Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

The Importance of Basic Lease Provisions

To gain a complete understanding of commercial real estate, learning about the basic lease provisions that drive a transaction's economics is crucial.

When acquiring commercial real estate, or acting as an owner of commercial real estate, you are typically purchasing or owning a “leased fee estate.” You will either take title or hold title subject to existing leases, or you will be negotiating new leases. It is therefore critical to understand the leasing game:

• What are the key economic lease provisions?
• What do the important lease paragraphs mean?
• What provisions are essential to include in the lease?
• What matters are usually excluded from the lease?
• What are the typical parameters acceptable for negotiation?

This chapter does not attempt a paragraph-by-paragraph analysis of each and every clause typically found in a lease, but rather discusses key economic provisions and problem areas on which to focus, as well as provisions that are most commonly negotiated. It should be emphasized that there are a multitude of legal issues contained in a lease that are not addressed in this chapter. These include issues concerning security, environmental problems (such as disposal of hazardous waste), insurance, eminent domain, casualties, estoppel (tenant representations that can be relied upon) language, subordination, nondisturbance and attornment (tenant agreeing under certain circumstances to accept another party, usually the lender, as the landlord) ...