Leases in commercial real estate form the foundation of the tenant mix and the rental cash flow. They are important documents to understand and administer. It is not unusual to have a variety of leases in the one property. On that basis every lease has to be read and checked.
Every lease in a clients managed property should be assessed for impact on the investment through any potential growth or risk. In simple terms you can and should do a lease assessment. Every single lease document should be checked and cross referenced to the occupancy situation.
Do Your Analysis on Real Issues and Property Factors
Here are some of the bigger things to look for:
- Identity of the parties – Understand just who the tenant is and how you can contact them. Make sure that they are the ‘legal’ occupiers of the property.
- Inspect the premises – Early in the review of lease documentation, go to the property and undertake a full property and tenancy inspection. Look for discrepancies in occupancy and tenant use.
- Suite or premises identification – The premises description should agree with the lease document and any plans applicable to the building. Check out the building surveys to ensure that all is well with boundaries and premises use.
- Area of the occupancy – There should be a plan that is applicable to the area occupied by each tenant. Understand the size of the space in each case. Understand that appropriate occupancy certificates have been issued for the building to be used and occupied.
- Permitted use – Is the tenant using the premise in accordance with the lease description? Is the permitted use of the property legal for the location? In a building with multiple tenants in occupation, watch the permitted use provisions of each lease as some tenants will attempt to introduce new property or premises uses. This is something you commonly see in a retail shopping center.
- Outgoings recovery – Every lease will have a relevance to outgoings paid and recovered for the landlord in a property. Make sure you understand that factor on each lease and how the rental and or outgoings recoveries may work.
- Rental paid and any Arrears – Check that the rentals paid are in accordance with the existing leases. Get a copy of the current rental invoices to check out that fact. Also look for arrears issues that may be delaying payments to the landlord. It pays to act early in any arrears situation rather than let a large debt accumulate.
- Rental escalations – Rental reviews will be set to occur in the property at particular times. Some of those reviews in the leases will be based on market rents, whilst others will be based on percentages or fixed amounts. Read the leases to understand just how those rent reviews will impact cash flow for the landlord.
- Option terms and expiry conditions – Determine if the leases have options to be extended and if that is the case, how those options can be activated. Other leases will be coming to an end so look at the make good requirements at the end of the lease.
- Landlord covenants – These are the clauses of the lease that specifically require the landlord to do something. They may have time frames associated with them and or responses and actions may be required of the landlord. Look for critical dates and responses.
- Tenant covenants – During any lease term, the tenant will be required to do things and provide certain information. Check out what those things are in each lease and ensure that the critical dates are captured into a diary alert system.
- Maintenance requirements – Some leases stipulate how a maintenance event should be responded to by the tenant and or the landlord. Look for response issues and how they impact the occupancy or property use.
- Fitout compliance and approvals – The fit out within the premises should have been approved for occupancy, and the construction of the fitout should have been in keeping with current building regulations and codes. As the right questions and check that these things have been complied with.
- Insurances – Certificates of insurance currency are generally required as part of the lease to support ongoing occupancy. Ensure that the certificates have been supplied for the tenant in occupation and the existing lease. Insurance cover is likely to be nominated as $20m public liability for even the standard commercial office tenancy today. Check out the insurance clause in the lease documentation.
- Bonds or Guarantees – With many tenancies there will be bonds or some form of guarantee to identify and track down. In the case of any lease default that bond or guarantee will be drawn on to recoup any losses the landlord may suffer. Ensure that you know where these important documents are located.
So there are plenty of things that can be checked when it comes to lease documentation and occupancy. Understand your leases and your tenants. Make sure that all issues are known and identified in any commercial, industrial, or retail property.