Commercial real estate leases can be intimidating to anyone who does not read and deal with them on a daily basis.
To start, many are over 50 legal-sized pages long, contain 14 major parts, are full of unfamiliar terms such as waiver of subrogation and legalese; such as “Whereas the Party of the First Part…..”
So I am continually shocked when small business owners either don’t have anyone review the lease before signing it or don’t seek the advice of a commercial lease expert. This occurs in about half of all lease transactions involving small business owners according to my own informal survey from decades of leasing, lease administration and training people about lease negotiation, leasing and lease administration.
Even more shocking is that a failure by small business to rigorously negotiate the entire lease document can result in significant financial issues and increased business risk. I’ve seen businesses destroyed due to a poor lease. That is why we show occupiers how to negotiate their lease correctly.
Many small business owners also don’t realize that the lease is the ongoing, two-way contractual arrangement between the tenant and the landlord AND the landlord and the tenant, so they file away the lease after it is signed, never to look at it again. In part, this is because they may be intimidated by the wording.
So here is a tip to cut through the convoluted wording when reading the lease. But keep in mind that anyone unfamiliar with a commercial lease should ALWAYS have a commercial lease expert and their lawyer explain both the lease clauses – in detail – and the nuances of the wording.
Always get or make a duplicate copy of the fully signed lease. The original should be kept in a safe place. It is the ONLY version that should be referenced if an issue comes up, because it is the ‘legal’ copy. The second copy is the one that become a quick reference guide to the lease. You will make a condensed version of the original lease highlighting the key point in each clause, using the copy.
On the duplicate copy ONLY, highlight the main essence of each clause, so that when reading the clause the main point you need to refer to in the management of your lease on a daily basis is highlighted.
Here is an example from a retail property lease concerning the need to keep store sales information. Here is the original wording as contained in the lease:
That the Tenant shall make and keep on the Premises for a period of at least two (2) years from the end of the Lease Year to which they are applicable or, if an audit is required or a controversy should arise between the parties hereto regarding Rent payable hereunder, then until such audit or controversy is terminated, correct
permanent sales records (indicating daily sales reports) in accordance with good accounting and retail practice, which shall be open to the inspection and audit of the Landlord or its duly appointed representative at all reasonable times.
Believe it or not, that is just one sentence. To fully understand how difficult that is to read I put the text through a readability assessment. This assessment uses various tests to determine what grade level you must have to easily comprehend what is written. Scores over 22 should generally be taken to mean graduate level text and most newspapers and non-technical books write for a grade 4 reading level
How did this fair?
|Flesch-Kincaid Grade Level||22.2|
|Automated Readability Index||25.3|
|Average Grade Level||20.5|
These tests indicate that this one clause could a person reading at a PhD level. No wonder leases intimidate people.
Now read that clause again. But this time pick out the most basic intent of the clause. You can either underline the important text or highlight it with a highlighting pen. But remember that if you make further copies of highlighted text, the highlighted portions may turn black depending on the colour of highlighter used.
How do you do that without having a PhD to understand the clause in the first place?
Use the Who, What, When method.
Almost all lease clauses provide direction to someone to do something by some time. To simplify the wording – for everyday needs – highlight Who must take action, What that action is and When is must be done.
Here is what you get:
That the Tenant shall make and keep on the Premises for a period of at least two (2) years from the end of the Lease Year to which they are applicable or, if an audit is required or a controversy should arise between the parties hereto regarding Rent payable hereunder, then until such audit or controversy is terminated, correct permanent sales records (indicating daily sales reports) in accordance with good accounting and retail practice, which shall be open to the inspection and audit of the Landlord or its duly appointed representative at all reasonable times.
And now the score is:
|Flesch-Kincaid Grade Level||8.8|
|Automated Readability Index||10.1|
|Average Grade Level||8.9|
There is certainly a lot more in the original clause than in the simplified, pared down version, such as where the documents should be kept, how they should be formatted, etc. But anyone reading the highlighted copy for the daily management of the lease will know that, in most circumstances, the tenant must keep sales records for two years after each lease year and those records may be audited by the landlord.
This isn’t a substitution for the exact lease wording and an understanding both the business and legal aspects of the original wording. It is however, a quick guide to gaining a basic understanding of the lease requirements for your day to day need.
Always remember that the lease is written from two perspectives.
The first is the legal perspective. That is why we have long complicated clauses as lawyers attempt to minimize risk by including as many specifics as possible over as many potential situations as possible. For this reason alone, the lease should be reviewed with a competently trained lawyer specializing in commercial real estate.
The second is the business perspective. The lease is the ongoing contract between the landlord and the tenant, so it must cover how that relationship will work over the time of the lease. This is a completely separate way of looking at the lease as compared to the legal point of view. Therefore, you need a commercial lease expert, such as our firm, to show you the business implications of the lease and how to properly negotiate the lease to protect your interests.