Unit 3: Leases and Tenancy Agreements
Lease Negotiation
A PM needs accurate info to prepare for negotiations including: -all facts about the building -tenant criteria -rental parameters and variations -inducements and mandate to apply them as necessary -available term -available space and alternative
Lease
A contract transferring the right to possession and enjoyment of real estate for a definite period of time. Through the contract, the landlord and tenant define their relationship and identify their rights and duties. A lease creates a leashold estate or interest in land between landlord and tenant. A leasehold interest is an interest in real estate for a definite period of time. In AB, tenancies are either commercial or residential. 4 broad categories of property types that a PM will encounter -residential -retail -industrial -office A written lease of 3 years or more should be registered on title to protect the tenant, as registration ensures the buyer of the property is aware of the existing lease arrangement.
Transfer of Possession
A lease, to be valid, must transfer the possession of the property to the tenant. The lease provides that the landlord 'demises the premises' (transfers the premises) or grants a lease to the tenant for a term. If the contract doesn't provide for a reversion of the property back to the landlord, then it is not a lease but a sale of property.
Additional Rent
All other monetary obligations of the tenant other than minimum annual rent and percentage rent. Examples: -property, local improvement and business taxes -repairs and maintenance to the leased premises and common areas -insurance -utilities -special charges (advertising, promo costs, security)
Concessions
Any of the following are concessions which could be offered to a prospective tenant in a difficult market: -expenses (taxes, maintenance, repairs, insurance, landscaping, etc.) -rent escalation limitations -expense escalation over base year
Indemnity of Landlord
Clause often referred to as 'hold harmless' clause. States that except for damage, which is covered by insurance, the tenant will indemnify and hold harmless the landlord for: -claims for bodily injury or death -property damage -other loss or damage arising from any act or omission of the tenant, or assignee, subtenant, employee, contractor, invitee, etc.
Remedying by Landlord, Non-Payment and Interest
Clause provides landlord with the right to remedy any default of the tenant by: -making payments due by the tenant to a third party -entering the premises to do work the tenant has failed to do, with all expenses to be paid by tenant, and charging interest at a rate of 3% per annum above the bank's prime lending rate on any unpaid rent or other amounts.
Landlord's Occupancy Costs
Defines the landlord's common area maintenance (CAM) expenses that are charged back to tenants.
Inducements
Following inducements may be negotiated: -rent free period -take over balance of prospect's current lease -pay all moving costs -cash allowance for tenant improvements -'turn key' lease with premises finished to tenant's specs -fixed rent for longer term -space planning services -ceiling on operating expenses for a specified period -fixed rent escalations -free parking
Commercial Tenancies
Governed by common law and include leases of factories, warehouses, stores and offices.
Expropriation
Government overtaking property. Rarely occurs, however the landlord and tenant each have their own rights to compensation and should not be merged.
Abatement
If the office premises are damaged, but not by tenant negligence, rent will be abated until the premises are 'reasonably capable of use'. Rent abatement usually excludes relief from the operating expenses and taxes to be paid by tenant.
Insurance
Landlords usually insure for every possibility including rental insurance that repays the landlord for rent loss if damage occurs to the building. Tenants insure against loss of income, damage to stock, improvements and fixtures and damage to premises they must repair under the lease.
Commercial Leases
Most elements of a residential lease are brief and can often fit on a single page. The covenants and conditions of a commercial lease can be extensive. The following will be covered in most commercial leases: -rent -general covenants -building services -use and occupancy of leased premises -repairs and damage -taxes -utilities -operation cost escalation -signs and directory -fixtures and improvements -insurance and liability -landlord's access to premises -remedies of landlord on tenancy default -events terminating the lease -registration of the lease -definitions and interpretation -renewals and rent review -arbitration -special provisions
Abandonment and Right to Re-Let
Provided an intent to abandon can be reasonably proven, or where actual abandonment has occurred, it is likely that the entire remaining rental and additional rent due for the balance of the lease becomes due and payable. If payment isn't delivered, the landlord may enter and seize the remaining assets on the premises. The landlord may further have the right to distrain the tenant's assets provided they act within the confines the lease contract. The landlord will also want the privilege to re-let the premises to maintain the highest possible occupancy level. This clause usually sets the formula under which the landlord must reduce the defaulting tenant's debt, referred to as mitigating their damages.
Rent
Rent in a shopping centre lease differs from other rentals in that it has 2 parts: the minimum annual rent and percentage rent. Minimum rent is the amount charged for use of the landlord's space and the amount charged will depend on the particular tenancy and local market. Percentage rent is common for retail stores and shopping centre leases and requires the tenant to pay a percentage of their sales volume. Generally calculated and payable monthly on the previous month's reported sales and adjusted annually within a certain period of the tenant's audited sales volume. Having tenant sales info provides several advantages to the landlord: -monthly sales figures allow landlord to receive monthly interim cheques for percentage rent due, rather than having to wait until the end of the year -a constant check on sales levels is provided and allows the landlord to monitor the tenant's success or probability for failure. Sales charts for all tenants are normally kept by landlords, including month-to-month or week-to-week comparisons with preceding years -regular sales reporting allows the landlord and tenants to evaluate the effectiveness of advertising, special promotions and the like
Tenant Records
Some leases have clauses which stipulate the requirement for tenant's to keep monitor gross sales data.
Gross and Net Leases
Some typical expenses incurred in the operation of a building include: -non-structural repairs -structural repairs -HVAC -building maintenance -landscape maintenance -janitorial services -security -utilities -insurance -property taxes -management Gross Lease includes all expenses. Sometimes called an 'inclusive lease'. Costs are known and consistent to a tenant. It is the landlord's responsibility to pay any increases in expenses until there is a rent review or an adjustment for an escalation in expenses. A gross lease may include an escalation clause to allow for these adjustments. Net Lease involves rent plus applicable expenses. The landlord would prefer a triple net lease because the tenant would share in the increase in the operating expenses. Net: tenant pays a base rent plus HVAC, lighting and property taxes Net, Net: tenant pays base rent plus all operating expenses, excluding property taxes, non-structural and structural repairs Triple Net: tenant pays base rend plus all operating expenses including property taxes but excluding structural repairs. Also called 'tenant pay all' lease or 'net, net, net lease'. Building operating expenses may be negotiable except for structural repairs. In practice, a landlord is responsible for the cost of repairs to foundations, structural walls and roofs of most buildings.
Types of Tenure
Tenancy at Will -occurs by implication from the acts of the parties. An implied tenancy at will may arise when an overholding tenant continues to rent the premises after the expiry date of the lease, there is no set term and the tenure continues only as long as both tenant and landlord agree and either may bring the tenancy to an end without notice to the other party. An express tenancy at will may arise when a real estate transaction does not close on the scheduled date and the tenancy is an interim measure until the transaction closes. Periodic Tenancy -any occupancy or tenancy that is automatically renewed on the last day of the term for a further term of the same length. Periodic because tenancy runs from period to period and continues until such time as either party gives notice to the other. The termination requirements are prescribed in the RTA. Fixed Term -type of lease where the time frame for the lease duration runs for a definite period of time. It does not automatically renew for a period of the same length like a period term. Has start and end dates and renewal provisions (3 months before termination date and tenant must return renewal 2 months before termination date). May also be referred to as 'term certain'. Tenancy at Sufferance -not consensual. Arises when tenancy has been terminated and the overholding tenant remains on the premises without landlord permission.
Typical Commercial Lease Clauses
Term Rent Overholding General Covenants Building Services Use and Occupancy Rules and Regulations Real Property Taxes Lessee's Utilities Repairs -Landlord -Tenant Damage -Fire -Other Special Provisions Laws of the Province Definitions Schedules -plan of property -building rules and regulations -legal description Etc.
Changes and Additions
The inclusion of a changes and additions clause is critically important for the landlord. The landlord should be able to alter the design, coverage, even the area of the premises, at its own discretion. Bylaws affecting permissible coverage might alter, allowing the landlord to construct additional buildings on the lands.
Promotion
The landlord makes a contribution (generally 25% to 35%) of the funds to the Merchant's Association which are spent on advertising and promoting the shopping centre overall. This approach has fallen into disuse as landlords tend to favour promotion funds paid by tenants but expended and administered by the landlord. The landlord will often make a contribution to the fund as well.
Proportionate Share
The landlord's architect will certify the total leasable area of the buildings and of each of the various leased premises. Example, total area of the development is 7,100 square meters. One unit is 150 square meters, so that tenant's proportionate share is 150 / 7,100 = 2.1127%. This proportionate share is used to calculate money payable by the tenant for additional charges.
Overholding
This clause permits the tenant to remain in possession and the landlord to receive income for what is generally a reasonable brief period following the termination of the lease. Reasons might prevent a lease renewal within the correct time schedule and the landlord's right to double the original rent gives the process an immediacy.
Leasing Process
To start the leasing process, begin with the following three items of info: 1. Establish amount of space required 2. Quote the rental rate and equate it to per annum or per month rent 3. Advise on the estimated share of operating costs
Specific Lease Clauses
Use and Occupancy of Premises -a clear description of permitted use by tenant -a statement that the tenant is not to use or permit the use of the premises for any other business or purpose -a statement that the tenant is not to do or permit anything on the premises that would increase the landlord's cost of insurance or cause its cancellation Repairs -responsibility for repairs is defined in detail Damage -If the premises or building are damaged by fire or other causes the clause generally provides for an abatement of rent in the either of the following circumstances: -where the premises are unusable or inaccessible for a period of time -where the premises are incapable of restoration within a time which leads to termination of the lease. This clause often contains further direction regarding the responsibility for repairing specific types of damage and agreement on the application of insurance funds. Definitions Emphasis placed on clearly establishing the intent of the parties to a contract. Example, a lease may state that the tenant will pay a proportionate share of operating costs and the tenant would wonder what a proportionate share is, how it is calculated and what is included in operating costs. Operating Cost Escalation May apply if the lease is less than triple net and provides an agreed method for adjustments in case of an under or overpayment. It provides agreement on tenant's share of op cost escalation over an agreed base year or over the estimated costs for the current year. Assignment and Subletting Sublet may be granted for a period of time less than the balance of the lease term, an assignment is for the balance of the lease term. Insurance - Landlord/Tenant Responsibility Landlord is responsible for insurance -building and improvements (except those installed by tenant) against all risks -third party liability for the common areas Tenant is responsible for insuring -trade fixtures, furniture, equipment, inventory and all other items on the premises -leasehold improvements installed by tenant -third party liability, minimum amount of coverage specified by the landlord -landlord and PM will be named in the policy Fixtures and Improvements Some or all of the following are common -tenant must obtain landlord's approval to install/alter leasehold improvements and to install trade fixtures -approval must be in writing -any work on the premises must be carried out by qualified contractors -landlord may back charge the tenant for any improvements install on their behalf -tenant must conform to the Builder's Lien Act and ensure that any liens placed on property by a contractor or subcontractor are removed -tenant must maintain appropriate insurance coverage for all work being performed on the premises -upon expiry, all leasehold improvements installed by the tenant become the property of the landlord unless agreed otherwise -tenant must make good all damage caused to the leased premises by the removal of leasehold improvements or trade fixtures Landlord Access to the Premises Lease grants exclusive possession of the premises to the tenant for the duration of the term, landlord must reserve a right of access to the premises for certain purposes in order to maintain some control over the property Default Default by tenant may occur by failure to observe a covenant or condition of the lease, such as failing to pay the rent. The lease provides for the landlord's rights and remedies including: -right to charge interest on unpaid rent -a specific time limit which a tenant must pay the rent -the right to terminate the lease after notice of default Rent Review Terms regarding rent and increases in the annual rent amount should be specified in the lease and may occur because: -an annual review for rent escalation -exercising an option to renew a lease term at a rent to be agreed upon
Escalation Cluases
When a gross lease is negotiated there must be a provision either for an annual rent increase or for an escalation clause to allow the landlord the right to recover rising costs in the operating expenses.