Know Your Real Estate Lease in Detail

Published on Friday, 25 October 2013 07:10:14    Written by Marc
Unless your company or organization is specialised in real estate or is a large company that has a real estate department and a legal team close by or even in-house, most companies that do manage real estate rely on a mix of internal and external people. In many cases, the people that take care of real estate also have other hats on and try to balance their time between managing the company’s real estate needs and other work they have. If you are in this situation, you are not alone.

Know your leaseBecause of this, while the main transactions get appropriate level of attention, smaller transactions may not. I have seen so many real estate leases with clauses that simply make no sense for one party or another that I came to the conclusion years ago that many people do not know half of what is in their leases, unless it is one of their major ones. At the very least, they do not know the details.

Consultants, Brokers, and Legal Advisers

People usually will know how much they pay, the term of the lease and a few general clauses, often the most important ones. In addition, the worst part is that many of these leases were signed with the help of large international brokerage firms, which obviously did not read the lease either. I was lucky to have worked in a number of companies that made acquisitions. That gave me the chance to review hundreds of leases that were signed by the companies we were acquiring. It also showed me never to blindly rely on external so-called experts or brokers for everything included in the lease.

On the other hand, I understand that the companies signing the leases are the ones responsible for what they sign, not their brokers, not their consultants. Once the broker brings a prospect and helps for the transactions, nothing can replace doing your own homework. Better yet, get legal advice to help you draft or review the lease. Moreover, unless your legal adviser is a specialist in real estate leases, do yourself a favour to get someone in your company to read the lease completely. It may sound trivial, but after seeing thousands of clauses in leases that were clearly to the advantage of the landlord, and structured in an unfair way against the tenant, I do think that way too many people simply did not take the time to read every one of the clauses that compose the leases.

Reading is Important; however, clearly understanding what the clause is about is crucial.

While some clauses can be very technical, others are straightforward. If a clause mentions ‘the Tenant will not be allowed to sublease the space’ for example, that should raise a flag. Why would you, as a tenant, accept something like that? Same if you see a clause that says something like, “at the end of the lease, the Landlord will determine what restoration work the Tenant will do, at the sole discretion of the Landlord.” That should raise more than just an eyebrow and make you want to clarify the parameters of what exactly the landlord does mean here, words as; “sole discretion of the Landlord” can mean a ton of things.

I wrote a blog a while ago on a lease we found where landlord could ask the tenant to restore a site to how it was over 30 years ago. The lease mentioned that the tenant would restore the site to its original condition. Now that may have made sense in 1978, but after 30 years of renewing the lease repeatedly you would think that someone questioned that original clause at some point. Nevertheless, many years later when the tenant does not want to renew the lease, he/she finds that there is a huge cost to pay to restore the site. In addition, these costs often come as a pure surprise since nobody even budgeted for these situations.

A small detail can be costly.

Again, although the text may be somewhat technical, for people in the real estate managing business, the clauses are normally relatively standard, but it is the little details that are often overlooked. For example, about two years ago we were trying to get a tenant from a building to come to our site as a subtenant. We figured that we had a great site and as sub landlords, we were willing to offer very competitive terms. Our future subtenant was also willing to do a deal with us so he sent a letter to his landlord to inform him that he was exercising his right to cancel his lease. There was a clause in his lease that gave him the right to cancel his lease on a certain date, which was three years into a seven-year lease.

Unfortunately, his landlord got wind that his tenant was interested in moving to our site, so when he received the notice letter from the tenant, which was send only one day before the latest day that the notice could be sent according to the lease. The landlord waited one day and responded to the tenant that the notice was invalid because it was sent by regular mail and the lease specified clearly that all notices needed to be sent by registered mail. Considering this notice was for the tenant to be able to cancel his lease, having it being invalidated, and the tenant was now locked into his lease for the remaining four years to go.

Obviously, the relationship between the tenant and hos landlord from that day one was probably not the best and we lost a good opportunity to get a subtenant. All this because of the clause that mentioned how noticed should be sent. Of course, had the tenant simply read in details that clause, he would not have done that mistake. That and sending the notice a day before the last possible day did not help (another reason to try always to send notices a few days in advance, in case of something happening).

I do not know how many clauses I read about 10 times, many aloud to really understand what it meant and often sitting next to a legal adviser to get a second opinion. However, when you understand that small details can something cost an arm and a leg if not understood properly, you take the time. After all, you might be stuck with that lease for a number of years so might as well have something you are ok.