Les See was ready to move his business out of his garage and into a real commercial space. Les found a vacant storefront and contacted the owner, Lana Lord, about leasing the space. Lana told Les the monthly rent amount, which Les thought seemed reasonable, and promised to send out a lease for Les’s signature. Les received a long, detailed “triple net” lease form and, as he started to read it, his eyes glazed over. Les knew that he needed some help and turned to his friend and advisor, I. Nuit, for counsel.
Mr. Nuit confirmed to Les that there was much more than rent to consider before leasing the storefront. The provisions of a triple net lease allocate most of the costs and responsibilities regarding the leased premises to the tenant. Les would have to consider the basic lease or “money” terms, together with a number of other provisions affecting the tenant’s rights and obligations.
Mr. Nuit provided Les See with the following Do’s and Don’ts to help him through the major provisions of Lana Lord’s lease:
Basic Lease Terms. DO analyze the rent for the entire term—consider any built-in annual increases, percentage rent, and additional rent for promotion and advertising. DO determine whether the premises will be adequate for your business and its projected growth during the term—you want room to grow but not space in excess of your projected needs. DON’T forget to negotiate options to extend the term and possibly options to expand into adjoining space. If your business is in a corporation or limited liability company, DO consider whether you are willing to undertake personal liability for some or all of the lease obligations—most landlords require personal guaranties for new and small businesses.
Tenant Improvements. DO determine whether the landlord will provide tenant improvements at its sole cost or whether an allowance will be provided to you to apply against your costs of improvements. DON’T enter into a lease providing a tenant improvement allowance until you have final space plans and estimates for the work—you must assure that the desired improvements can be completed with the available funds.DO seek to have your rent payments commence after your tenant improvements are complete—paying rent is much easier to do when your doors are open for business.
Common Area Maintenance ("CAM") or Operating Expenses. In virtually all multi-tenant buildings and centers, certain expenses relating to the operation of the property are allocated among the tenants. DO confirm the percentage allocation of CAM charges to your premises, and review the types of CAM charges covered by the lease and the history of the building’s CAM charges for prior years. Structural repairs, capital improvements and improvements to comply with law are generally allocated to the landlord and should be excluded from CAM charges. DO recognize that landlord’s collect estimated CAM charges throughout the year and, if the estimate is too low, you will be liable for the deficiency in the following year. DON’T accept a provision that makes the landlord’s determination of CAM charges final—require the landlord to provide as detailed a statement of CAM charges as you can get, and reserve the right to audit the landlord’s charges and to review the landlord’s calculations.
Real Property Taxes. Property taxes allocable to the premises are the liability of the tenant. DO review the definition of taxes and confirm which taxes and/or assessments are to be included. Income, franchise and estate taxes, and assessments extending beyond the term of the lease should be excluded from the tax allocation to tenants. DON’T forget that your property tax liability may increase dramatically if the landlord sells the property—a sale is a Prop. 13 change in ownership which triggers a reassessment. Landlord’s will sometimes agree to cap the tenant’s obligation for tax reassessment increases.
Les See was surprised that there were so many provisions of the lease that required him to make payments to Lana Lord, and that those amounts could all increase over the term of the lease. I. Nuit could see that Les was starting to grasp the responsibilities of a tenant under a triple net lease, but cautioned him that there are still more tenant obligations for him to consider before signing the lease.
Repairs and Maintenance. DO read these provisions carefully—if the tenant is responsible for repairs and maintenance, it may significantly increase the costs to lease the premises, particularly in older buildings. DON’T accept responsibility for any structural elements or building systems located in structural elements—these should be landlord responsibilities and they should not be included in your CAM charges.
Compliance with Laws. DO determine whether the burden of maintaining the premises in compliance with laws is placed on you or the landlord. DO consider potential compliance costs in your total costs of leasing the Premises and, in particular, check the lease to determine if the premises have been inspected by a Certified Access Specialist (CASp). DON’T accept responsibility for compliance with laws unless the landlord warrants at the outset that the building is in compliance with all presently existing laws. DON’T accept responsibility for compliance with future laws unless it is limited to items required solely due to your particular use of the premises.
Assignment and Subletting. DO consider an exit strategy (i.e., to assign or sublet) if you must move out of the premises during the term. DO be aware that, upon an assignment or sublet, the landlord may be entitled to terminate the lease or to keep all rents in excess of the tenant’s fixed rent obligation—ask to retain a portion of any "excess" rent. DON’T forget that, unless the landlord provides a release, you continue to be responsible for the rent and other charges due from the assignee or subtenant for the balance of the term, including potential options to extend.
Tenant Remedies. DO attempt to preserve your right to make repairs for which the landlord is responsible and to deduct the costs from your rent. In many leases, the landlord requires a waiver of this right. DO negotiate abatement and termination rights—abatement rights allow the tenant to reduce the amount of rent if the landlord fails to remedy items that interfere with the use of the premises, and termination rights may give the tenant an option, under certain circumstances (such as partial destruction of the premises), to vacate the entire premises without further obligation.
Termination, Relocation or Expansion Rights. DO resist provisions giving the landlord termination, relocation or expansion rights—those provisions allow the landlord to take back all or part of your premises or to move you to other space in the building or center. DO make certain that, if you accept a relocation clause, you can only be relocated to a comparable location and position and that the landlord has to pay for all expenses related to the relocation to and improvement of the new space.
Damage and Destruction. To the extent that the premises are damaged by some casualty, your rent may be reduced or abated until repaired. DO confirm that the abatement provision is fair—if the damaged area is in your entry way or other critical area, a reduction based on the proportion of the square footage that is damaged does not adequately cover your loss. DO reserve the right to terminate the lease if the premises cannot be restored to a fully usable condition within a reasonable period of time. DON’T agree to resume paying full rent upon the landlord’s completion of its repairs—you must also have the opportunity to complete repairs of your own improvements.
I. Nuit further advised Les See that he would likely not be able to convince Lana Lord to make a lot of changes in the lease. Les realized that he needed to consider much more than just the location of the premises and the monthly rent in deciding to enter into a lease. Before moving out of the garage, Les had some homework to do: understanding the many obligations and responsibilities of a tenant and the costs and demands that they would place on his business.