Dealing with Landlords … The Good, The Bad, & The Ugly
Dealing with Landlords … The Good, The Bad, & The Ugly
BY: Jeffrey D. Jones, ASA, CBA, CBI
A critical component of brokering businesses is obtaining an assignment of an existing lease, seeking additional lease option periods where none currently exist, or obtaining a new lease for the Buyer. This will entail dealing with Landlords or a Landlords’ Management Company. Many business sale transactions are lost each year due to conflicts over lease terms and conditions. Seeking a new lease or lease assignment can be an exciting experience, but there are many pitfalls that need to be addressed when negotiating with a Landlord.
When leasing a property, it can be a free standing building or space in an office building, a business park, a warehouse, shopping center, or shopping mall. There are many common elements to a property lease, but there can be some unique elements depending upon the type of property and the use of the property. Some of these elements can be negotiated and some can not. The following information will summarize the more common elements of a property lease and will address important issues that may need to be negotiated to be sure the business will not suffer due to specified restraints.
The property owner can be an individual or a large investment company who may or may not be located in the same city as the property. When negotiating a lease, you will typically be dealing with a leasing agent who works either directly for the property owner or a management company who has been hired by the property owner to manage the property.
Every lease will have Basic Lease Terms that include the location of the facility to be leased, size of the space being leased, the term of the lease, the rental rate, and the use of the facilities. Additional provisions will typically address the following issues:
Common Area Maintenance Fees
- Real Estate Property Taxes
- Real Estate Insurance Cost
- Utility Charges
- Trash Fees
- Merchant/Tenant Association & Related Fees
- Advertising Fees
- Sign Fees & Regulations
- Construction Cost
- Parking & Common facilities uses and restrictions
- Compliance with Laws & Safety Requirements
- Required Liability Insurance
- Regulation of Hazardous Materials
- Landlord Liens on business assets
- Landlord’s Rightss of Access
- Restrictions regarding Lease Assignment & Subletting
- Lease Default Provisions
- Sales of Premises by Landlord
- Hours of business operations
- Security Deposit
- Holding Over Provisions
- Relocation Option
- Broker Fees
The Basic Lease Provisions will be addressed in this article and the Other Lease Provisions will be addressed in a sequent article. Basic Lease Terms include the following provisions:
Location – When leasing space in a building, considerations must be given to the type of business and use of the facilities. A retail business will want a high traffic and visible location, whereas a service business that has customer/client traffic will want an easy access location. A wholesale or manufacturing business will be concerned with a location close to its customers and/or near transportation facilities.
Size of the Facilities – The size of the space to be leased is typically expressed in terms of square feet. Factors that impact the required size of space will include the number of employees, the number of customers/clients who will be coming to the facilities, the amount of office space needed, and the amount of storage space needed.
Term of the Lease – Most landlords will not lease a facilities for less than one year. On the other hand, most landlords will not want to commit to a lease longer than 5 years, unless it’s a free standing building such as a Mc Donalds, wherein the lease term may be for 20 years. Most landlords prefer 3 to 5 year leases and will usually provide options to renew at the then current market rental rate.
Rental Rate – The rental rate is typically quoted as a price per sq. ft. either on a monthly or annual basis. The rental rate will be stated either as a gross rent or a net rent. A gross rent means the tenant pays a fixed rental rate and the landlord is responsible for paying all operating costs of the property. Whereas a net retal rate is a base rate that provides the rate of return required by the landlord and the tenant then pays pro rata the property taxes, property insurance, and property maintenance costs. This is often called a triple net lease, because in addition to the base rent, the tenant pays all the operating expenses of the property that include taxes, insurance, and maintenance.
Use of the Property – All leases will address the allowable use of the property and the restrictions thereof. It is important to review the uses and limitations of the property stated in the lease. Some leases will be subject to use limitations due to exclusive uses granted to other tenants. Some landlords may want to exclude the use of the facilities for businesses that may cause insurance costs to be high, personal preferences such as businesses serving liquor or sexually oriented businesses, and businesses that would generate excess traffic resulting in parking problems. Lease use limitations can sometimes be negotiated with the landlord to allow a specific use.
Upon getting a new listing, Business Brokers should obtain a copy of the existing lease and read it to fully understand the terms and conditions specified in the lease. Most often it will part of the Brokers’ job to coordinate the transfer of the existing lease or obtain a new lease for the Buyer. This will entail contacting the landlord or management company to verify the terms and conditions of the existing lease, or for obtaining a new lease. This will avoid surprises that could kill the sale of a business. Once you have an earnest money contract or LOI in hand approved by both Buyer and Seller, more often then not, the Broker will need to coordinate meetings between the Buyer and the landlord. Landlords will require a copy of the Buyer’s financial statement and resume. Make the Buyer aware of this so that these items can be prepared and presented to the landlord. I recommend that the Seller also attend these meetings, because the Seller has the relationship with the landlord and can often help resolve issues that could kill a deal.
Most landlords will do a credit check of the Buyer and some will even require the Buyer provide a business plan to obtain approval of the lease. Most landlords will require that the Seller remain on the lease for at least the remaining term of the lease. Recently, I have had several experiences where landlords required the Seller to first sign a new lease so that they remail liabiable before a lease assignment was approved. It is part of the Brokers job to properly prepare both your Seller and Buyer to address the landlord’s requirements.
Jeff is President of Advanced Business Brokers, Inc. 10500 Northwest Frwy., Suite 200, Houston, TX 77092 713-680-3290, [email protected].