What Lease Provisions Might a Tenant Expect in a Tight Real Estate Market – Tips to Landlords and Tenants

Rights of Cancellation

In the event that a tenant finds himself in a position of needing to sublease the premises, the landlord may exercise the right of termination to regain possession of the premises. This provision is most commonly used when a tenant is successful in subleasing the premises, and the landlord makes a demand to take over the Tenant’s position with the new tenancy. There are forms for this termination that are published by the AIR CRE.

Rights to Share Profits

In a real estate market that is ascending, the current rent that the tenant may be paying is substantially below current market rates. In the case of a sublease, an owner may insert a provision within the lease that the Landlord may share in the profits of the increased rent. Commonly the percentage of rent sharing is 40-50%. 

Length of Leases

For the last several decades, leases were for terms of 5-10 years. The longer leases were generally utilized for manufacturing companies since the cost of moving became very expensive. In the last five years, leases are rarely written for ten years, and even five-year terms are going away. The most common lease today is three years with an annual increase in the rent. Retail may be an exception to the rule since their need to build up goodwill is essential in their business over long periods of time.

Size of Space

Over the years, there has been litigation over the size of the space leased. It is imperative to attach a plan to the lease outlying an accurate accounting of the size of the space. Many leases will include common areas within the size of the space, which must be described within the lease.

Common Area and the Single Tenant Lease

In several instances where the tenant signs a single tenant net lease, the building may be one of a number of buildings owned by the same entity. In this case, there may be landscaping, repairs, maintenance, management, and painting of the building. Please ensure that the tenant is provided with a list of the common areas and their annual charge before the lease is signed.

Free Rent

As an incentive for the tenant to lease the premises, he or she may be granted free rent at the beginning of the lease or spread out over the term of the lease. It should be noted that in the event of a breach of a lease by the tenant, the landlord may elect to regain that free rent since the tenant did not comply with the terms of the lease. This loss of this free rent example, under a breach of lease, is now quite common.

Common Area Expenses

These expenses are ordinarily seen within single or multi-tenant leases. Please take note of the fact that many common area expenses include the following:

  • Property management fees
  • Earthquake insurance
  • Painting of the exterior of the building every 4-6 years

Landlord’s Broker’s Responsibility

In most real estate transactions, there may be a provision for lease extensions beyond the expiration of the lease. In many instances, the broker/agent may require additional commissions for any extensions that the tenant exercises. Normally these extensions are usually 50% of the rate that the landlord originally paid the broker at the commencement of the lease. In a tight real estate market, the savvy landlord may be able to negotiate away from further payments to the broker when the tenant exercises its right for extensions of the lease.

Options to Renew the Lease

These are provisions granted to the tenant for leasing the building and who complies with all of the terms and conditions of the lease. It should be remembered that options to renew the lease are always provisions that benefit the tenant and not the landlord. These options to renew may provide a rent increase for the option term. Some owners’ in a tight real estate market will indicate to the tenant that he does not grant options. Options to renew the lease should be considered by the tenant as important as the original terms of the lease. Even if the landlord indicates he will not grant options, it has been seen that landlords may agree to extend the lease at a fair market value. Tenants should consider any right to remain within the building at almost any cost must be strongly considered.

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Segal Commercial
2221 Barry Ave., Suite 200
Los Angeles, CA 90064