Countless factors go into finding just the right space to lease: location, signage, access, parking…the list can go on and on. But often times it is the terms of the lease itself that can make or break a deal. An experienced and thoughtful real estate attorney can prove invaluable to a tenant when negotiating a lease.
Drew Felts, a commercial real estate attorney with Blanco Tackabery & Matamoros, P.A., has been a tremendous help to many of my clients. I took the opportunity to ask him a few questions regarding commercial leasing and hot button items for tenants to consider.
When representing a tenant, what is the very first thing you look for when reviewing a lease?
When a tenant asks us to review, negotiate and/or draft a commercial lease, I first look at the location and size of the property, the rental amount due under the lease (including CAM provisions, if applicable), the permitted use of the property as described in the lease and the term of the lease. Of course, I dive into all provisions of the lease throughout our review, but it is important, at the outset, to understand exactly what the client wants to accomplish under the lease, where they are doing it and for how much. Fundamental to a strong attorney-client relationship is a deep understanding of the business purposes and goals of the firm’s clients. Once we have discussed the business terms of the lease, I next turn to the maintenance obligations of the tenant under the lease. Oftentimes, tenants are required to pay for more of the maintenance costs associated with the leased premises than initially realized because of confusing language. In certain instances, I may recommend that the client request a cap on the out of pocket expenses the tenant is required to pay for maintenance on the leased premises.
While reviewing a lease Have you ever caught anything that might save the tenant huge sums of money down the road?
This happens more often than you would think. Interestingly, it is not always the terms of the lease that pose issues for our clients. I frequently identify issues with the client’s operating agreement (if the tenant is a limited liability company) or bylaws (if the tenant is a corporation), which require amendments to such documents or various written consents in order to authorize execution of the lease pursuant to the tenant’s governing documents. Even more often, the governing documents of the tenant are either out of date (e.g., include the names of people or entities that are no longer members of the company) or nonexistent. In such cases, I assist the client with updating governing documents or drafting operating agreements or bylaws, as applicable, in order to bring current the corporate structure of the entity.
Another money-saving issue I run across during lease review is the recording of a memorandum of lease. In North Carolina, leases for a term of more than 3 years, or in South Carolina, leases for a term of more than 12 months, including renewal options, must be recorded in order to be binding on subsequent purchasers of the leased property. Accordingly, I advise tenants to always include a provision in the lease requiring the landlord to sign a recordable form of memorandum of lease at the time of execution of the lease. If asked to review an existing lease, I always check the public records to ensure a memorandum of lease has been recorded and, if not, I draft and record the memorandum of lease as part of the review.
What are a few “fatal flaws” you tell all tenants to look out for?
I advise all clients to read the entire lease. I know, I know, that is my job, and I do read the entire lease, but I feel every tenant should take time, at the very least, to skim the whole document. You would be surprised at how many tenants find provisions that raise questions or, in some instances, become non-starters based on a cursory review of the entire lease.
As for “fatal flaws,” I always point out the insurance requirements of tenant under the lease. I recommend that the tenant run these provisions by its insurance agent to ensure the tenant can comply with the lease requirements. Additionally, the tenant must be aware of any use restrictions contained in the lease. As you might expect, there will be major issues for the tenant if the lease restricts or substantially interferes with the tenant’s right to operate the type of business it intends to under the lease. Tenants also should look for any relocation rights of landlord. Some leases permit the landlord to relocate the tenant within the same building as the leased premises are located at landlord’s discretion, and this can cause problems if a tenant has spent a lot of money on upfits and is required to relocate and upfit a new space.
What are some of the most common errors you run across?
Most of the errors I see in leases arise from miscommunication between the parties. For example, the tenant may have asked for renewal options, but the landlord failed to include them in the initial draft of the lease. I also see discrepancies in the parties listed under the lease. I always check to make sure the proper names of the landlord and tenant are listed within the lease, which includes verifying the existence of entities registered with the Secretary of State. The actual owner of the real estate must be listed as the “landlord” (unless the lease is a sublease). The tenant, especially one that leases multiple properties as part of its business, should make sure that it is using the correct entity for a particular lease – often times there are tax implications for a tenant leasing and/or operating a certain business under a particular entity, which should always be run by the tenant’s CPA. I also find errors in the legal description used to identify the subject leased premises. Sometimes, the legal description is simply incorrect, but more often, I find errors in identification of the particular space to be leased within a larger building.
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Drew Felts works in the Commercial Real Estate Practice Group at Blanco Tackabery along with a team of highly experienced attorneys. Amy Lanning and Anna Gregory Wagoner, also members of the commercial real estate team at Blanco Tackabery, helped in responding to these questions and provide invaluable insight and expertise to Blanco Tackabery’s commercial real estate clients. Please feel free to contact Drew, Amy or Anna Gregory directly with any questions related to commercial leasing or other commercial real estate or business legal needs via email or by phone at (336) 293-9000.
Blanco Tackabery’s Commercial Real Estate Practice Group is a cornerstone of the firm and is recognized as a preeminent commercial real estate group in its market. For more than 40 years, its attorneys have represented individuals, businesses, developers, financial institutions and investors in a wide range of matters related to the acquisition, development, ownership, leasing, management, financing and disposition of commercial real estate. Blanco Tackabery has attorneys licensed in North Carolina, South Carolina, Georgia, West Virginia, New York, Michigan and the District of Columbia.
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