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A Good Lease is a Terrible Thing to Waste

A Good Lease is a Terrible Thing to Waste

At the heart of investment real estate is often times the lease. Well-crafted lease agreements can create value for both landlords and tenants, and poorly designed agreements can do just the opposite. Be as careful and thorough as possible when negotiating this real estate contract, because it is exactly that, a contract. Those who fall into bad times or those who do not protect themselves sufficiently can find themselves saying "I should have put that in the lease!"

Find a Professional

The requirements for leases, commercial leases especially, can vary widely from state to state so obtaining the guidance and advice of local experienced professionals can be essential. Laws requiring landlords to make disclosures about their properties are relatively few; therefore, it is imperative for tenants to ask questions during lease negotiations.

If you're a tenant and you're concerned about security, flooding or any other thing, you need to ask, because there is a duty on the part of the landlord to be truthful. Additionally, leases for residential properties feature more disclosure requirements, such as the federal requirement that owners disclose any information they have about the existence of lead-based paint or other lead hazards. A professional will know what questions to ask, when to ask them, and know if vital information is being left out.

Know Who You're Dealing With

Too often, tenants are not as diligent as they need to be in determining exactly who their landlords are. It is critical to be aware of who you will be dealing with for an extended period of time. Before you really begin to negotiate the lease, run a title report and make sure early on you understand exactly who that landlord is and what his/her past business has been. In cases where the property owner of record is an entity (corporation, limited liability company, etc.), more often for commercial properties, it is important to verify with the Department of State that the entity is in fact active and legally exists, and that the landlord in fact has the power and authority to enter into a legally binding lease agreement with you.

On the flip side, landlords should run background checks on prospective tenants to get a firm handle on the financial strength or potential shortcomings of the prospective tenant. Landlords of residential properties also may choose to run criminal background checks on prospective tenants to ensure the safety of the property and other tenants.

Know the Causes for Concern

As a landlord you want to be aware of how lease clauses will affect value and your ability to sell or finance the property. One example is that Landlords should be hesitant to grant tenants early termination rights in leases. Property owners were fairly willing to give tenants the rights during the recession, when space was hard to fill, but the clauses decrease the value for a number of reasons. As a landlord, you want long-term, stable net-operating income, and anything that interrupts that, in the middle of the lease or earlier, affects the value of your investments and capital improvements. On the other hand, a tenant should consider the merits of pursuing a non-disturbance agreement, which guarantees that the tenant can stay in the property under the terms of its lease in the event that the property is transferred in a foreclosure sale. Similarly, in an environment of climbing rental rates, a new landlord is likely to be anxious to remove existing tenants in favor of higher-paying ones.

As is evident from the above, there are many things that must carefully be considered and properly negotiated when entering into a lease agreement. 

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