Other Terms
Premises:
The term "premises" seems simple enough, but it should be clearly
defined in your lease document. If you are leasing an entire building,
for instance, does the lease include the parking facility? Are you
responsible for parking maintenance? If you are leasing part of a
multi-tenant facility, look closely at the landlord's definitions of
common areas and your leased space. Since rent is charged per square
foot, your landlord will, naturally, seek to maximize the measurement
of the space you are leasing. Measurement, of course, is subject to
interpretation - one can measure from the outside walls or the interior
walls, for example, or include obstructed unusable space in the square
footage.
Operating Expenses: Your
lease document should include a complete description of the expenses
for which you will be charged. Operating expenses are recurring
expenses that are essential to the continuous operation and maintenance
of a property, and the term does not include real estate taxes,
insurance, mortgage payments, capital expenditures, and depreciation.
Operating expenses can include repairs, trash removal, salaries of the
landlord's employees, building improvements or operations of common
areas (see below), among other items. Some of these expenses represent
a potentially significant future increase in cost of occupancy, so it
is best to read the list closely. Also, unscrupulous landlords will add
expenses that you should not have to pay, such as the cost of marketing
the property to other tenants or for square footage of the landlord's
office space within the property.
Common Area Maintenance (CAM):
In a multi-tenant facility, the landlord typically assumes
responsibility for the structural elements of the property, while the
CAM charges are divided among the tenants of the building and are
included in your rent payment or paid separately, depending on your
lease. Your CAM charges will be based on the square footage you lease
as a percentage of the overall facility, and typically are summarized
in the lease document as a percentage of the common areas. Again, it's
important to know exactly what square footage will be used as the basis
of the CAM charges and, again, examine the list of operating expenses
closely to determine exactly what you are paying for.
Escalation:
The escalation clause allows the landlord to increase the rent at a
future time to stay abreast of inflation. The escalation may be defined
as a fixed increase over a defined time period or as a cost-of-living
increase linked to a government index - e.g., Consumer Price Index - or
an increase directly tied to increases in operating the property.
Base Year:
Base year refers to the first 12 months of a tenant's occupancy or the
calendar year, depending on the timing of the lease. Base cost is the
operating expenses of this first year and is used as the basis of
future increases in operating expenses that are passed through to
tenants. Therefore, you should note how the landlord defines the base
year, because the beginning of the second year is when you begin paying
pass-through expenses, if applicable in your lease.
Tenant Improvement Allowance:
Landlords often will grant a tenant improvement allowance so that a
space can be customized for your needs. The allowance is typically
offered in terms of dollars per square foot, with the tenant
responsible for any charges above the landlord allowance. Landlords and
tenants alike usually prefer to control the construction process, and
larger tenants have more leverage in obtaining a "tenant work letter"
that gives them control over the project.
Subordination and Nondisturbance:
Unless your landlord is a public company, it can be difficult or even
impossible to know whether the company is financially stable and
reliably paying the mortgage. To assure your business continuity, you
can add clauses to your lease that will preserve the lease with its
current terms should your landlord default on the mortgage and the
lender assume ownership. Without this assurance in writing, the lender
is not legally required to recognize your lease and you could face
eviction or a steep rent increase. The subordination clause will state
that the mortgage is subordinate to your lease, and the nondisturbance
clause will state that the lender and future owners of the property
cannot terminate your lease as long as you continue to fulfill your
obligations. This clause is especially useful if area rents have risen
considerably while you have operated under your current lease, as one
of the first things the lender or a new owner would want to do is
increase rent to market rates.
Americans with Disabilities Act (ADA) Compliance:
Although the ADA has been on the books for many years, many buildings
are not ADA-compliant. If your landlord is going to build out your
space, make sure your lease includes a clause requiring the buildout to
be ADA-compliant. Once you take occupancy, your business could be at
risk for compliance, and the legal fees and the cost of retrofitting
can add up quickly.
While this list obviously doesn't cover
every possible lease term that you might see, these are some of the
terms that can cause the most trouble if overlooked. What's important
is that your lease terms point to the potential hazards for your
business. The good news is that mysterious leasing terms are easy to
understand at all once you're approaching them from a place of
knowledge.
