LEASE CLAUSES:
Don’t Win the Battle and Lose the War
- Part I -
By Levi F. Smith, Esq.
As Published in Michigan Lawyers Weekly
December 15, 2003
In a soft real estate market, tenants should seek more than lower rent, rent abatement, limited
annual increases or increased tenant improvement allowances like voice data lines
and moving expenses. The entire landlord standard form lease is now open season for tenant-friendly
negotiations. Landlords simply cannot afford to let the tenant get away from any remotely fair deal.
Ask and You Shall Receive – Tenants are getting the landlord to pay for its exterior exclusive signage on the building. During typical times, tenants, if able to get the naming rights, have to pay for it.
If a tenant asks, landlords who want to make a deal will remodel the lobby, replace the roof (if on the top floor) and repave the parking lot to get the signature.
Other concessions have been exclusive use similar to a shopping center, increased landscape outside tenants’ windows, escorted guard service to the car after hours and shuttle busses to downtown parking areas five blocks from the premises.
Cap Real Property Taxes For Purposes of Annual Increase – In a soft market, landlords will discuss and concede language in their standard “lender approved” lease clauses.
In Michigan, for example, property tax increases are capped by Proposal A to 5 percent per year or inflation, whichever is less. If the building is sold during the lease term, property values are reassessed and usually increase.
Why not cap increases to 3 percent to 5 percent regardless of sale? The new landlord’s problem is not the tenant’s unanticipated tax increase.
Definition of Operation Expenses For Purposes of Annual Increase – Landlords want to pass all expense increases on to the tenant. The tenant’s job is to make sure capital improvements are not passed on, including roof replacement and parking lot replacement. These are two common capital improvements that may find their way into the annual escalation bill.
Also exclude legal fees for evictions, new leases, sale, mortgage refinance and so forth. There are national companies working on a contingent fee basis who are very profitable because they find significant landlord mistakes on the annual bills.
A tenant should have a clause that gives it and its agents the right to audit the landlord’s books, records and hard drive to verify the annual increases with a substantial penalty for errors in excess of 5 percent.
Continued in Part II
BIO: Levi F. Smith, a native Michigander, lives in West Bloomfield.
After passing the bar in Michigan and California and practicing law for 6
years, he entered the commercial real estate field. In 1988 he founded the first corporate real estate firm,
Levi F.
Smith Real Estate, Inc. in Michigan to exclusively represent tenants and buyers. For
more information, visit
http://www.michigan-commercial-real-estate-properties.com
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Smith Real Estate, Inc.
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