How to Demystify Complicated Lease Clauses

Posted on August 26, 2015August 26, 2015

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.

STEP 1

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.

STEP 2

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?

Readability Formula	Grade
Flesch-Kincaid Grade Level	22.2
Gunning-Fog Score	25.9
Coleman-Liau Index	12.7
SMOG Index	16.3
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:

Readability Formula	Grade
Flesch-Kincaid Grade Level	8.8
Gunning-Fog Score	11.6
Coleman-Liau Index	8
SMOG Index	6
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.

A Retail Merchandising Mishap

Posted on August 26, 2015August 26, 2015

I wrote about the importance of carefully crafting a retail use clause recently. Today, I read that greeting card and stationary company Paperchase has entered into wholesaling arrangements with Staples, an office supply company. This marks an expansion of the Staples use from office necessities to appealing to the general public by introducing greeting cards into their mix.

Paperchase also announced shop in shop concessions in the Hudson Bay stores in Canada and a desire to do the same in the USA.

Other uses such as grocery stores, pharmacies and many others are expanding their merchandising concepts as consumer’s tastes change and they grapple with omnichannel competition.

All this points to the need for carefully crafted restrictive use wording. Admittedly, I hate restrictive use clauses in leases when working for landlords; and attempt to get them in tenant leases when working with occupiers.

When working for tenants I start with getting an exclusivity clause that says something along the line of the following: “The Landlord won’t suffer or permit any other tenant to sell or permit to be sold any product, service or merchandise that conflicts with the Tenant’s use.” Please understand that I am not a lawyer and I’m not offering legal advice by providing this wording so please discuss this article with your lawyer and obtain the best wording for your circumstance.

But why do I start with that type of wording? The concept I want to get across in the negotiation is a true broad exclusivity within the property. Going back to the Staples/ Paperchase situation, let’s assume my client operated a card store. When my ficticous client entered into the lease, Staples was not in the greeting card business. Now they are a direct and large competitor.

While a prudent landlord would exclude large box stores, multi-department stores and anchors from any exclusivity restrictions; I’ve seen many leases that don’t exclude them.

From the landlord’s perspective, this type of wording is very dangerous. It is very difficult to manage a property with this type of wording, particularly when it is tied to poorly structured use clauses. For example, how would the landlord tell Staples, a national tenant, that they couldn’t sell greeting cards in this one specific location? If the landlord did nothing and my example greeting card tenant raised the exclusivity issue, then the Landlord has problems with this tenant. It creates an untenable situation.

The answer to the landlord’s conundrum is a well crafted use clause for each and every tenant, an exclusion to any restrictive covenants as noted above and wording in any granted exclusivities that is limited to the landlord leasing space to a competitor.

To learn more about this topic and how I can benefit your investments contact the author to arrange a 30-minute, no-obligation consultation.

Peter D. Morris is the principal consultant at Greenstead Consulting Group and an acknowledged expert of income-producing real estate.

He has a unique perspective gained from multiple roles in real estate including consulting, training, acquisition/disposition, leasing, asset management, development and property/facilities management as well as being the Chief Operating Officer of a publicly traded real estate company. He has a depth of knowledge in most real estate asset classes including multi-unit residential, mixed-use, retail, office, industrial and hospitality. Peter has worked with top companies such as Cadillac Fairview, Brookfield Properties, Marathon Realty, Grosvenor Americas and Colliers International. He also brings a global perspective having worked in 8 different countries including Canada, the USA, as well as countries in Asia, South America and the Middle East.

pdmorris@greensteadcg.com

CNL Lifestyle Properties, Inc. Engages Us to Reposition Whistler Creekside Village

Posted on August 26, 2015August 26, 2015

Creekside Village, Whistler, BC

The owner of Whistler Creekside Village has engaged BC based Greenstead Consulting Group to assist in developing a repositioning and remerchandising plan for the property to better address the needs of both residents and visitors to Whistler.

“The opportunity arose to make significant and, we believe, positive changes to the offering we present at Creekside Village”, said Ryan Bell, the Director of Asset Management for the owner, CNL Lifestyle Properties, Inc. “A number of leases expired and we made the conscious decision to develop a scheme to replace those uses to better compliment our existing tenants such as Creekside Market, BC Liquor, Scotiabank and Starbucks, to name a few.

After an internal planning session, Greenstead Consulting Group was hired to refine a repositioning and merchandising plan for the property.

According to Greenstead founder, Peter Morris, Creekside Village is ideally suited to provide a different experience to the common brand name retailers found elsewhere in Whistler. He suggested that Creekside Village will be seeking tenants that are unique and/or offer something quintessentially Canadian, resulting in a ‘must visit’ reason at Creekside Village.

“The better quality hotel accommodations adjacent the property cater to an affluent, luxury family clientele who appreciate the opportunity to uncover something new and different as compared to the mass chain stores”, said Morris.

Morris stated that the preferred merchandise mix includes a signature restaurant; a salon/spa; unique art and gift gallery; quick service food outlets, with either a healthy food option or a menu of wide appeal; resort or adventure wear and a lounge, craft brew pub, wine bar or speak-easy atmosphere location to cater to those wanting somewhere to go in the evening.

According to the recently produced Whistler Chamber of Commerce Commercial Lease Report that provides a snapshot of current rates and operating costs rents in the Creekside Village area are less than in the Village Square, where they can be as high as $125 per square foot according to the report. Morris believes this is one reason his client will be able to find the right tenants.

“Even with the high rents demanded in Village Square, tenants still have to advertise to attract customers and the combined costs compound the risks of doing business in Whistler. Alternatively, if you locate your ‘must visit’ type of concept in a property with less rent, you can still spend on advertising to attract customers and the overall risk is reduced,” Morris said.