August 2017

Tenant’s Concerns Prior to Signing a Lease-Material Disclosures

A tenant should always perform his or her due diligence in gathering the facts on any material defects seen or unseen in a building they plan to lease.  The facts may not be disclosed by the owner’s broker or by the owner. 

The concealment of material facts may cause further serious damage to the property that the tenant may inherit after signing a lease.  A business owner investigating property for future decades of residency should have his/her broker inquire to the broker or the owner regarding unforeseen material facts.  Simply ask, if there are any possible material defects that may cause the company concerns in the future.

Zoning or deed restrictions may prevent the tenants use or future use of the property.  As a result, the prospective tenant should always research the history of the property’s zoning laws.  The restrictions could eventually cause government authorities to order a cease and desist of the business.

The landlord may not be aware of any deed restrictions on the property. Consequently, a new title report can always be obtained from the title company.  In addition, a tenant planning on making changes to the property must always consult the city planning and zoning department.

Environmental discovery on the property is recommended to confirm the premises are not contaminated.  A restaurant or food manufacturing plant should especially research environmental cleanup history.  A visit to the planning department could uncover permits for the remediation of any environmental condition.  It is advised to get a phase I environmental test prior to signing a lease for food or restaurant use.

The landlord may have for example cleaned up mold or asbestos from the property years earlier.  However, he or she may have forgotten the cleanup and did not disclose the information unintentionally.  Another example may be a toxic spill in the parking lot that occurred many years earlier and was not disclosed.

Neighboring businesses that may cause problems for the tenant should always be disclosed before signing a lease.  The nuisance neighbor may not bother the prospective tenant; never the less, disclosure is imperative.  A medical group may be affected by a loud and disruptive neighbor while a Dog kennel wouldn’t even notice it.  In addition, a neighbor who abuses parking spaces that may decrease the prospective new tenants parking requirements represented in their lease must always be disclosed.  

It is crucial for a potential long term tenant to know if the owner is intending to sell the property or hold on to it for a long time.  A new tenant should always fight for a limitation of real estate taxes or Proposition 13 protection before signing a lease.  The sale of the property will always trigger a new valuation of the property.  An increase in real estate taxes due to the sale of the property may cost the tenant thousands of dollars which was never anticipated.

There are several more disclosures that may need to be considered.  The tenant should always do their homework prior to signing a lease and moving into the property.  The landlord may be ethical and has no intention of deceiving the tenant; however, the tenant should do his or her due diligence to prevent costly litigation in the future.

A checklist is attached to this blog for a company to use before signing a lease.

"Lee Segal was employed to assist our company in the acquisition of two industrial manufacturing facilities in Mexico.  I worked with him closely for several months, and I came to depend heavily on Lee for his technical knowledge and business acumen in commercial real estate.  He is absolutely my first choice as a consultant when I am faced with similar acquisitions.  In addition, he is the first person I recommend to colleagues and clients.Lee‘s capability and professionalism in commercial real estate matters make him the best addition anyone can have as a lead member of a critical team."
Sheldon Campbell, Corporate Facilities Manager, Compass Plastics Technology/AB Plastics; General Manager, Quality Laminates de Mexico, S.A. de C.V.