As a commercial real estate broker your due diligence holds a great deal of responsibility when leasing a building to a prospective tenant.
The first item is to determine what type of lease is to be used. A widely accepted lease is the AIR CRE form which has been utilized for decades and revised annually. Also, certain industrial parks, shopping centers and office buildings may use their own custom lease. No matter what type of lease is used, it is typically in favor of the landlord.
The Lease agreement can be in many forms such as a Gross Form or Net/Triple Net Form. These leases place some or all of the property maintenance upon the tenant depending which rate the landlord offers. The tenant must be aware of the red flags in each offer for industrial buildings.
Industrial property leases are either gross or net. Either one of these leases can place little or all of the responsibility for the maintenance on the tenant.
Net or Triple Net-either one of these leases place substantial amount of the liability of maintenance on the tenant. This liability may include the maintenance of the roof, walls, electrical, plumbing, HVAC and exterior painting and paving.
Gross-This lease shifts the responsibility of roof, walls and floor to the Landlord which can relieve the tenant of a major part of the costs. On the other hand, the lease may contain a paragraph on Common Area Maintenance which requires a reimbursement to the landlord for costs to the exterior of the premises which may include exterior lighting, water, paving and landscape to the premises. Be aware of the clauses in contracts.
Warranties by the Landlord-Maintenance
In the AIR CRE lease the Landlord will usually agree to the printed form of the lease which is usually not in favor of the prospective tenant. The warranties for plumbing, electrical (including lighting), fire sprinklers and landscaping is 30 days. The HVAC is covered for 6 months. A recommendation to tenants is to negotiate longer warranty periods and the warranties should start when the tenant occupies the space. The landlord may terminate the warranties if the tenant makes improvements. It is essential to make sure the tenant performs an inspection of the operating systems by a licensed plumber, electrician and air conditioning contractor. They could assist in the tenant’s negotiations on the warranties.
Tips to Commercial brokers/agents to avoid possible litigation:
1) have the tenant measure the building (exterior walls and not interior space) or provide an architectural plan supplied by the landlord.
2) Have the tenant visit the planning and building and safety departments in the City to determine if its use of the premises conform to City zoning and or code violations
3) Request from the landlord or exclusive agent disclosures on any work that has been done on the building including electrical, roof, plumbing and any environmental issues including all contamination either removed or still in place.
This environmental disclosure should include mold and asbestos even though they have been removed. Have the landlord or agent provide documentation of the removal and possible “no further action letter” issued by the State for major contamination.
All of these notifications to the tenant should be placed in writing by the agent representing the tenant and or the landlord. It should not be taken for granted that the tenant will read the lease and realize the importance of these matters. It may be a good practice for the agent to have a checklist for the tenant to acknowledge that he or she has read the document and understands its importance.
In the last recession when new construction was absent and very little renovation was taking place, the cities were not receiving fees for new work and took an aggressive approach to code inspection violations. As a result, it should be the agent’s duty to inform the tenant the importance of the property inspection before signing the lease. Many times, electrical panels are repaired but the contractor failed to obtain a permit for the repairs. The consequence of not taking out a permit could be costly for the new tenant.
The time it takes to advise the tenant of these potential mishaps is small compared to entering into litigation and defending oneself in a lawsuit.