Tenant Beware when Signing a Commercial Lease - Good Tips

The tenant must perform his or her due diligence inspecting the premises in order to avoid expensive pitfalls that may occur prior to signing a lease for a commercial property.  The lessee should not delegate the due diligence to the agent/broker but take command to investigate the condition of the premises for its use themselves.

The following is a minimal list of what the future lessee should investigate:

1.    Visit the city Building and Safety Department plus the Planning Department which will inform the tenant if the building has the proper zoning for their use.

2.    At the Building and Safety Department, request permission to inspect the permit package.  The permit dates to repair and upgrade the building will determine if the building permits are recent (minimum age is 5 years for current upgrades).  Almost all buildings would obtain permits within the last 5 years for miscellaneous repairs.

3.    A licensed contractor should inspect the premises. An experienced contractor should be able to point out areas that should require further investigation in order to protect the new tenant from possible matters that may arise.

4.    Always employ an HVAC contractor and an electrical contractor to determine if the condition of the installation of the heating, air conditioning and electrical systems are appropriate and up to code.

5.    An inspection by a roofing contractor is always advised if the property is under a Triple Net lease.

6.    Always request from the owner if there are any potential hazardous materials on the site or if any have been removed in the past.  Items such as mold, fungi and asbestos should always be disclosed by the landlord even if those materials have been removed.

Never lease a property on an as is basis/where is basis.  When the tenant visits the property and spots items that may be of concern before the lease is signed, he or she should have the owner exclude those items from the as is condition.
 
Warranties in the commercial real estate industry for repairs or replacement are usually 6 months on the HVAC system and 30 days on the other components of the building.  The future tenant should obtain longer warranties from the owner in my opinion. Consequently, the tenant should be very cautious if the owner does not grant any warranties as to the condition of the property for lease.

The landlord may express that everything was built to code at the time of the construction of the building and its improvements.  What does the meaning of “up to code” represent to the potential tenant?

An electrical contractor may have made repairs to the property and brought those repairs up to current codes.  The issue or definition of code has been interpreted that “up to code” means a permit has been taken out.  

I have observed that a great deal of repairs made to a property are made without a permit.  Tenants and owners try to avoid permits due to their cost, longer construction time and the possibility that a building inspector may discover items that were constructed without permits.  As a result, tenants always beware when signing a commercial lease.

 

“Lee Segal was very accessible, intelligent and thoughtful about the case we worked on together. He is not the typical expert witness, as he is a working real estate professional first, and an expert witness second. He’s extremely knowledgeable about all aspects of commercial real estate. Above all, he’s easy to work with and was dedicated to the case.”   Stephen Goldberg, Partner, Spierer, Woodward, Corbalis & Goldberg
Stephen Goldberg, Partner, Spierer, Woodward, Corbalis & Goldberg