Leasing Basics: Tips to Help Landlords Maximize Lease Revenue
With the COVID-19 pandemic throwing a wrench into both the commercial and residential real estate markets, controlling what you can is important. Many states and municipalities have enacted lease-eviction moratoriums, some lasting through the summer. This restricts lessors from filing eviction actions for nonpayment of rent as well as assessing related fees and penalties. As the real estate market reaches a new equilibrium, now is the time to review your outstanding leases to make sure you’re getting the most for your money.
Real estate contracts can be complex. Both tenants and landlords must seek professional advice as they negotiate lease contracts. For new leases, work with a real estate attorney or accountant with experience dealing in the kind of property you’re leasing. Experts who lack specialized knowledge might be unaware of the lease language necessary to protect your property.
Tenants may call in their own specialists to help detect expensive errors in existing lease agreements. Specialists are typically hired to find math errors, ensure that the tenant is charged only for expenses specified in the lease, check space measurements, and examine insurance and real estate taxes.
Having your own real estate attorney or accountant will minimize the chances of a tenant’s specialist finding a mistake. Catching mistakes yourself may be far less costly than letting your tenant find them first.
Writing and reviewing
Though it might sound basic, be sure all agreements are in writing — and signed by both parties. In your dealings with real estate attorneys, accountants and tenants, properly executed written agreements can resolve many disagreements before they happen. Oral contracts or amendments aren’t likely to hold up in a court of law, especially if the parties involved can’t agree on what the terms of the contract were.
Your job isn’t done just because everything is in writing. You’ll need to re-examine and revise standard lease agreements regularly, as laws are changing so rapidly. This means leases should be revised every few years. Landlords who want to stay current with recent trends and legal decisions may find that preprinted, cookie-cutter forms no longer work. Also, you may have trouble convincing a tenant to accept changes on a modified preprinted form, so that you lose out on a deal entirely. Have your lease agreements professionally updated regularly.
Filling in the details
Make sure the lease specifies who will pay for utilities, real estate taxes, insurance and maintenance. Your tenants’ rent may cover the basic cost of owning and maintaining a building, but what about bills for items, such as roof repair and window replacements?
Landlords can protect profits by designating an expense stop in leases that aren’t yet in place. This item is simply a maximum level of expenses to be paid by the building owner. Any building costs in excess of the expense stop are the responsibility of the tenant.
Always check tenant references and require security deposits. Consider adding escalation clauses based on the consumer price index (CPI) to hedge against inflation risks. For commercial renters, you might ask to take part in their upside with percentage leases wherein rent equals a base flat rent plus a percentage of the tenant’s gross sales.
Generally, neither landlords nor tenants enjoy going to court when disputes arise. By agreeing in the lease to use mediators for dispute resolution, you can keep disputes out of court and, possibly, animosity out of the landlord/tenant relationship. Mediators can save time and money — not to mention aggravation.
In contrast to arbitration, where a judge hears both sides and single-handedly decides the outcome, mediation provides a neutral platform where both parties can air their grievances and work out suitable arrangements, with a third party’s help. When mediation is finished, both parties should walk away, feeling that they received a fair shake.
Making leases work for you
With an uncertain economy, getting back to basics is important. This includes making sure your leases still work for you. For help reviewing your existing leases or reviewing potential new ones, contact Nick Sarinelli, CPA, CFE or Doug Collins, CPA on (973) 298-8500. Visit our real estate services page for more information.