Rent Increases

Rent increases should be clear. They should not be left to the interpretation of some percentage of some index based on possibly different time frames. Rent

increases should be in precise mathematical dollar amounts at precisely stated times. Concerns about runaway inflation can be addressed as a separate matter.

Additional Charges

Three factors should be included and described in clear, unambiguous detail when there are charges to the lessee in addition to rent. They are (1) the basis

for charges (what they are), (2) how the dollar amount is to be computed, and (3) when it is to be paid.

Renewal Option

The lessor should not hang his hat on lease-renewal options. A renewal option is a nonbinding agreement that works in favor of the lessee. When fixed dollar

amounts are used, if market rents are higher, the lessee will exercise the option upon expiration of the lease. On the other hand, if market rents are lower

upon expiration, the lessee will not exercise the option but will renegotiate a new, lower rent. When an option to renew is based on an interpretation of

some index, negotiations effectively begin all over. The good news is when the lessor is refinancing a property, lenders like to see renewal options.

Assignment and Subletting

There should be no assignment of lease or subletting to a new lessee allowed without the lessor’s approval.

Interior Alterations, Exterior Signs, Fixtures, Lighting, and Advertising

Interior alterations that are not reasonably necessary for the lessee to conduct business should require the lessor’s permission. No exterior signs,

fixtures, or lighting should be installed without the lessor’s approval. No advertising material or methods of advertising should be allowed that the lessor

considers objectionable to the other lessees or the property.

Estoppel Certificate

An estoppel certificate is signed by the lessee and effectively states that, other than the lease, there are no other agreements existing between the lessee

and lessor. It is important that the lessee agree to provide this document when asked. Every lender and most buyers will require an estoppel certificate from

each lessee.

Subordination

There should be an agreed-upon subordination of the lease by the lessee to any liens placed on the property by the lessor. Without this subordination,

lenders won’t lend.

Signature

The signature of the lessee that executes a lease needs to be properly authorized. That authorization needs to be validated by the lessor. When partnerships

are involved, or when due diligence dictates, the signatures of more than one lessee may be required.

Summary

Leases are executed documents between the lessee (tenant) and the lessor (owner) that will decide the present and future revenue stream of a property.

Consequently, leases have a significant impact on deciding the present and future values of income properties. The lessor’s ability to finance, refinance, or

sell their property depends on the property’s leases. The courts have determined that a lease is a binding obligation that cannot be altered without the

permission of the lessee and the lessor. Therefore, both parties should be careful: Use approved lease documents and seek experienced counsel where there is

any doubt.

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