Watch Out For These 11 Red Flags In A Commercial Lease Agreement
Whether you’re going for a long-term or a short-term lease agreement, you will still be bound to a landlord when signing a lease. Of course, you want to maximize this time to generate profit from your business while tending to minimal problems, or none at all.
So, before signing a lease agreement with a landlord, here are eleven (11) red flags you need to be wary of.
1. Signs of Landlord Financial Constraint
One of the major red flags you need to take note of is the landlord’s possible financial struggles, which can manifest in several ways: poor maintenance of the property, landlord not willing to give TI’s but offers abated rent instead, a lot of vacancy at the project, or word of mouth from current tenants when asking about the project and landlord. As a tenant, you may be wary of financially constrained landlords since unforeseen circumstances may lead you to problematic situations in case your landlord is unable to carry the financial responsibilities of these instances.
2. Missing Disturbance and/or Holdover Clause in the Lease
For instance, a financially struggling landlord was forced by their lenders to take possession of his/her property, which a tenant is currently leasing. This will automatically nullify the leasing agreement. So, what will happen to the tenant?
The lack of disturbance clause in an agreement does not provide any security to the tenant to have ample time to find and relocate to another location if this happens. Therefore, a disturbance clause is a major requirement that should be included in the agreement before signing. As a matter of fact, this should be a mandatory requirement to all landlords in the first place.
A holdover clause must also be included to allow tenants enough time to negotiate before renewing the contract or relocating.
3. Too good to be true projections
Another red flag to look out for is when a property is presented to have future work to be done or an outstanding business survivability given the major economic disruptions of a particular time or area. If the property projections are too good to be true, chances are they were presented exceedingly beyond their actual numbers or the numbers are indeed true. Either way, tenants must always confirm this by asking legitimate documents to back up these significant claims.
4. Not Using Demographic or Analytical Study Results
As a tenant, it is important to ask for data, such as demographic study results and analytics, from your commercial broker or landlord in order to maximize the assurance that the property is bound to generate adequate income. If you are unable to get this data, you may be walking into a commitment that could cost you down the road. Having access and understanding demographic and analytical data is part of your due diligence as a tenant. Most commercial brokers and landlords can provide this information. If not, consider this a red flag. In any case, it is better to consider bailing out before it is too late for you and your business.
5. Unclear mechanics on computations
The terms included in the agreement between the landlord and the tenant must be as particular as they can be in order for both parties to clearly understand what each detail entails. This is especially important for fees and calculations as these involve money. If a landlord provides unclear calculations that lack or do not specifically point the mechanics of computations, then make sure that you, as the tenant, clarify this. Otherwise, it can potentially cause problems in the future and you will be left with no choice but to abide since you are bound to the signed agreement.
6. Unclear designations and obligations
As a tenant, look out for vaguely described responsibilities of each party in the agreement. You need to avoid being put in a position where an unclear agreement is put against your favour and results to you taking on a role that was not explicitly stated in the agreement. A good commercial broker with work out the larger deal points through a Letter of Intent (LOI) prior to going to a lease.
7. No pass-through language on paper
Another important data that a potential tenant should also get their hands on are the operating expenses history of the property for at least two or three years and the list of planned capital projects planned by the landlord within the next year or two. This is significant since this will impact the pass-through terms on the agreement, or the negotiations on whoever shoulders the maintenance costs.
Typically, the landlord will attempt to generate back all these expenses as soon as possible, potentially influencing the rates set on you. So, if the landlord cannot provide the data or if a pass-through language is not set on paper, apply skepticism and inquire about this aspect. What you can do is to negotiate fair terms and put the agreed terms in writing to make everything official and contract-bound.
8. Unclear/unspecified CAM coverage
Depending on the type of lease agreement the landlord and the tenant get into, the Common Area Maintenance (CAM) entails important discussion between the two parties. If the CAM coverage appears vague or unspecified in terms of coverage, make sure to clarify this with the landlord. The danger of vaguely written CAM coverage is the possibility of paying the maintenance of items and facilities that may not necessarily be included in the supposed common area maintenance coverage.
In addition, tenants must inspect all maintenance facilities and equipment of the property and ensure that they are all in good condition. Furthermore, have the landlord grant a 6-month warranty to the maintenance facilities and equipment, such as the HVAC, so the tenant can avoid acquiring the financial burden of poor maintenance.
In case the maintenance expenses are shouldered by the landlord, tenants should have protection if the designated role of the landlord to maintain is not duly executed. Tenants must also secure into writing an annual audit of maintenance expenses to evaluate if the landlord is appropriating adequate amount of expenses for maintenance to sustain quality facilities and operations.
9. Alarming Turnover Rates
The rate of tenants leaving the property can speak for itself, and a high turnover rate is very alarming. This implies that there is probably something wrong with the property or the landlord. If possible, talk to the previous tenants to determine the reason for their relocation. Either way, this should be enough to discontinue your negotiations and find a well-recommended property instead.
10. Sloppy Documents
How the legal and official documents appear imply the legitimacy of the landlord. If documents are filled with casual and messy corrections, faded printing, and illegible writing, consider this a major red flag to be very wary of. This might appear to be a small consideration to take but in worst case scenarios, an unclear information can lead to consequences on the tenant’s end. It is always better to clarify these terms and ask for more legible copies to avoid future problems.
11. Putting assurance on verbal confirmations
Verbal confirmations and negotiations can be done as initial steps in taking the negotiations to writing. But if the landlord heavily relies on verbal confirmations and often disregards legal action, it may be best to find a better alternative or have a commercial broker get involved who can have better documents brought into the deal.
Even after outlining all the information above, leasing commercial space and/or renewing your lease can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help you achieve your leasing goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
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Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
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