Potential Property Pitfalls at Lease Renewal Time

About to renew your lease? Avoid these pitfalls.

As a facilities manager this is an area where constant vigilance is required.  Almost every lease prohibits the tenant from the use of hazardous materials, except for those specifically related to tenant’s use and approved by landlord, and those hazardous materials will need to be properly handled and stored.

This is an area that can fall through the cracks.  Make sure that you work with your insurance manager to determine that the type and amount of required insurance is up to date and adequately insures your property and liability exposure.

Damage to Premises
Review the lease to make sure that in the event of a major casualty the landlord has to give notice of its intent to rebuild and restore the premises within a specific time period and that rent abates during this period of time.

Operating Expenses
A manager of a building in an industrial park where the tenant pays a proportionate share of real estate taxes and operating expenses should focus upon whether those taxes and operating expenses charged by landlord are reasonable and consistent with expectations.  Review the taxes and operating expenses which are charged to make sure the landlord is not trying to capture costs unrelated to the specific operation of the industrial park or buildings or specifically related to leases of other tenants.  The lease may have an “audit” provision giving the tenant the right to audit landlord’s statement of operating expenses and to be reimbursed for the cost of the audit if there is a discrepancy over a certain percentage (say 3%).

Pay particular attention to the real estate tax component of any expenses being passed along to the tenant particularly if the property has been sold during the time the tenant has occupied the premises.  Often the sale of the property will trigger the local taxing authorities to reexamine the assessed valuation of the property and, if the property was sold by the previous owner at a profit, real estate taxes might increase. 

While over the last five years sales at a profit are rare, this author recently had a client that is a tenant in a property that sold for more than a 50% profit which will trigger a significant increase in the real estate taxes that the tenant will be required to pay under the existing terms of the lease.  As it so happens, the lease is up for renewal in a year and I renegotiated the base year of the lease so that the tenant will only pay increases in the taxes above the reassessed valuation of the property.

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