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8 Things CRE Landlords Need To Think About When Entering A Lease Agreement

Re-Leased 02 May 2018

Commercial property landlords live and die by the lease agreements they negotiate with tenants. It may be bread and butter work for landlords, but leases also require great effort to ensure they’re well-planned and fairly drawn-up.

And while it is often tenants who are warned to use caution when entering into a new lease agreement, as to avoid being written into a corner they don’t want to be in, landlords, too, must take great care when negotiating the rules of tenancy or else risk future expense and conflict down the road.  

Here are 8 tips for commercial landlords entering into a new lease agreement.

Be sure to get a guarantee

The first step a commercial landlord needs to take when entering into a new lease agreement is to obtain a guarantee that the tenant is a good position to stay true to their financial obligations.

Such a guarantee can be obtained through background checks and a comprehensive vetting process. Not only does this require proof from the tenant’s previous landlords that they are reliable and timely with rent payments, but it could also require talking directly with the tenant to try and obtain a comprehensive understanding of their current financial situation and the likelihood of it remaining strong over the coming years.

If landlords are aware of a potential tenant’s assets, liabilities, financial standing, and have a good understanding of their behaviour in the past, commercial landlords can have much more confidence when signing a new lease agreement.

Ensure a careful balance for terms and renewals

It is understandably tempting for landlords to write tenants into the longest possible lease agreements - the longer the tenancy, the less the landlord has to worry about finding new tenants, the less a property risks sitting empty.  

However, we always recommend that landlords think closely about the length of tenancy they offer and consider what implications it may have for their future interests.

If, for example, the property is going to need rejuvenation or structural maintenance at some point soon, having a tenant locked into a long contract might impede this. This could result in the landlord having to pay compensation to the tenant or delay important work.

It is worth writing a clause into all lease agreements which allows the landlord to terminate the tenancy, with appropriate notice or compensation, if urgent redevelopment tasks require it.  

If things go wrong, act quickly

A landlord can go to great measures to try and avoid any of the potential risks that come with a lease agreement but, sometimes, things can still go wrong. When that happens, it’s important to act quickly.

If, for example, a tenant misses a rent payment or breaches the terms of the lease, react straight away and contact the tenant directly to identify the cause of the problem. Prompt action ensures the issue isn’t given time to worsen and acts to inform the tenant that you, the landlord, will not easily overlook such breaches of confidence.

Planning and agreeing on rent reviews

Planning the perfect time for a rent review is essential for commercial landlords. Too short a period between reviews could act to frustrate the tenant, too long and the landlord risks making less rental income that they should be in the current market.

Review dates must be set and agreed upon before the contract is signed, after which reminders must be set for those dates.

Automated management platforms, such as Re-Leased, can facilitate this with scheduled calendar reminders for both tenant and landlord. If the date is missed, it could be that the landlord has to wait until the next review date before taking any action.

Give tenants clear rules for any elective changes
they make to the property

It’s not unusual for tenants to want to put their own stamp on rented office space and landlords have to be understanding of this common request.

It can be off-putting, to commercial tenants specifically, if a landlord remains closed-minded to them adding personal touches to the space that they’re paying for, especially if said changes are required for their shifting business needs.  

We recommend including a clause in the lease agreement which clearly states the extent to which the tenant can alter the property. This clause can also state that the landlord has final say over any proposed changes. It should also outline who is financially responsible for elective changes and whether or not the property must be returned to its original state come the end of the tenancy.

Finally, if the changes, paid for by the tenant, end up adding value to the property, the lease agreement must state whether the benefits of that added value are enjoyed solely by the landlord, or shared with the tenant.

Retain approval of the tenant’s right to transfer the lease

It might seem simple, but it’s essential that a lease agreement contains a clause stating that the tenant may only sublet the property, or transfer the lease, with the landlords full and explicit permission.

This enables the landlord to maintain full control over who the tenants are, ensuring that they are always trustworthy and in a financially stable position. And, if the lease agreement is breached in any way by this new tenant, the landlord must ensure the original lease agreement protects them against any potential damages.

Record everything in writing

As soon as the terms of the lease have been agreed upon, they must be recorded, in full, in the form of a Deed of Lease. This is a full written document, signed by both parties which must be updated with each lease renewal and rent review.

Manage leases on a platform

With all of the above to consider and stay on top of, landlords benefit greatly from using a cloud-based platform to manage their leases.

Re-Leased allows landlords to oversee all insurance documentation, receive automated reminders for all key events and dates,  process tenant payments, and communicate with tenants.

With so much to remember, it’s important that landlords store all of the information they require on one centralised platform.

That way, there is always confidence when entering into a new lease agreement that regulations are being complied with – risk is being reduced, and, perhaps most importantly, that all key stakeholders know exactly where they stand at all times.

Set your business up for success by managing your leases effectively. Read our Ultimate Guide to Lease Administration here

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