Whether you are the landlord or the tenant, the following issues should be understood and addressed at the lease drafting stage.
Besides monthly base rent, typically, a tenant is responsible for its pro-rata share of common area expenses such as maintenance, insurance, property taxes, and other expenses common to all tenants at a given property. Common area expenses are not fixed. To gauge these expenses it is beneficial for a tenant to ask the landlord for historical pass through expenses. In responding to tenant’s inquiry, the landlord should provide the most accurate information and communicate in writing that historical pass through expenses are estimates and are not binding. As with many items in a lease, the items included in calculating pass through expenses are determined by language in the lease. Landlords and tenants should be mindful in negotiating pass through expenses and should consult with their respective real estate professionals as to what is industry standard in the particular geographical area.
Options to Extend the Term
Options to extend the length of the lease term are typically included in most leases and benefit the tenant. The lease option language will provide that the tenant may exercise its right to extend the term of the lease for a specific period of time based on a fixed rent rate, fair market rent rate, or some other rent calculation. Landlords and tenants should be mindful in negotiating the lease as to whether the option is personal to the original tenant or succeeds to an assignee or subtenant. In my experience, only about 5% of options to extend are exercised, instead most lease extensions are in the form of an amendment extending the term of a lease and adjusting other lease terms.
Estoppel Certificates and SNDAs
Tenant estoppel certificates and subordination and non-disturbance agreements (SNDAs) are typically required for financing and/or the sale of the property wherein the leased premises are located. The tenant estoppel certificate and SNDA are generally part of the lease obligations and sometimes a form of the tenant estoppel certificate and SNDA is attached to the lease.
A tenant estoppel certificate is a verification by the tenant describing the term of the lease, the rent rate, security deposit amount, whether there is or has been a default, and any available lease options. An SNDA is: (i) an affirmation that the lease is subordinate and will be subordinate to any security financing, (ii) the tenant’s agreement to recognize the lender or successor owner as its landlord, and (iii) an averment that the tenant will not be disturbed by a lender or successor owner of the property wherein the leased premises are located. In negotiating the lease, tenants need to be aware of the obligation and the time involved in reviewing, executing, and returning to the landlord the estoppel certificate and the SNDA. The tenant should make sure the lease language allows enough time to process landlord’s request. The landlord needs to be mindful that its lender or prospective buyer may require the tenant estoppel certificate and SNDA, and therefore, should make sure the lease contains the obligation for the tenant to execute and return the estoppel certificate and SNDA.
The above issues are a sampling that should be addressed at the negotiation stage of the lease. There are many other important provisions in a lease, but based on the current trend, the above issues are hot button.