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Christine Ziomek
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May 29, 2012

Landlords And Tenants Should Know Their Leases And Understand All The Implications

By: David I. Tesler, Esq.

In my experience, the vast majority of landlords and tenants read through their commercial leases with the same focus and thoroughness as most people spend with their iPod instructions – which is to say – not very deep or long. Someone in the organization may capture the basic data to be entered into company software, such as a few of the critical dates and dollars, but the majority of the lease is rarely read by anyone other than the attorneys who negotiated it. Typically, after a number of years, information becomes stale, pages of leases, amendments or valuable correspondence are misplaced and the lease itself is not pulled out unless a specific problem needs to be addressed. For some, just locating a complete lease file or finding the true master lease among competing lease files becomes a six-month project. Sound familiar?

And yet, the commercial lease contains all the rules, rights and obligations governing the relationship between landlord and tenant with regard to a demised commercial real estate space. The value of the demised space typically ranges between hundreds of thousands and tens of millions of dollars. That's why, despite the frequency with which I see it, I am always surprised when landlords and tenants are not as familiar with the contents of their leases in the same manner as they might be with other (equally critical) aspects of their business.

Understanding what's contained within the leases can have significant economic implications. Leases often contain many provisions that can seriously impact the cost (and savings) associated with the leased premises. For example, leases have clauses relating to prohibited uses and/or exclusive uses that are often either being violated or not sufficiently utilized. Landlords have received additional income via a lease amendment for allowing a tenant to use the premises in a manner that was not contemplated by the original lease. Tenants have also enforced exclusivity rights to sell an item at a shopping center that was being violated by another tenant. These are two singular examples among hundreds. Option and notice dates, incorrect procedure, and springing options are routinely incorrect with grave implications.

Even items with explicit financial implications are often not tracked properly. As CEO of the nation's largest lease abstracting company, I've seen countless examples of incorrect rent being charged, rent step-ups missed and critical dates tracked to an original invalid date. Perhaps the greatest source of financial errors involves the complex area of common area maintenance (CAM). Because of all the complicated moving parts associated with the landlord's attempt to track and profit from a property's common area maintenance, many leases contain pages of text seeking to spell out how the landlord will calculate CAM and what the tenant will be obligated to pay. Since CAM fees are basically unknowable at the time the lease is being written, the parties involved must create a formula that contemplates future expenditures. It's not unusual to see even a seasoned real estate attorney reading through these provisions two or three times to fully understand the intended CAM structure.

The best way to know and stay on top of all of the salient pieces of information in every lease is to have all leases abstracted. A lease abstract is a summary of the key financial, business and legal information in a commercial real estate lease. It highlights unusual lease provisions, financial obligations or other issues of import. The key to a valuable lease abstract is to keep things short and simple.

When should leases be abstracted? There are key times before and during the ownership of a property, including:

  • Whenever a new lease is executed
  • Whenever a lease is modified in some respect
  • Prior to the acquisition of commercial real estate
  • Prior to the merger or acquisition of a company that has a portfolio of lease assets
  • Whenever a company acquires or contemplates acquiring a portfolio of leases
  • Whenever a property changes current management
  • Whenever ownership converts to a new property management software system
  • Whenever lease files are not adequately organized
  • Whenever a real estate company does not have complete confidence in the accuracy and validity of its lease data
  • Immediately, if lease abstracts had not previously been created or recently updated.

The point is simple but too often overlooked: leases are complicated documents that are chock full of very important details. They set forth all the rules associated with how a particular premise will be utilized. Both parties to a lease should fully understand the implications of every significant lease provision. And the best way to do so is with a thorough, timely and expert lease abstract.


David I. Tesler, Esq., is the CEO of LeaseProbe LLC, producing commercial lease abstracts and handling Lease Administration and CAM Audits, and Real Diligence LLC, a company that specializes in financial due diligence of real estate and notes. LeaseProbe and Real Diligence are part of the Madison Commercial Real Estate Services family of companies.