Custom Build Lease to Avoid Fatal Flaws

All office building and shopping center leases should have the same basic provisions that address the rules and regulations for how the property will operate, such as rent collection, allocation of CAM costs, exclusives and co-tenancy rights, operating hours, and security measures. But owners should go above and beyond basic provisions.

A one-size-fits-all lease can be useless if it ignores a tenant's specific issues and, instead, includes terms that aren't relevant to the particular space for which it was drafted. Make sure that you draft leases that are appropriate for tenants' needs to make your center or office building run as smoothly as possible, instead of struggling with tenants over constant requests to deal with problems that are not covered in their lease provisions. Attention to detail up front will help you avoid flawed leases that you will need to remedy later.

Include Specific Lease Definitions

Every lease should start out with the same general provisions that are applicable to all tenants at the property, but you should tailor each one to some degree on a tenant-by-tenant basis.

“It is a mistake to do a large master template for all tenants at a property,” says Peter D. Morris, SCSM, SCMD, CLS, a real estate asset manager with over 30 years of experience in the commercial real estate industry. “An owner will want to reflect his vision for the property, or properties if he owns more than one, in the leases, but other provisions should be added according to specific tenants,” he advises.

In addition to provisions that control the general rules and regulations, the most important thing to include in each lease should be definitions that pertain to each tenant's space. These definitions will: (1) determine, to a great extent, how the tenant should operate in relation to other tenants—for example, what qualifies as an ancillary tenant and an anchor tenant; and (2) set standards to avoid confusion over rent calculations and cost-related items—for example, how its space is measured and which parts of the property are common areas.

Listing all lease term definitions in a schedule that is attached to the lease should help make it easier to read and understand. Disorganized definitions can lead to lease ambiguities. You might lose track of what has been defined and then inadvertently define the same term again or leave out a definition entirely. “That's where you run into problems of interpretation, where the gray areas come in, and where people get lost as to what exactly is meant by a term,” says Morris.

Ask your attorney about using this type of Model Language to define certain terms—in this example, common areas of the property—in your lease schedules.

Model Language

The Common Areas of the property shall consist of the building lobby and restrooms, corridors, building break rooms, building conference room(s), health facility, janitorial closets, and storage rooms.

Ambiguous lease terms can be very costly when they involve measurement standards that determine how much a tenant will pay in rent. For example, the Building Owners and Managers Association (BOMA) updated its measurement standards this year. If a lease simply says that the tenant's space will be measured using BOMA standards, the type of BOMA methods to be used can be misinterpreted because the organization recently released new standards that give an office building owner two options: measure against Model A, also known as the Legacy measurement, which was created in 1996, or Model B, which was released this year.

“If the office is going to be measured to BOMA standards, but the specific standard is not clear in the lease, which one does the owner use?” asks Morris. “If I were a sneaky tenant, I would say, ‘I'll measure according to whichever one works for me, irrespective of which standard the owner intended to use,’” he adds. Use this Model Language to designate which measurement method you will use.

Model Language

For purposes of this Lease, the rentable square footage area of the Premises and Building shall be measured using the most current standards of the [insert measurement method, e.g., Building Owners and Managers Association (BOMA)].

Use Form That Fits Property

Morris says that he runs into problems when someone pulls a form lease off the shelf and uses it for a property that it doesn't apply to just because he is familiar with that type of document.

“The lease should be tailored from the standpoint of what is most important to you,” says Morris. For example, if a lease that is tailored to an industrial, single-tenant building is used at a multi-tenant office property, a lot of time, energy, and effort have to go into trying to make the property fit the form, whereas it should be the form that fits the property, Morris emphasizes.

Center and office building leases should be specific to their property type because of the difference between them when it comes to the amount of general public access. An office property has very little public access because it is primarily visited by invited guests who have appointments and employees. The general public at large can visit a center. “The way that you craft your lease should be specialized to the way that you intend to operate the property, which will be different between the two because you have completely different operating environments,” says Morris.

Another major difference between an office and a retail property that should be reflected in the lease is that an office tenant doesn't rely on another tenant for its success as much as a retail tenant relies on the success of the other tenants in its center.

For example, if a center has retail stores and also a nightclub in it, questions will arise with respect to extended operating hours, waste removal, allocation of cost for additional lighting, security, and the type of clientele permitted (for example, an “over 21” club). Or a nontraditional anchor tenant could be closed one day a week or have limited operating hours that reduce foot traffic at the center. It's crucial to address these issues in the lease because other tenants—and the profitability of the center—heavily depend on them.

When you respond to issues over disparate types of tenants—especially those that are more costly for the center than others—decide how you will handle them. For example, you may respond by having the property single-metered as opposed to multi-metered, using multiple garbage facilities instead of a central garbage facility, or allocating costs disproportionately rather than evenly for tenants. Then address these issues in each lease.

It's not enough to cover just general rules and regulations for things like the days or times for garbage collection or cleaning at the property. The lease for a nightclub should specifically address things like its clientele and costs for additional lighting, while the lease for a library tenant should specifically address things like required operating hours. Use this type of Model Language to make a tenant's lease form fit its type of operation at the property.

Model Language

Owner, at its sole option, may charge Tenant, from time to time, and Tenant shall pay Owner upon demand, as Additional Rent, the cost established by Owner for treating, handling, processing, collecting, and/or removing garbage, refuse, trash, or other waste (collectively, Garbage) relating in any way to the operation of its Business exceeding the Equal Share payable by all Tenants in the Center.

Fix Flawed Lease

Ambiguity in lease terms can create a flawed lease, says Morris, whose company, Greenstead Group LLC, provides real estate owners with asset and management services and helps retail tenants increase their sales. He stresses the importance of custom building each lease to avoid future problems.

If a current lease already is flawed, you still may be able to rectify it. You can try to get all of your tenants to agree that there's an inequality in one or more tenants' leases and do a mass lease amendment for all of the tenants to solve that, although the likelihood of that happening is very small.

If tenants won't agree to a mass lease amendment after you recognize that there is a problem, modify tenants' leases as they turn over, or when there is an opportunity to open a current lease and interject a new clause. For example, when a tenant tries to negotiate rent relief, it will give you leverage to fix the flaws in the lease.

Considerations When Custom Building Lease

As stated above, one of the most important things to consider when avoiding flaws in a custom-built lease is using a lease form that's appropriate for the type of property. For example, using an industrial lease for an office building doesn't make sense and can cause major issues. An office functions differently than a center or industrial property and needs a lease tailored to that function.

Also, look at the tenant's blueprint—the layout of the tenant's space within your property—and then look at the definitions you're using in the lease to see if they fit that.

“I recommend that when they are crafting their leases, owners should know their objective for the property,” says Morris. The way in which an owner operates a property and its tenants will depend on the period of time they plan to own the property, which will directly affect the leases.

“Really, it comes down to looking directly at the property and asking, ‘What do I need to do to operate this property properly?’” Morris concludes.

Insider Source

Peter D. Morris, SCSM, SCMD, CLS: Greenstead Group LLC, 1528 Ard Eevin Ave., Glendale, CA 91202; pmorris@beyond-the-building.com.

Search Our Web Site by Key Words: lease schedule; common areas; custom-built lease