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A checklist of what bases should be touched in order to insure that you have a net lease.
May 01, 2007 -- When you purchase a commercial property, you may find that a net lease is already in place. You have a tenant that has certain rights that continue with the change in ownership. Or, perhaps you are the lessee that is negotiating a net lease. Either way, you should know the bases that should be touched in order to insure that you have a net lease. Here is a checklist of what the net lease should cover:
• Performance: Provision should be made for termination for nonperformance by tenant. The landlord should have the right of reentry for tenant's continued default. There should be continued rent liability on the part of the tenant where there is a default.
• Repairs: The lease should provide that the tenant shall bear all costs of repair. The tenant's responsibility should cover all repairs: external or internal, structural or nonstructural, ordinary or extraordinary. The tenant may seek some limitation on his responsibility in this respect. For example, he may want the lease to be cancelled if the cost of restoration exceeds a certain amount. However, this type of provision is against the concept of a net lease.
• Restoration of Premises: While the tenant may be entitled to cancel the lease if the premises are substantially destroyed, the tenant should not be given the right to cancel merely because the tenant's improvement is damaged. If state law permits the tenant to waive the right to cancel, he may be required to do so in the lease.
• Insurance: Insurance should be carried in the names of both the tenant and the landlord and should be paid for by tenant. The lease should provide for rent insurance covering at least one year's rent, taxes, and insurance premiums, unless you are dealing with a tenant with a very high credit rating. Where there is a mortgage in effect on the property, loss, if any, should be payable to the extent of the mortgagee's interest. The tenant should be required to provide additional insurance if the mortgagee requires it. In the event of loss, the landlord will want the mortgagee to make the proceeds available to restore the premises.
• Alterations: Alterations and improvements should be made by the tenant subject to both the landlord's and the mortgagee's consent. In addition, the tenant should be required to give security for satisfactory completion of the improvements and for restoration of the property to its original condition at the termination of the lease.
• Obligations of Mortgage: In figuring out the net rental, all obligations imposed by the mortgage on the property should be taken into account. If there's no mortgage on the property, the lease should make provision for including the obligations of a mortgage if one is placed on the property.
• Subordination to Mortgages: Provision should be made for subordination of the lease to the mortgage. Provision can be made for the mortgagee to give the tenant a recordable instrument stating that, in the event of foreclosure, the tenant will not be joined as a party defendant as long as he's not in default under the terms of the lease.
• Taxes: The lease should provide that all taxes, water charges, etc., are to be paid by the tenant, including all assessments, recurring and special. Periodic deposits by the tenant to prevent default should also be provided for.
• Municipal and Other Government Regulations: The lease should require the tenant to comply with all governmental--federal, state, and local--laws and regulations presently in effect and also laws and regulations that may subsequently be adopted.
• Condemnation: Here is how the lease may provide for the possibility that the property may be condemned by public authorities: In the event of a complete taking of mortgaged property, the condemnation award should go first to the mortgagee to the extent of the value of the land and improvements, with a fixed sum to the tenant for the value of the leasehold and the improvements. The remainder, if any, should go to the landlord and tenant according to a predetermined formula.
In the event of a partial taking by public authorities, the lease should require that the tenant bear the cost of restoring the property to a "workable unit," with the landlord making the net proceeds of the award available to the extent necessary and to retain the remainder. Reduction, if any, in rent should be based on a reasonable formula, not necessarily in proportion to the area taken; productivity to the tenant of the area taken and the area remaining should be taken into consideration. |
