In Search of the Simple Lease

Sep 28th, 2019   Heather Nanstiel
Real Estate Law

There is no such thing as a "simple lease".

by David C. Uhlig

There is no simple lease. During my day to day, I draft and negotiate a fair amount of commercial lease agreements.  They range from office leases, to retail leases and industrial leases but invariably, especially with new clients leasing their first space, the conversation begins the same; they say “I am going to send you a simple lease that my Landlord drew up, take a quick look and let me know it all looks good”; and I respond, “Okay, send me the lease and I’ll take a look.”

Most real estate lawyers are familiar with this elusive document…, the “simple lease”, so often described by clients eager get their business up and running and turning a profit.  Unfortunately, Landlord form leases are typically one sided at best and the clauses invariably tilt to the Landlord’s advantage.

One Example — Operating Expenses

One example of a lease clause that can be surprisingly expensive for tenants is the clause governing operating expenses.  Most tenants understand the difference between a triple net lease and a gross lease; the former is structured so that in addition to base rent, tenants are responsible for a share of operating expenses (the landlord’s real estate taxes, insurance and costs to operate the building in which the premises are located) and the latter is structured so that tenants pay a single rental payment that includes everything.  In the commercial context, triple net lease forms are very common and tenants often sign these leases without legal review and counseling.  Operating expense provisions seem simple – the tenant pays its share of the operating costs, but often the form lease language is over-reaching with what may be included in the operating costs.  An example of expenses that should be excluded or at least carefully limited are capital expenses.  Furthermore, it’s a good idea for tenants to ask for a cap on annual operating cost increases so they can budget for the worst case scenario during each lease year.  If there is no cap on operating expenses, they can increase without limit and Landlords have little motivation to keep their costs down when they can be passed through to tenants without question.  Another important concept when it comes to operating expenses is language allowing the tenant to audit the Landlord’s books.  A fair audit provision should state that if the tenant’s audit reveals overcharges exceeding a certain percentage (usually 3% to 5%), the Landlord will be responsible for paying the audit costs. An experienced real estate attorney understands which expense categories are inappropriate to pass through and can help their clients limit ballooning expenses and excess expense pass throughs.

Pick Your Battles

The key to providing useful legal counsel to tenants in commercial lease negotiations involves picking one’s battles.  A typical commercial lease agreement contains upwards of 50 clauses and its possible to negotiate each one, however sending proposed revisions to all or nearly all of the lease clauses is sure to cause delays (which neither side wants), not to mention excessive legal fees and sometimes, it can blow a deal.  Evaluating which clauses will be most important to a client begins with understanding the nature of their business very well and then focusing on the clauses that relate to their business and those which may cost them additional money above and beyond rental payments.  The expense clauses in triple net leases certainly qualify.

Before signing that next “simple lease” have an attorney take a look and help you try to balance the important terms.  It’s very difficult to help a tenant after they’ve signed the document!