tenant.

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Commercial leases can be added described by the type of use connected with the asset - office, retail, warehouse, pad, or "ground". An office lease is generally used in structure intended for non-industrial business use. retail leases are generally utilized for shopping malls and strip centers. storage leases are generally seen for industrial or light industrial uses. Pad or ground leases are often used for cafeteria premises or for premises where the tenant will be responsible for building and maintaining the structure. Texas law does not need a industrial landlord to utilize any exact form of lease, and the type of lease a prospective tenant may be faced with signing will vary by the type of building, intended use of the premises, and preference of the landlord.

The lease's period and base rent are of primary significance to the industrial tenant. Usually, a industrial lease is for a term of 5 to 20 years with fixed escalations in base rent or escalations based on an economic index, like the buyer price index. Also, the tenant may be offered options to extend the lease term or enlarge into adjacent or other areas of the property. Depending on the asset and the landlord, lease term and base rent may be negotiable. As a general rule, the larger the space tenant intends to occupy, the greater the flexibility the landlord will show in negotiating provisions in the lease. However, if a asset enjoys a high occupancy rate, a landlord will be less likely to show leeway in negotiating the economic terms of the lease. Yet, I am reminded of two great adages of the industrial world: (1) everything is negotiable; and (2) if you don't ask, you won't know.

Also, a tenant should take care to read and understand the record of the premises contained in the lease. Most industrial leases are based on "rentable quadrilateral feet", a number which is ordinarily larger than "usable quadrilateral feet". The tenant's rent and responsibility for repayment of pass-throughs (Cam, taxes, insurance, utilities, etc.) are ordinarily based on the rentable quadrilateral feet of the premises. Discrepancies in quadrilateral footage and boundary lines should be resolved prior to performance of the lease, or the tenant could face unforeseen costs or inherent litigation.

Many landlords offer a tenant "build out allowance" as an inducement to lease the premises. These sums, however, do not report "free" money and landlord's cost of the allowance is tied to exact conditions in the lease. For example, if the tenant breaches the lease and abandons the premises prior to the end of the lease term, the tenant may have to repay the build out allowance, along with landlord's other damages. The tenant should make sure it understands when and under what circumstances the build out allowance will be paid.

Additionally, the tenant should understand his "lease commencement date" and "lease expiration date". The lease commencement date may or may not be on the date tenant occupies the premises. Also, the landlord may have promised the tenant a 60 month term but the lease could furnish a fixed expiration date for a term of less than 60 months. Again, careful scrutiny of the lease is required.

In expanding to base rent, the tenant customarily will be asked to pay "additional rent", which constitutes pass-throughs (Cam, taxes, and insurance) and any other charges that landlord might deem to comprise in your lease. Cam, pass-throughs, and other charges reimbursable under the lease are the primary source of tension in the modern industrial landlord/tenant relationship. The tenant wants the certainty of knowing what his rent and charges are going to be on a monthly and every year basis. The landlord wants security from unexpected rises in taxes or the costs of providing services to the property. The key: read your lease and Know every payment you will be faced with once your tenancy begins.

In the retail context, in expanding to base and added rent, the prospective tenant is often asked to pay landlord a ration of tenant's gross sales on a monthly or quarterly basis. The landlord ordinarily justifies these charges as a indispensable component of compensating landlord for providing a vibrant mall or strip town for tenant to guide business. In most commercially viable retail property, cost of ration rent is unavoidable. However, the "breakpoint" and number of ration rent should be negotiated.

Another area of significance to the industrial tenant is the services that will be provided by landlord and repayment of landlord for those services. Similarly, tenant should understand those services that landlord will not provide, because tenant will be responsible for those services as an out of pocket expense. Further, unless the lease is gross, the landlord should identify the components that constitute the costs of operating the "common area" for which it seeks repayment through tenant's monthly Cam charges. The definition of Cam varies from lease to lease based on landlord preference, the type of property, and the negotiations of the parties. If a gross lease is not available, the tenant should negotiate the items to be included in Cam, the items that will not be included in Cam, and an every year cap or limit on expenses that landlord may exertion to pass through to tenant.

The landlord will ordinarily want repayment for tenant's share of real asset taxes and landlord's insurance costs. The lease should furnish a definition of "tenant's share" or "tenant's proportionate share" based on the quadrilateral footage tenant will occupy versus the quadrilateral footage of the building. The industrial tenant must have a full comprehension of all these provisions prior to signing the lease.

Key provisions in the industrial lease define the events of tenant's default and landlord's remedies for tenant's default. The tenant should also address what constitutes landlord's default and tenant's remedies. Tenant default provisions are ordinarily defined by two categories: (1) economic defaults; and, (2) non-economic defaults. Economic default provisions deal with failure to pay rent, failure to pay for charges assessed under the lease, failure to pay taxes when due, etc. Non-economic default provisions typically refer to other provisions in the lease - use of the property, hours of operation, or failure to furnish services required by tenant under the lease. It is indispensable that the tenant have a full comprehension of (1) what constitutes an event of default; (2) tenant's right to cure, if any; and (3) landlord's remedies for tenant's default.

Assignment and subletting provisions are also foremost to the tenant. Texas law prohibits subletting without the consent of the landlord. Tex. Prop. Code §91.005 (2005). If the tenant desires to sell the business, merge with an additional one business, or convert the entity under which it conducts business, lease provisions regarding assignment and subletting will come into play. Many leases furnish that the tenant may assign or sublet the premises with the consent of the landlord, which consent "shall not be unreasonably withheld". Obviously, the more flexibility the tenant has in its assignment and subletting provisions, the more flexibility the tenant will have in the guide and prospective sale of its business.

The modern industrial lease will ordinarily address landlord and tenant's responsibility for accidents and personal injury, casualty, damage to the building, and eminent domain. These provisions vary by jurisdiction, landlord, building, tenant, and use of the property. The tenant should describe these provisions thoroughly with counsel to see if they meet the tenant's risk expectations with respect to the property.

The tenant may also seek options to extend the term of the lease. The option clause should state the number of options ready to the tenant, the term of each option, the rent for each option period or the formula for determining rent for each option period, and the formula tenant will utilize to practice the option. Also, the tenant may want to comprise expansion ownership connected with the premises, which can comprise a "right of first refusal", "right of first offer", or a general expansion right granted with respect to determined space or areas in the building or property.

In sum, the industrial lease will address, in great detail, the aspects of the association in the middle of landlord and tenant, and will vary by use, location, landlord preference, tenant bargaining power, and jurisdiction. In Texas, there are very few statutory regulations governing the landlord/tenant relationship, and most characteristics of that association will be defined by contract. There is no "standard" form of industrial lease and the provisions that can be included in the lease will be thought about by the creativity of the parties and their counsel. As with any other contract, the tenant should Know What It Is Signing. The consequences of signing a "bad lease" can comprise unforeseen expenses and business failure.

The Elements of a market Lease - A Tenant's Perspective