Beware of these sneaky clauses when signing a lease – A cautionary guide by Orange County Register

Similar to having prime seats at the Super Bowl, very few individuals have had the unique experience of selling a company and negotiating a lease on a building that they own.

In my previous article, I discussed important clauses and terms that real estate owners should take into consideration.

Today, we are going to broaden our topic. Many of you may have experience with leasing commercial real estate or know someone who does.

Within commercial leases, there are certain paragraphs that should be avoided, or at the very least, thoroughly understood due to their potential impact. I often refer to these as “gotcha” clauses, as they can be unexpected and detrimental, much like a linebacker blitzing from the blind side. These clauses can catch you off guard and result in negative consequences.

So let’s continue our examination of these common “gotcha” clauses found in the fine print of your commercial lease agreement. And, in keeping with our football theme, let’s dive right back in, shall we?

First, we have the notorious “pass-through” provision. This is similar to a surprise onside kick. It is completely legal, but it is a play that you don’t anticipate until you receive an invoice for a portion of the property tax increase, expensive building repairs, or other operating expenses that the landlord has conveniently decided to pass on to you. Be prepared for this unexpected move.

Second, we come to the deceptive “relocation” clause. You may be progressing well in your business, much like a solid drive down the field, and suddenly you are forced to move to a different suite in the building. This allows the landlord to relocate you at their discretion, leaving you to deal with the resulting confusion, relocation costs, and the challenge of keeping your business on track.

Third, we have the sneaky “escalation” clause. You may think you have locked in your budget with a steady rent, only to discover that your rent is increasing at a rapid pace, much like a wide receiver running a deep route. This clause permits yearly rent increases, causing you to scramble and adjust your financial strategy.

Now, allow me to introduce two more threats that you need to be aware of, akin to linebackers on the field.

The “automatic renewal” is one contender. Hidden deep within the lease, this clause will automatically renew your lease for a predetermined period unless you provide notice within a specific timeframe. Failing to meet this notification requirement can result in consequences similar to missing a field goal at the final whistle – a seemingly small mistake with significant repercussions.

Lastly, be cautious of the “use” clause. This clause dictates how you can utilize the leased property, and any violations could lead to penalties or even eviction. It is comparable to stepping out of bounds when sprinting towards the end zone – an action that may appear harmless, but can abruptly halt your progress and cost you the game.

These “gotcha” clauses may sound intimidating, but fear not. Just like a knowledgeable coach, you can prepare a strategy to protect yourself.

Read and fully understand each clause in your lease. Seek the assistance of a skilled real estate attorney or experienced commercial real estate broker to help you navigate these challenges. Spot these blitzing linebackers before they tackle you.

In my next article, I will share offensive plays to help minimize the impact of these “gotcha” clauses. After all, the best defense is a good offense. Stay with me, and I will ensure that you not only stay in the game, but also come out victorious. Stay tuned!

Allen C. Buchanan, SIOR, is a principal at Lee & Associates Commercial Real Estate Services in Orange. He can be contacted at [email protected] or 714.564.7104.