Volume 2, Number 3
|Table of Contents|
What Every Lawyer Needs To Know About Real Estate Leases:
attornment: An agreement to recognize a new owner as the landlord/other party to the lease.
BOMA: Building Owners and Managers Association. BOMA established methods are frequently used and cited for measuring commercial office building space. See their webpage: www.BOMA.org
base rent: This is the minimum rent, usually denoted in monthly, annual and by square foot. The square foot number is based upon an annual rental. For instance, a 2,000 sf premises could have a $1,000 per month, $12,000 per year and $6.00 per rental square foot rent. In addition to base rent, tenants in retail may also pay percentage rent, and all tenants may or may not pay other costs (e.g. “triple nets” aka NNN), depending upon whether their lease is a net lease, gross lease or full service lease with a base year (terms defined below).
base year: Certain leases are a hybrid of a net lease and a gross lease. For these leases, the first year’s rent includes the NNNs, but each year after that the tenant’s proportionate share of the amount of increase in the NNNs is collected as additional rent. The base year is the year used to establish the initial NNNs which are included in the base rent. BE CAREFUL if this is new construction, as it might not be advantageous to use the first lease year as the base year.
build-out: This means the work initially does to customize the premises for the tenant; in other words any work beyond the “vanilla shell” which the tenant wants for the space; frequently the build out is done by the landlord, or there is an allowance given to the tenant for that work (a “tenant improvement allowance”.
build-to-suit : This term is used when a new building is being constructed for a single tenant and it is being built specifically according to the tenant’s requirements. Usually the landlord and tenant will sign a lease before any construction is commenced and there is a process included in the lease for how the construction will be done and the approval rights and responsibilities during the construction process. This is often seen in “big box” single building retail tenants.
capitalization rate (or “cap rate”): This is simply the owner’s return on investment calculation. When an investor is considering purchasing tenanted buildings, they will be looking to recover a certain cap rate and will compare this to similar projects.
common area: Generally, this means any portion of a project outside the 4 walls of the tenants’ premises, which are available for the tenants’ use. The common area is used as part of the load factor calculation (see below). It is also referred to in collecting the NNNs from the tenants: the landlord usually wants to control its use and configuration of the common area, and also wants to be reimbursed from the tenants for all the costs of maintaining, repairing and replacing common area elements (aka CAM charges).
common area maintenance charges( CAM): Usually considered a component of NNNs, these are the charges landlords impose on tenants to recover the landlords’ costs for maintaining, repairing and replacing common area elements.
covenant of quiet enjoyment: This is sometimes referred to in “modern” leases as the " warranty of possession." It is essentially a covenant (or warranty) that the Landlord has title to the leasehold it is granting to the tenant and the right to so convey it, and that the landlord will defend against any claims made by someone else claiming it has a right to possess the property. These are often limited to persons claiming they got the right to possess from the landlord, although many tenants try and make it broader to require the landlord to make a claim on its title insurance.
escalation clause: This is just a fancy term to reference how increases in the base rent or NNNs will be calculated and/or assessed; and whether there are limitations (aka caps, expense stops, dollar stops) on such increases.
estoppel certificate: The tenant is often required to sign estoppel certificates within a certain number of days from the landlord’s request (although there is no reason this cannot be bilateral). These are often required when the property is being sold or financed, although some landlords use them to hem in tenants on litigation claims. It is a statement of certain facts regarding the status of the lease; for example whether there are any landlord defaults, how much rent is being paid, when rent is paid through, what documents constitute the lease, etc. The certificate also recites that the addressee is relying upon the certificate to take certain action and that tenant is, therefore, estopped from later claiming anything which would contradict the statements made in the certificate.
expense stop: This is the amount of a certain NNN expense which the landlord agrees is its responsibility, and the tenant agrees to pay its pro-rata share of any excess above the stop amount.
first refusal right or right of first refusal (Purchase or Lease): A lease clause giving a tenant the first opportunity to buy or lease a property at the same price and on the same terms and conditions as those contained in a third party offer that the owner has expressed a willingness to accept. To be distinguished from right of first opportunity or right of first offer, which are simply rights to be the first to negotiate with the landlord for the additional space or purchase of the property. Also distinguished from an option to purchase or lease, which would outline the specific terms for a tenant to be able to purchase or lease – regardless of the deal the landlord might be able to reach with a third party.
full service rent: This usually means a base rent which includes all NNNs for the first year (or up through the base year); although the tenant would be liable for increases in the NNNs above the base year.
go-dark: a term frequently used in retail leases to refer to tenant closing its doors to retail sales. Many retail leases denote going dark as a default, some give the landlord the right to collect extra rent, eliminate any exclusive rights granted to the tenant and/or terminate the lease early and collect damages if the tenant goes dark.
gross lease: A lease where the base rent includes all NNNs and the tenant never pays any extra costs.
HVAC: This means the heating, ventilation and air conditioning systems in a premises or building.
hold over tenant: This refers to a tenant who stays on after the lease is terminated or expires. A hold over section in the lease will define the tenant’s status if it “holds over,” whether the lease terms still apply and the rent rates during the hold over period.
leasehold improvements: See build out.
load factor, aka core factor, aka building factor: In many leases, the rent is calculated based upon the “rentable square feet” in the premises. This means more than just the actual interior of the premises (aka the usable square feet), but also includes a pro-rata portion of the common areas and other building areas (like janitorial closets, elevators, stairwells, etc). The load factor is a calculation of how much of the non-premises space is included in a tenant’s base rent. It is calculated by dividing the rentable square feet by the usable square feet.
NNN: See triple-net below.
net lease: This is a lease where the tenant pays base rent plus a proportionate (usually pro-rata) share of the NNNs.
net rentable area: This is a BOMA term, which refers to the floor area of the premises or building after deducting for vertical penetrations (e.g. elevator shafts); this is a hybrid number, however, because no deductions are made for mechanical rooms, necessary columns and the like.
non-compete: A clause granting the tenant in a retail property the exclusive right to sell certain products (e.g. Mexican food, or a coffee shop). There are usually di minimus carve outs for other tenants to sell a small amount of those products. See also radius restriction.
operating expenses: Part of, or sometimes the term is used instead of NNNs. This refers to landlord’s costs in operating the building and could include CAM charges, taxes, insurance, utilities, certain repairs and replacements, reserves, and the like.
pass-through expense: This is a generic term for landlord’s expenses which are “passed through” to a tenant or all tenants for reimbursement, either as an additional rent item or as part of NNNs.
percentage rent: Provides for a rent to be paid as a percentage of retail sales, usually quarterly or annually. This usually applies after a threshold in sales have been reached, referred to as the “breakpoint.” Only should apply in retail leases.
radius restriction: an agreement that a retail tenant will not open a competing business within a certain radius from the premises and/or an agreement from the landlord that for all property it owns and/or controls within a certain radius of the premises, that landlord will not lease to a competitor. For the landlord, be sure the restriction ends when the lease terminates; or even better when the tenant goes dark.
recapture: When a tenant requests landlord’s consent to an assignment or sublet of the premises, and landlord’ has reserved the right to terminate (“recapture”) the lease either in whole or as to the portion of the premises which is the subject of the request. Also used for other instances where landlord has reserved the right to terminate all or a portion of the lease before the term’s expiration date for other reason (e.g. serial tenant defaults).
rentable square footage: This is the sum of usable square feet plus the tenant’s pro rata share of the Building Common Areas.
subordination agreement: An agreement by which the tenant agrees to the priority of a mortgage over the leasehold interest, or other claim held by the tenant on the property, when combined with an attornment agreement referred to as an SNDA and SAND agreement.
tenant improvements: Improvements made to the leased premises by or for a tenant, see also “build out” above. tenant improvement (“TI”) allowance: Defines the fixed amount of money contributed by the landlord toward tenant improvements.
Triple Net (NNN) Rent: A lease in which the tenant pays, in addition to rent, certain costs associated with a leased property, which may include property taxes, insurance premiums, repairs, utilities, maintenance and the like.
usable square feet: A BOMA measurement of how much of the premises or building are actually usable as tenant space.