Big Mistakes that Happen in Commercial Property Leasing

In office and industrial property I have seen so many ‘leasing experts’ make big mistakes.  They do so because they do not understand enough of the leasing process and rental structures.

It is so easy to make big errors or allow omissions to occur in the leasing process that impact the property cash flow and occupancy for a very long time.  The landlord then suffers the ‘weaknesses’ of the lease for years.

Let’s look at the facts:

1. Leasing an office or industrial property involves finding a quality tenant and then introducing them to the property.
2. The negotiated lease provides a rental cash flow for the landlord for a long period of time.
3. The agent negotiates the lease deal after finding and qualifying a quality tenant.
4. The tenant signs a ‘heads of agreement’ that reflects the facts of the negotiated deal but also the skills and knowledge of the agent when it comes to ‘leasing’.
5. The solicitor for the client takes the ‘heads of agreement’ and creates the lease for the parties to sign.  A poorly constructed ‘heads of agreement’ will usually result in an average or below average lease document.

So where does it all go wrong?  Many agents do not know enough about lease structure and rental types to put together a strong and accurate ‘heads of agreement’.  From that point the solicitor creates a standard lease that exactly reflects the ‘agreement’ be it of poor standard or otherwise.

If the agent has not covered all the correct lease factors accurately in the ‘heads of agreement’, then the final lease will not pick them up (because most solicitors just do the documents without a full understanding of the property, the market, and the client).  The landlord then has to live with the lease results and facts of the deal for the duration of the lease term ( in most cases this is many years).

Here are some very common issues that I have seen:

• Some agents do not get sufficiently ‘educated’ on the complexities and alternatives of rental strategy in leasing.
• Income types such as gross, net, face, effective, and passing rents are not fully understood by many leasing agents and are then poorly introduced to the negotiation.
• Some agents don’t know how to read a lease, and have probably not done so for a very long time.
• Advanced rents such as single net, double net, and triple net are not fully explored to help the landlord’s outgoings recovery to the best of the negotiation and property under lease.
• Incentive alternatives are not carefully considered and introduced to the lease in the right way which still protects the landlord’s incentive outlay in times of tenant default.

So the message here is clear.  If you are going to provide leasing services for your clients in investment property, take the time to understand lease strategies, and the creation of an accurate ‘heads of agreement’.  Your clients will reap the benefits of your skills for years to come.