Katelyn DeMartini: Welcome to Property Pointers: Real Estate Law Made Simple. My name is Katelyn DeMartini.
Leizl Hinajon: And my name is Leizl Hinajon. We are associates at Holland & Knight, and today’s topic is lease abstracts.
Katelyn DeMartini: A lease abstract is essentially a summary of the key terms of a lease. It should make it easy for others to quickly and easily understand the important points. And in that way, it can be a great due diligence tool for colleagues or for businesspeople to easily determine what the main points of the lease are. So that can be an important tool for financial forecasting, for understanding the respective rights of the parties and getting a better sense of risk analysis.
Leizl Hinajon: There are a few basic details that you always want to make sure is at the top of your list, One being the tenant and landlord entities. Who are the parties of this contract? Making sure you have the correct contact information to make sure that each party is accurately represented.
Another key item is the lease date and the term of the lease. Understanding how short or long a lease term is affects how businesspeople or even the lawyers negotiate an agreement.
The other item is just understanding what is the property covered by this agreement. So whether that’s a full building or if it’s separate units, if there’s shared space, it’s really important to understand what rights the tenant has and over what space.
Another thing that we always want to look for is the rights of each party and who’s responsible for different items in the lease. What has been your experience in how rent is calculated and who is responsible?
Katelyn DeMartini: Yeah. It’s always important to note rent in a lease abstract and all of the components of that. So of course how it’s calculated is important to know whether there’s base rent with maybe additional rent or expenses of the property or if it’s just a straight rent number. It’s also important to note whether there are any rent escalators, maybe the rent goes up over years or as part of a renewal term. And then as mentioned before with the expenses, it’s also important to know whether all of the expenses are shared equally or if there’s one party in particular that bears all of those expenses. So those might be real estate taxes, insurance or maintenance and repair obligations. So it’s important to note that when you’re understanding the rights of the respective parties, which one’s going to bear the costs related to those obligations.
Leizl Hinajon: Similarly, with each party having responsibilities, that also is not only for rent, but also maintenance obligations and trying to figure out, like you said, who’s responsible for the costs. If the tenant has a tenant improvement allowance, for example, that would be a landlord cost that the tenant gets to utilize, and if they want to build out or modify a space. You also need to make sure that you have in the lease abstract, the landlord’s approval rights. How much is the landlord going to be able to approve or disapprove, most of the time, is dependent on how long that lease is. So [in] a shorter-term lease the tenant might not have as much flexibility, long-term lease like 10-plus years, then you kind of give a little bit more to your tenant since they’re a longer-term client.
Katelyn DeMartini: Well, I think it’s definitely important to know events of default. When you’re preparing a lease abstract for a party, it’s important, too, what the rights of those parties are if something were to go wrong. So for example, if the tenant were to stop paying rent, it’s important from the landlord’s perspective, of course, to know what their rights are. Could they possibly terminate that lease for the failure to pay rent? Could they terminate the tenant’s right to possession of the property? So it’s always important to note what those rights are for each party so that if something were to go wrong, they understand how to resolve it.
Do you have any ideas of other important examples of things that you might note in a lease abstract?
Leizl Hinajon: Whether or not the tenant has a right to assign the lease or if they have any early termination rights, if they have a ROFR or right of first refusal, that’s really important for the landlord to know. As the basic lease details, when a lease ends, you just want to make sure that you know what’s the next step. So going to a lease abstract, you can see, OK, this lease is coming to its expiration date. Are we going to flip it to a new tenant? Are we going to have to do a renewal? How is that going to work for the building to stay occupied? Other items of note are use restrictions. Is there anything that the tenant can’t do in that space? Because that could also lead to an event of default. I think there’s also some considerations if the landlord has a lender, what are the rights that the landlord had to ask a tenant to supply an estoppel certificate, what were the parameters around that estoppel certificate and potentially subordination agreement if needed.
Katelyn DeMartini: In conclusion, lease abstracts can be a great tool for due diligence. They can help you, your colleagues or folks on the business side better understand the terms of the lease and quickly and easily analyze those terms so they understand the rights of their respective parties without having to fully read the lease.
Leizl Hinajon: And while leases can be generalized, it’s important to understand the state specific laws that might affect the agreement. So be sure to contact your local real estate attorney, and our contact information at Holland & Knight will be linked below.
