Dos & Don'ts

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If your lease with a tenant that’s making improvements or doing other construction in its space requires the tenant to give you documents—a certificate of occupancy from your local government, contractor affidavits, or lien waivers—to prove that the work was done properly, you might’ve required the tenant to give you another vital piece of information—drawings of the finished construction work. If you didn’t require “as-built” drawings from a tenant doing construction work, you could be at a disadvantage.

When you buy an office building or shopping center, don't rely on the prior owner's space measurements when you set your tenants' rent. Always remeasure each tenant's space, and then use your measurements to calculate the rent before you negotiate a new lease. Otherwise, you could lose money. That's because by putting a prior owner's incorrect measurements into a new lease you might get less rent than you could have asked for because the space was in fact much larger than the prior owner's measurement indicated.

It's important to make your notice to a tenant valid if your attorney sends it. If a tenant violates your lease, you're probably required to notify the tenant in writing that if it doesn't cure—that is, correct—the violation by a set deadline, you can take action against it. But it's common for owners to ask their attorneys to send this violation notice on their behalf, because they think that will show the tenant that they're serious and make it more likely to comply, or because they're too busy to send it themselves.

When you're negotiating a lease with a strong tenant that wants an exclusive to sell certain merchandise at your center, it may demand that you agree not to rent space to any other store that has a “department” selling the prohibited merchandise. If you agree to this restriction, you may be setting the stage for a potential dispute with the tenant. That's because the term “department” is so vague that you and the tenant may not agree about its meaning.

When describing management fees that you'll pass through as a CAM cost or an operating expense, don't depend on synonyms for “manage” or “management” to convey your meaning. If you use only the words “supervise and administer” or “supervision and administration” a tenant may argue that the lease doesn't authorize you to pass through “management” fees. So you may get stuck footing the bill for them, warns Houston attorney John S. Hollyfield.

Make sure that your property manager is vigilant about keeping maintenance and inspection records. They can help you refute claims made by your tenants or their employees that you or your management staff knew about a dangerous condition at your property and failed to fix it.

Tenants sometimes complain that they don't receive notices sent by owners, which can lead to arguments if they lose valuable lease rights or options, or wind up defaulting on their leases because they didn't know that their owners were trying to contact them. This doesn't affect only your tenant negatively, though. You can lose money if you need a response from the tenant, especially when time is of the essence, but the tenant didn't realize it needed to take action.

Before you sign a lease, have a local attorney review it. Since real estate laws aren't uniform among the 50 states, it's important to consult an attorney who can practice in the state whose laws will apply to the lease. Otherwise, you risk getting burned by unfamiliar state laws—or losing out on important state-specific rights.

Don't agree in the lease to maintain your building at the same level as other “comparable” buildings or centers in your area. Instead, specify these buildings or centers by name and address. Otherwise, if the tenant claims that your building isn't being maintained adequately—as compared to comparable buildings—you and the tenant could end up arguing over which buildings are comparable.

If your lease requires the tenant to give you proof that it has the necessary insurance policies, don't accept the tenant's proof by fax. That's because it's easy for an unscrupulous tenant to “create” the required proof by cutting and pasting documents together, then send it to you by fax so you can't tell that it's falsified.

To protect yourself, require the tenant to send you the original insurance form and endorsements. If you must accept copies, require that they be certified by the insurer—not photocopies.