10 Lease Additions to Boost Rent, Revenue
With the balance of power shifting to owners in today's commercial real estate market, you'd be wise to seize the opportunity to boost rent and revenue from your tenants. You can add to your coffers significantly by making simple additions to your standard lease form. For example, you can require a tenant to pay you a fee to process lien waivers, assignments, and sublets. And you can add language to your lease that lets you keep interest earned on a tenant's security deposit, rather than handing over the interest to the tenant.
CLLI, with the help of New Jersey attorney Marc L. Ripp, will give you a checklist of 10 additions and corresponding Model Lease Language that you should consider adding to your lease to help you boost rent and revenue. Will tenants accept all of these additions? Tenants without much negotiating power will most likely accept all of them. However, strong tenants will probably balk at some of them while letting you keep others. Any items from our checklist that you can keep in your lease will enrich you.
10 REVENUE-BOOSTING ADDITIONS
* Add ‘Use-It-or-Lose-It' TIA Condition
If you're giving your tenant a tenant improvement allowance (TIA) so it can build out its space, make sure the TIA includes a “use-it-or-lose-it” condition, says Ripp. That is, state in the TIA clause that if by a certain date—such as the lease's commencement date—the tenant hasn't completely used up the TIA, the tenant will forfeit the unused portion. Then, the money will go back into your pocket.
Add the following language to your lease's TIA clause:
Model Lease Language
If any portion of the Tenant Improvement Allowance is not used by Tenant on or prior to the [insert date, e.g., Commencement Date], any excess shall be forfeited and shall not be used as a credit against Base Rent or any other sums due Landlord hereunder.
* Require Fee to Preserve Special Options
If a tenant wants special options—such as a renewal option and an expansion option—you have another potential revenue source. Agree to give the tenant those options, but make them expire annually, unless the tenant pays you an annual option fee, says Ripp. Here's how the option fee works: If the tenant wants to keep the options open, it must notify you in writing and send you the option fee during a certain period—for example, between 30 and 120 days before the first anniversary of the lease's commencement date. If the tenant doesn't notify you within that period, or its notice doesn't include the option fee, the options will automatically expire, he notes. You'll have to decide how high the option fee should be. An amount between 2 percent and 5 percent of the annual base rent is fair. Even if the tenant pays the option fee, it still has to follow the requirements to exercise the options set out elsewhere in the lease, Ripp notes.
Model Lease Language
Notwithstanding anything to the contrary herein, Tenant agrees that its option to [insert option, e.g., renew this Lease] in accordance with Clause [insert #] hereof and [insert option, e.g., expand the Premises] in accordance with Clause [insert #] hereof (collectively, the “Option Rights”) shall expire each and every year on the anniversary of the Lease Commencement Date, beginning in Year [insert #] of the Lease Term, unless the Option Rights are preserved and maintained as follows:
a. Provided Tenant is not in default under any of the terms of this Lease, Tenant may preserve the Option Rights for successive periods of one year each during the Lease Term, commencing on the date such option would have expired and ending on the anniversary of such date, by giving Landlord written notice of such election so that Landlord receives such written notice at least [insert #, e.g., 30] days, but no more than [insert #, e.g., 120] days, prior to the expiration date of the Option Rights and by including with that notice a payment to Owner of a fee equal to [insert #] percent of the annual Base Rent payable during the succeeding year of the Lease (the “Fee”). Time shall be of the essence with respect to the giving of such notice and the payment of the Fee;
b. If Tenant fails to or elects not to notify Landlord of Tenant's election to preserve the Option Rights for another year or to pay the Fee, the Option Rights shall expire automatically, and shall be of no further force or effect, without any right on the part of Tenant to renew or expand; and
c. No exercise by Tenant of its right to preserve the Option Rights shall constitute the exercise of the option to [insert option, e.g., renew this Lease] or [insert option, e.g., expand the Premises] or be deemed to modify or extend the Option Rights in any respect. The options to [insert options, e.g., renew this lease and expand the Premises] must be exercised only in strict compliance with Clauses [insert #s of renewal option and expansion option clauses] hereof.
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Practical Pointer: A tenant may request that you notify it and give it time to fix its error if it misses the deadline. If the tenant has some negotiating power, you may have to agree to this point.
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* Charge Fee to Process Lien Waivers
Because tenants are often seeking financing to help run their businesses, you're likely to get regular requests from them for a landlord's lien waiver. This type of lien waiver typically states that you agree to waive or subordinate a valuable right—that is, the right to take possession of the tenant's personal property if it doesn't pay its rent—so that the tenant's lender or equipment lessor can take over the tenant's personal property instead. Because lien waivers/subordinations take time to review and negotiate—whether prepared by the tenant's lender or equipment lessor, or by you—charge a fee to cover your administrative fees, legal fees, and other processing costs, suggests Ripp.
Add the following language to your lien waiver/subordination document:
Model Language
Tenant shall pay Landlord on demand and as Additional Rent under the Lease a nonrefundable fee payable to Landlord in the amount of $[insert amount] to cover Landlord's administrative, legal, and other costs and expenses incurred in processing, negotiating, and drafting this Subordination of Landlord's Lien.
* Charge Extra Fee for Removing Big Refuse
If the tenant wants you to remove oversized cartons or trash from your office building, charge it an extra janitorial fee, says Ripp. You should charge the fee even if your janitorial company won't bill you for hauling away those items, he adds.
Model Lease Language
Tenant shall pay Landlord directly Landlord's charge for the removal from the Premises of any of Tenant's refuse or rubbish, including large cartons or other containers or refuse, in excess of that generated from the day-to-day operations of [insert type of business, e.g., an executive and administrative office] of Tenant's size.
* Charge Fee to Process Assignment, Sublets
If the tenant wants to assign its lease or sublet its space, charge it a processing fee, says Ripp. That is, require the tenant's assignment/sublet request to include a nonrefundable fee payable to you in a set amount to cover your administrative, legal, and other expenses incurred in processing each of the tenant's requests, he says. However, make it clear that by accepting the tenant's fee payment, you're not obligated to accept the tenant's request, he adds.
Add the following language to your sublet/assignment clause:
Model Lease Language
a. Notwithstanding anything contained in this Lease to the contrary, Landlord shall not be obligated to entertain or consider any request by Tenant to consent to any proposed assignment of this Lease or sublet of all or any part of the Premises unless each request by Tenant is accompanied by a nonrefundable fee payable to Landlord in the amount of $[insert amount] to cover Landlord's administrative, legal, and other costs and expenses incurred in processing each of Tenant's requests.
b. Neither Tenant's payment nor Landlord's acceptance of the foregoing fee shall be construed to impose any obligation whatsoever upon Landlord to consent to any of Tenant's requests.
* Get Share of Assignment/Sublet Profits
Require the tenant to pay you part of the profit it gets from assigning or subletting, advises Ripp. Profit means any amount the tenant gets above the total amount it has to pay you under the lease, prorated to reflect the portion of the space that's assigned or sublet. Make it clear that even if the assignee or subtenant doesn't pay the tenant that excess when it's required, the tenant must still pay you part of its profits, he adds.
Model Lease Language
a. Without affecting any of its other obligations under this Lease, Tenant shall pay Landlord as Additional Rent [insert #]% of any sums or other economic consideration that:
(i) Tenant receives as a result of an assignment or subletting, whether or not denominated as rents under the assignment or sublease, and
(ii) Exceed in total the sums which Tenant is obligated to pay Landlord under this Lease (prorated to reflect obligations allocable to that portion of the Premises subject to such assignment or sublet).
b. The failure or inability of the assignee or subtenant to pay Tenant pursuant to the assignment or sublease will not relieve Tenant from its obligations to Landlord under this Clause. Tenant will not amend the assignment or sublease in such a way as to reduce or delay payment of amounts that are provided in the assignment or sublease approved by Landlord.
* Get Percentage Rent on Sidewalk/Patio Area Sales
Suppose a tenant operates a restaurant and wants to use an adjacent patio area as an outdoor seating area. Another tenant runs a store and wants to use an adjacent sidewalk to sell or display merchandise. If you permit those activities and the tenants pay you percentage rent, get a piece of the action from the sales and services generated in those areas, says Ripp. To do that, add language to the lease stating that the revenue derived from sales or services generated on the patio or sidewalk must be included in the tenant's gross sales for calculating percentage rent. Otherwise, the tenant might argue that these sales and services are excluded because they weren't generated in its space.
Model Lease Language
It is understood and agreed that all sales and revenues derived from services performed and sales made in the [Patio Area/Sidewalk Display Area] shall be included in Gross Sales for the purpose of determining Tenant's Percentage Rent payable under Clause [insert #] of this Lease.
* Keep Security Deposit Interest
If your standard lease form is like most leases, it requires a tenant to give you a security deposit. If you're entitled to keep the deposit in an interest-bearing account, then keep all of the interest the security deposit earns, rather than giving it to the tenant, says Ripp.
Add the following language to your security deposit clause:
Model Lease Language
If Landlord keeps the Security Deposit in an interest-bearing account, Landlord shall receive and retain all of the interest that accrues.
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Practical Pointer: If you're dealing with a strong tenant, it may require you to pay it all of the interest earned. However, if you agree, make sure you can deduct an annual administrative charge, says Ripp.
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* Speed Up Late Charge
A typical lease gives the tenant a grace period of 10 days or more to pay its rent before you can charge a late fee. That's too much time to give a tenant, says Ripp. And by delaying that long, you encourage the tenant to pay its rent toward the end of the grace period, he warns. Give yourself the right to charge a late fee after a fewer number of days, he suggests. This tells the tenant that you take the late-rent issue very seriously. Plus, it puts money in your pocket sooner. To avoid ambiguity, specify the day of the month (for example, the third day) when the rent becomes late.
Model Lease Language
If Landlord does not receive the Rent, Additional Rent, or any other Lease costs in full on or before the [insert day, e.g., third (3rd)] day of the month it becomes due, Tenant shall pay Landlord a late charge, which shall constitute liquidated damages equal to [insert amount, e.g., $20 a day for each day rent is late after the first of the month], which shall be paid to Landlord together with such Rent, Additional Rent, or other Lease costs then in arrears.
* Charge Holdover Rent
Charging a tenant holdover rent if it chooses to stay in its space after the lease expires could mean a substantial amount of extra money for you, notes Ripp. For example, he likes to charge a tenant holdover rent for an entire month—even if the tenant holds over for less than a full month. And he makes sure that the holdover rent is high—for example, 200 percent of the fair market rent of the space (but not less than the expiring adjusted minimum rent, inclusive of CAM, taxes, and operating costs).
Add the following language to your lease's holdover clause:
Model Lease Language
Tenant shall pay Landlord a monthly rental equal to double the fair market rental value of the Premises for a full month, as determined by Landlord (but in no event less than double the sum of the Base Rent and Additional Rent for a full month then applicable under the Lease) for each month or each partial month during which Tenant or any subtenant retains possession of the Premises, or any part thereof, after the expiration or earlier termination of this Lease.
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Practical Pointer: Consider also making the tenant responsible for all costs, losses, claims, or liabilities (including attorney's fees) that you may incur as a result of the tenant's holding over in the space, as well as your legal fees if you have to start eviction proceedings to evict the tenant from the space, adds Ripp.
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Remember to consult an attorney in your area when drafting your leases. And remember to visit our web site at http://www.vendomegrp.com for more information on model language, clauses, and forms.
CLLI Source
Marc L. Ripp, Esq.: Counsel, The Gale Co., 100 Campus Dr., Ste. 200, Florham Park, NJ 07932-1007; (973) 301-9500; MRipp@TheGaleCompany.com.