Recently, I reviewed a 70-page lease for a client. To say it was like reading a book is an understatement. But that’s what I’m here for – to make sure that my clients can make informed decisions about the leases they sign.
Below are a few tips to consider when reviewing terms and types of lease agreements.
Length of the Lease – If the lease is more than a three-year term you will need to record a memorandum of lease. According to North Carolina G.S. § 47-18, a tenant who is leasing space for a term of more than three years should ensure that a memorandum of lease be executed and recorded in the office of the register of deeds in the county where the property is located.
Renewals – If you have the right to extend the lease at the end of the term, make sure you know the deadline to exercise that right. Alternatively, if the lease automatically renews, make sure you set a reminder for when you must notify the landlord that you don’t want to stay.
Common Area Maintenance Charges – Some landlords make tenants pay for the cost of maintaining common areas that all tenants share, like parking lots, landscaping, and insurance. If there’s no limit on the amount of these charges or on the amount they can increase each year, your rent can end up being much more than you’ve budgeted.
Repair Costs - You might also be responsible for repairs to the space you’re renting, including things like the HVAC system, which as we all know is a very large expense if the system fails. For example, on average a new HVAC system can range from $3,000-$8,000 which no business owner would be able to justify in the trying times we are in currently – where a recession is guaranteed to set some of us back. Tenants should always try to negotiate for a cap on the amount of repair costs they are required to pay.
Condition of the Space - Any space leased “as is” is a red flag because the landlord will likely not be responsible for fixing any problems with the space you find after you move in. You should always make sure you thoroughly inspect the property and are okay with any problems before signing this type of lease. Consider requiring the landlord to deliver the space with certain conditions met instead.
Personal Guaranty – Many landlords require a personal guaranty for businesses leases, especially if your business is new and doesn’t have an established revenue stream. This means you will personally be responsible for paying the rent and other charges if the business can’t pay.
Events of Default – What happens if you can’t pay? What if you break another part of the lease? Can you be evicted? Charged late fees and interest? Will you have the opportunity to fix problems before possible eviction? Under a lot of leases, the tenant can be evicted for minor infractions, like a retail store being closed on a day it should have been open.
Therefore, it is smarter to take a proactive approach and contact an attorney you can trust to review your lease “before you sign” – not once something breaks. For example, signing a 5-year lease with $5000 monthly rent is a $300,000 investment for your business. Consulting with and hiring a lawyer to review documents is a fraction of the investment. And there’s a strong possibility that attorney can help you find a smarter investment and help you protect it.
Types of Lease Agreements
There are three kinds of lease agreements.
Triple Net Lease (triple-net or NNN) is a lease agreement on a property whereby the tenant or lessee promises to pay all the expenses of the property, including real estate taxes, building insurance, and maintenance. These expenses are in addition to the cost of rent and utilities.
Gross Lease includes any incidental charges incurred by a tenant. The additional charges rolled into a gross lease include property taxes, insurance, and utilities. Gross leases are commonly used for commercial properties, such as office buildings and retail spaces.
Modified Gross Lease is a type of real estate rental agreement where the tenant pays base rent at the lease's inception, but it takes on a proportional share of some of the other costs associated with the property as well, such as property taxes, utilities, insurance, and maintenance. In other words, “you pay half, and we will cover the other half”.
Residential Lease vs Commercial Lease
So what’s the difference? When you sign a residential lease, you are protected by real estate laws which are made to protect the individual rights of the tenant. commercial leases contain fewer protections for the business owner. For example, in North Carolina, there is no implied warranty of habitability in a commercial lease. That means that the landlord does not have to keep the property in usable condition unless the lease requires them to do so.
Often business owners get caught up in the day to day – and pay very little attention to what they sign and accept in lease and other contracts. As a business owner it is important to be aware of your responsibilities and rights and have someone negotiate your rights. Contact Kliebert Law today. We will help you read before you sign.