5 ‘Lease Gotchas’ in Office and Healthcare Leases: What Tenants Should Watch Out For.
I was recently meeting with a prospect, now a client, and they asked me about "Lease Gotchas" – those lease terms that may not be obvious at first but can become significant pain points down the road for tenants.
It was quite a fruitful conversation, as they shared a few issues they experienced over the years. Landlords often use the term “standard” as they negotiate leases, while they may be “standard” to them, I assure you they can make changes to their document, and often will if you are measured and reasoned in your approach - it’s important to have someone on your side in lease negotiations. Here are some common "lease gotchas" that tenants should watch out for:
1. Operating Expenses (Common Area Maintenance or CAM Charges)
CAM charges typically cover the landlord’s costs for maintaining shared spaces, building systems, etc., but the definition of what’s included can vary significantly. Some landlords might include capital expenses, which can be a surprise to tenants. Tenants should carefully review the scope of CAM charges and negotiate caps on these expenses, ensuring that any capital improvements are excluded or amortized over their respective useful life.
2. Repair and Maintenance Obligations
Leases may require tenants to be responsible for repairs and maintenance that aren't obvious, such as HVAC systems or the roof, which can be costly. Clarify which party is responsible for major structural repairs and ensure any such obligations are properly capped or negotiated.
3. Operating Hours
Limitations on when services like heating, cooling, or security are provided can be restrictive, particularly for tenants with after-hours operations. Verify that the operating hours meet the business needs or negotiate extended hours and clearly define costs for after-hours services; in theory, this should not become a profit center for a landlord.
4. Sublease and Assignment Clauses
Restrictions on subleasing or assigning the lease can limit flexibility, which could be problematic if a tenant needs to relocate or downsize. Ensure that the lease provides a reasonable ability to sublease or assign (especially in the event of a sale or merger) and avoid clauses that give the landlord too much discretion over strategic business decisions or impose heavy transfer fees.
5. Relocation Clauses
Some leases give the landlord the right to relocate the tenant within the building or complex. While this may seem minor, it can cause operational disruption and costs. When possible, negotiate to eliminate these clauses in their entirety, but at a minimum, ensure that the Landlord bears all associated costs and that the new space is comparable in size, location within the building, which may impact views, and make sure rent cannot increase as a result of the relocation.
These "gotchas" can lead to substantial unforeseen expenses if tenants aren't vigilant, so paying attention to these clauses during lease negotiations can save them from future headaches.