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Lease, Terms, Conditions and Definitions

The following information contains excerpts from the book Site Smart, authored by Craig Melby and Jane Utzman and published by P. T. Publications, West Palm Beach, FL.

PT Publications can be reached at 800-272-4335.

FULL SERVICE LEASE Lease used almost exclusively for multi-tenant office buildings, a full såΩervice lease is a situation where everything is included in the rent. The landlord pays all of the property’s operating expenses including maintenance, taxes and insurance. In this type of lease the landlord typically provides the following services:

  • Utilities including water, electricity, heat and air
  • Janitorial services
  • Maintenance services
  • Security services

Note: When using a Full Service Lease in a typical multi-story office building, the Tenant will be introduced to the concept of Load Factors.

A “Load Factor” becomes necessary when the Tenant uses a certain square footage inside their offices, but also shares in the hallways, bathrooms, elevators, lobby, etc. Therefore, a calculation is done to determine how much of the building’s space is devoted to these common areas, and that “Load Factor” is added in to the Tenant’s square footage. In other words, if twenty percent of the building is devoted to common areas, then twenty percent more footage is added to the Tenant’s “usable” area.
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GROSS LEASE In this type of lease the tenant pays the landlord a gross amount for rent, plus sales tax where applicable. The landlord then pays the property's operating expenses such as property taxes, insurance, management or maintenance costs from the income he receives. The Tenant may be responsible for electric, telephone, and possibly water & sewer charges depending on the verbiage of the lease document. This type of lease is more common for office users or in older buildings where utilities may not be separately metered.

With some gross leases, the landlord may put an expense stop provision in the lease. In this type of clause the tenant pays the excess over a specified ceiling on operating costs. For example, the owner of an office building may require tenants to pay for heating and air conditioning if costs exceed $1.25 per square foot as well as any increases in taxes over the base year.
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NET LEASE  Most common with today's commercial properties, the Net Lease directs the tenant to pay the landlord a “Base Rent” which is net of property expenses, PLUS an additional amount for tenant's share of the property's expenses such as property taxes, insurance, common area maintenance (C.A.M.), management, etc.

Many times this is referred to as a "triple net" lease in reference to base rent being "net" of: ¹· Property taxes ²· Insurance ³· Common Area Maintenance.
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NEGOTIATED LEASE TERMS The incentives offered by a landlord depend on the softness of the rental market as well as the financial strength of the tenant. Landlords will only offer incentives when absolutely necessary. As the rental market gets stronger and more space is absorbed, incentives will tend to decrease.
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RENTAL RATE Negotiating the best possible rental rate is probably the single most important item to most Tenants and can be one of the easiest assuming the proper research is done!

  1. What do other tenants in this center pay?
  2. What was the rent in the last lease that was done?
  3. What is the asking rental rate for other similar centers in the area?

The very best protection for the Tenant in securing the best rental rate is to do the homework. Know what other centers charge and what other Tenants pay in this center as well as competing centers.
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YEARLY RENT ADJUSTMENTS. During the initial lease term, the landlord may offer a fixed rate over the term of the lease or offer yearly adjustments. Rent can either be adjusted by a dollar amount, a fixed percentage or tied to a fixed index such as the Consumer Price Index(CPI).
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TERM The length of the lease is usually a very important issue. Some Landlords may want a long lease for financial stability, others may prefer a short lease because of hopes that rental rates may rise in the short term future. Tenants may want a short lease in case of a decline in their business, or if their business becomes more profitable and they need more space for expansion purposes. Other tenants may want a LONGER term lease because of their large investment in tenant improvements, amount of money spent advertising a new location, as well as moving costs if their lease isn’t renewed.

Depending on what the landlord wants, the length of the lease will effect all other concessions offered.
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"KICK-OUT" CLAUSE Also known as a Lease Termination Clause, some Tenants may want to build-in an option which would allow them to pay the Landlord a penalty fee and cancel the lease. A Tenant may anticipate future expansion or fear that this location may not produce profitable results for the business. The tenant may also fear that the anchor store may leave, thus significantly reducing traffic flow. Without this clause, the landlord could sue the tenant for all future rents due for the entire length of the lease. This clause can make it less costly for the Tenant, who could then pay a set penalty fee and move out.
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TENANT BUILD OUT ALLOWANCE Commonly referred to as “Tenant Improvement Allowance” (“T.I. Allowance”), this is the amount of funding the Landlord will give to the tenant to reimburse the tenant's cost of finishing the interior improvements.

NOTE: Many times the Landlord will refer to providing the Tenant with a “Vanilla Shell” or “Vanilla Box”. Since each landlord defines the meaning of a vanilla box differently, the tenant may want the definition of the vanilla box spelled out in writing. Generally speaking however, the term “vanilla shell” means the Landlord is providing the space with four walls ready for paint, concrete floor, ceiling, lighting, bathroom, standard electrical, plumbing and HVAC systems. This would NOT include floor covering, wall covering or any interior partitions.
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FREE RENT By offering free rent, the landlord can attract more tenants to the building, especially start-up businesses that need the rent abatement for the first few months of their operation. The amount of free rent offered depends on current market conditions, the vacancy rate in the subject building, and the financial strength of the tenant. The amount of free rent can range from zero to 3 months per year of lease length (three year lease equals nine months of free rent).

The tenant can use the free rent "up-front" in the first year of the lease. Depending on the credit worthiness of the Tenant and the market demand for space, the landlord may insist that any free rent be spread over the lease term. This way, the tenant will not use the free rent period and then vacate soon thereafter. An example would be when a tenant receives every 12th month free, until the credit is depleted.
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DISCOUNTED RENT Similar to free rent, discounted rent provides tenants with time to build up their gross sales without paying high overhead. With discounted rent, the landlord and tenant agree to a base rental amount and various discount rates during the term of the lease. A typical scenarios may include a reduction of seventy five percent (75%) for the first three months, fifty percent (50%) for the next three months and twenty five percent (25%) for the remainder of the first year.
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PERSONAL GUARANTEE. For startup businesses and those with limited assets, landlords may require that the tenant personally guarantee the lease. Usually the owner of the business acts as personal guarantor. By guaranteeing the lease, the owner can be sued personally by the landlord upon default by the tenant.
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OPTIONS Options benefit the tenant, not the landlord, since the tenant can choose whether he remains in the building or locates elsewhere. Rather than sign one ten year lease, the tenant could sign a five year lease with one five year option. The more options, the more flexibility the tenant has in deciding whether to stay or leave.

For the same reason, landlords prefer limits on the amount of options offered because it gives them less control of their property. Some landlords will not give options at all for that reason, but insist on negotiating a new lease at expiration.
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NOTIFICATION Usually there is a notification period prior to lease expiration in which the tenant must notify the landlord if he intends to exercise the option. Many times a notification period ranges from three to six months. The purpose is to give the landlord time to start leasing the space if the tenant vacates.
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PERCENTAGE RENT. Also known as "overage rent", percentage rent is used most often with retail tenants where the Landlord actively promotes the property and thus benefits from his tenants sales. This is especially common in large shopping centers and malls.

Percentage rent is paid on those sales that are over and above a certain dollar amount, which is called the "breakpoint". The breakpoint can either be a fixed number or it can adjust with increases in base rent.

A "natural" breakpoint occurs when the tenant pays his base rent OR "x" percent of sales, whichever is more.

Formula to figure breakpoint: Breakpoint = Yearly Base Rent / Sales Percentage

Example:

Tenant pays $8,500 in base rent per month, and 4% of sales over natural break. What is the breakpoint?
Monthly Base Rent  $ 8,500
Yearly Base Rent ( x 12 months) 102,000
Divide by sales percentage .04
Equals BREAKPOINT $ 2,550,000

Therefore, the Breakpoint is $2,550,000 and tenant must pay 4% of any sales over this amount to landlord as additional rent. (Until the base rent is increased, at which time the breakpoint will automatically increase.)
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   Using the previous example, if tenant does $2.75 million in sales, total rent will be calculated as follows:
Total sales $2,750,000
Breakpoint sales $2,550,000
=  Excess sales $200,000
x   Overage percentage .04
=   Percentage rent 8,000
+  State Sales Tax (assume 6%) .06
=  Total additional payment due landlord $8,480

NON-COMPETEA landlord may require a non-compete clause which will insure that the tenant will not open a similar store within a determined radius or market area. This usually only happens with a percentage rent lease, since the landlord wants to make sure that the tenant is not dividing his market share into two locations, thus avoiding paying the percentage rent.
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USE The USE of the premises is a very important item and should be clearly defined in the Lease. The use of the space definitely affects the tenant mix of the center and may directly affect the neighboring tenants as well. If the tenant changes their scope of business or products they sell, the image of the center might suffer. In many retail centers, landlords spend a significant amount of time and money attracting the right mix of tenants to the center that will attract a specific type of shopper. To maintain the center’s value, the use must conform to the tenant mix that will most benefit the center. Also keep in mind that the new use may not be compatible with the existing tenants due to the type of product offered or perhaps due to the increased parking requirements, etc.

Another reason why landlords insist of the inclusion of this clause is because the another tenant’s lease may include the “right of exclusive use”. This means that only a certain tenant can sell a specific product or service in the center, thus obligating the landlord to prevent other tenants from selling those same goods or services (see following section).
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EXCLUSIVITY CLAUSE Many tenants desire (and some REQUIRE), an exclusivity clause. This provides the tenant with an exclusive right to sell his product or service on the property. (ex: pizza, eye glasses, insurance, etc.)
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ASSIGNMENT AND SUBLETTING Assignment means that all of the lessee’s (Tenant’s) rights, title, and interest in the lease are assigned to another party.

Subletting means that the tenant leases the premises to another but still has the primary responsibility to the lessor to see that the terms and conditions of the lease are carried out in accordance with the original lease. As with the assignment, the landlord typically approves the sublessee. If the new tenant does not pay the rent, with a sublease the original tenant is still responsible.

In both cases, the Tenant is still “on the hook” with the Landlord, unless Tenant has received a release of obligation from Landlord (called “novation”). The primary difference is that with a Sublease, the first Tenant’s lease is still in place, and the first Tenant can charge the Second tenant different terms such as a higher or lower rent, etc.

Hint: It may be very important for tenants to include this clause in their lease if they have plans to sell their business, since the buyer must be able to take over the lease. As long as the assignee has equal experience and/or credit worthiness, and as long as the assignor is not released from liability under the Lease, it is not too difficult to obtain language that reflects assignments as being OK with proper notice and Landlord’s approval, “not to be unreasonably withheld”.
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SIGNAGE While most landlords and tenants agree on the importance of an attractive facility, some tenants feel that constructing the biggest, brightest sign possible is an even higher priority. If every tenant in the center or building constructed a sign with their own specifications, the result would be a hodge podge of signs leading to "sign pollution".

The landlord wants a successful building which usually consists of successful tenants, therefore the landlord will probably work with the tenants as much as possible concerning their sign requirements. The problem arises when:

  1. All the tenants compete for attention with the largest, brightest signs possible, and the whole property ends up looking terrible.
  2. Tenants use different size and style signs (some hand painted plywood!)
  3. The local zoning department develops restrictions on erected signs.
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DESCRIPTION OF PREMISES "Usable" vs. "Rentable" The lease should describe the location in the center, the size of the space and the method used to measure the space, so that disputes don’t arise at a later date.

The space that a tenant actually uses is termed "usable", while the space that the tenant rents is termed "rentable". In most cases usable and rentable square feet differ. This is because shopping center space is measured from the inside of the inside walls and the outside of the outside walls, while office space includes the previously discussed “load factor” that includes the tenants share of common areas such as hallways, bathrooms, etc.
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RELOCATION In some leases the landlord has the right to relocate the tenant to another space if landlord wishes. Reasons for this include necessary remodeling or the expansion of a neighboring (usually anchor) tenant. Many times this clause will provide that Landlord will furnish Tenant with new space that has similar sign exposure, frontage, and overall attractiveness.
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LEASE OPTIONS Especially in a freestanding, single tenant building, the landlord may provide the tenant with an option to purchase. The primary benefit of a lease/option is that if the building appreciates in value, the tenant can benefit by purchasing it at below market rates.

"BOILERPLATE" - Standard Lease Clauses


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There are various ways for a Tenant to be in default of their Lease, such as non-payment of rent, selling goods or services not included in the use provision, not operating during the agreed upon hours, and others depending on the terms of your individual lease.


REMEDIES OF DEFAULT  The Landlord will typically want the freedom to use every possible remedy to cure a default, and all possible power to remove Tenant from the premises should that become necessary. In normal situations, as long as Tenant pays the rent and follows the basic premises of the lease, the Tenant will never have a problem with the Landlord. Although some of the landlord’s remedies can be deleted or diminished, Tenants who try to change too many of the default remedies may make the Landlord very apprehensive when considering you as a tenant .
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ESTOPPEL  This simply means that if the Landlord sells or mortgages the property the tenant agrees to sign a letter that will acknowledge Tenant’s current lease situation. Typically this “Estoppel Letter” will note the remaining term on the existing lease, rental amount, arrears if any, and any outstanding charges.
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INSURANCE The tenant must obtain their own liability and tenant insurance for the contents of the space including inventory and tenant improvements. The landlord may specify the specific dollar amount of liability coverage required by the Tenant. The Landlord will also insure the building in respects to liability and property damage. While the landlord’s and tenant’s liability coverage may overlap, the property insurance covered by the Landlord includes everything except the interior contents of the tenants space. Most leases require you to provide the Landlord with proof of insurance.
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TAXES The lease should state who is responsible for paying the taxes which may be levied on the premises. With a net lease the tenant pays. Even with a gross lease, any increases may be passed on to the tenant. There also may be some provision for special assessments for sewer, road, or street lighting.
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DAMAGE OR DESTRUCTION  What happens if a hurricane or earthquake hits and severely damages the property? Does the Tenant continue to pay rent, and for how long? This clause covers that situation. It gives the tenant the option of waiting a fixed amount of time for the landlord to repair the premises or cancellation of the Lease document.
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REPAIRS  This clause specifies who makes repairs to the premises. Obviously, it would be ideal for the landlord to make all of the exterior and interior repairs. Usually this is not the case. Typically the landlord will make major repairs only such as roof leaks and replacement. Some tenants have not read this section carefully and were later surprised when they experience electrical , plumbing, or air conditioning problems and find that they, not their landlord, are responsible for these repairs.
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ALTERATIONS What happens if the Tenant makes major changes to the premises and then vacates, leaving the Landlord with an expensive mess to cleanup? What if the improvements do not meet code requirements, or were constructed without permits? That is the reason for this clause. Typically, the landlord simply reserves the right to approve all of the construction work done to the Tenant’s premises. Tenant shows Landlord the plans and permits, Landlord gives approval.
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CONDEMNATION  What if the city, county, state or federal government condemns all or part of the property for a road, right-of-way, or utility easement? This clause discusses this issue in detail. Usually Landlords responsibilities depends on the amount of the property condemned, and the effect on the parking area and the physical building. If the condemnation is severe enough, the Landlord will usually cancel the lease.
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ATTORNMENT This means that if foreclosure proceedings are brought against the Landlord by the mortgage holder, or if a deed is given in lieu of foreclosure, Tenant shall recognize the transfer and accept the new owner as Landlord.
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SUBORDINATION  This simply means that Tenant agrees that the Lease is subordinate to the mortgage. When a new owner purchases the building the Leases remain in place and are not effected by the change in ownership. In the same way, the Lenders position is not effected by changes in Tenant lease situations. In the event of foreclosure, the lender has the option of keeping or terminating the lease.
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HOLD OVER   This clause specifies the conditions if the tenant stays beyond the term of the lease. Usually it states what conditions and terms of the lease apply as well as any increase in rent during this hold over period.
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INDEMNIFICATION  What if a Tenant falls on the property and breaks a leg? What if the Tenant’s customer injures themselves while using one of Tenant’s products or services, and sues Tenant and Landlord? This clause is designed so that Tenant agrees not to file suit against the Landlord, for any mishaps that may occur at the premises. It usually also states that if Landlord and Tenant are named in a lawsuit together (perhaps a customer is filing a lawsuit), then Tenant shall pay all Landlord’s costs in connection with such litigation.
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APPOINTMENT OF A RECEIVER  This part of the lease specifies what happens if either the tenant or landlord declares bankruptcy as well as any actions a receiver may take. Keep in mind that if the landlord declares bankruptcy, the receiver could cancel the lease. Therefore you should look carefully at the financial strength of the landlord, at least so that the threat of bankruptcy or foreclosure is not obvious.
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ABANDONMENT  The lessee generally agrees not to abandon or vacate the premise during the term of the lease. If an anchor store would vacate a center before lease expiration, this could effect the profit of the smaller stores since they rely on the draw of this anchor tenant. Also the insurance rate of the building could increase due to increased exposure to vandalism. Sometimes in retail operations, abandonment is defined on terms of the dollar amount of merchandise that must be available for sale or the amount of hours the store is open. If the store lacks merchandise or is closed most of the time, this will decrease any percentage rents as well as effect the income of other tenants.
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RULES & REGULATIONS  These will be self explanatory, and usually cover items such as parking regulations, sign requirements, limitations on noise and smell, etc. The rules govern how your business and the other tenants must act , and are in everyone’s best interest.
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NOTICES  This section covers how the landlord and tenant deliver any notices as well as what constitutes a receipt of notice. Notices may be delivered personally, by mail, return receipt requested, or tacked on the door of the premises (the lease will state the method). The lease should specify the time involved with delivery for each type of notice.
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RECORDING THE LEASE In some regions, landlords will record the entire lease or a short form of the lease in the county governmental offices. A recorded lease is considered to be an encumbrance on the property. In fact, in some states a lease over 10 years, must be recorded and for state transfer tax reasons is considered a sale and is taxed as such.
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This information has been provided by ITRA-TheMelbyGroup , Incoporated., Tenant Representation Specialists. We hope you have found this information informative and useful. Additional questions of a general nature may be submitted to us via e-mail.

 

 



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