It’s amazing to both of us. In our combined 50+ years in leasing office space, more than half the tenants we encounter never review their lease on an annual basis. In our experience, the only time landlords hear from tenants about lease-related issues is “after the fact,” after an expense invoice, after a rent increase, or after a missed option exercise date.
Why the problem? It’s simple. Many people treat a lease like they treat a mortgage. They figure that once the lease paperwork is signed, all they have to do is make a monthly payment. This is the wrong approach and will get you in all sorts of trouble.
A lease is the kind of document you need to review annually, particularly as it relates to “Big Picture” items such as rent, length of term, options, etc. So what is a savvy tenant to do? Here are Colliers’ Top 8 Tips for managing your lease:
- Upon lease execution, have your broker, lawyer, or accountant provide you with a summary of the lease terms, paying particular attention to the commencement date, rent, the date and amount of rent increases, and the number of months or days you have to exercise any options;
- Make a note (written, in Outlook, anything other than a “mental” note) of the first day of a new lease year and remind yourself to review the summary of terms previously provided to you. Treat this date as the second most important anniversary date in your life;
- Give a copy of the lease to your lawyer and your accountant, and tell them to read the lease, keep an eye on option exercise dates, and call you the first day of the lease year to discuss possible changes or issues;
- When you get a bill for increased operating expenses or taxes, compare it with your lease document to make sure that you were billed as agreed upon in the lease. You may be shocked to learn this, but sometimes property management accountants make mistakes in coding bills. Other times, bookkeepers are not aware of negotiated limits or “caps” on certain expenses in certain leases. Therefore, the terms in your lease, including limits on expense increases, may be different from other tenants, so check lease terms for billings.
- Know in advance when the amount and timing of the rent increase is to occur. Sometimes the Landlord’s accounting department makes a mistake and calculates a higher increase than negotiated in the lease. Help your Landlord out by checking the lease, calculating the increase, and seeking confirmation from the Landlord or its agent. You will be in the definite minority of tenants taking this approach. Stand out so they know not to mess with you;
- With regards to tenant improvement construction, make sure that you get the entire Tenant Improvement allowance that you negotiated. Check the lease for how much you should be getting and then check how much has been paid to you directly, or indirectly. If the lease includes a specific number, you should make sure that the landlord reimbursed you that amount, or at least provided documentation as to what got reimbursed, why and by whom.
- Staying or leaving a property is sometimes driven by the fact that you have an option to stay or go. Make sure that you know if you have an option and the date by which you must exercise that option if it is to be effective. It is more than embarrassing to exercise an option after the notice period has lapsed.
- Compare the rent you are paying, and the scheduled increase in the rent you will be paying, to what other tenants currently pay for comparable space in your building or comparable buildings to yours. (This is where having a broker saves you additional monies.) You may find that you are paying substantially more rent than market, or that you are paying less than the market rate. In either case, compare your lease rental rate to market rental rate on an annual basis.
Unlike a mortgage with fixed interest rates and long terms – 20 to 30 years – a lease for office space is not something to put in a drawer or leave on a hard drive. It is something to review, consider, and monitor on an annual basis. An annual review insures that you get the benefit of options, negotiated expense limits, and other favorable items found in lease. Be a Smart CEO – or make your CEO smarter – by managing your lease and keeping occupancy costs under control.