A lease can contain pitfalls.

Posted On Wednesday, 19 February 2003 02:00 Published by eProp Commercial Property News
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For property investors a lease in its most simple form is a cash stream for a defined period of time, while for tenants it represents a commitment to providing that revenue.

Rodney LuntzBut a lease is often fraught with pitfalls for the unwary tenant or investor.

A better way to look at a lease is as a cash stream with options, for both tenant and investor, says Rodney Luntz of property consultancy Abro Luntz.

He says a lease agreement must not be rigid. It must allow for possible future changes in the tenant's needs and should be priced accordingly.

The legal implications of a lease need to be understood. For example, tenants are often satisfied to have the right of first refusal on their floor space as opposed to a firm option that secures that space for their use.

For instance, the loose term 'option to renew at rentals agreed between parties' rather than specifying a percentage increase and its composition (gross or net of costs) is unenforceable and a recipe for conflict between tenant and landlord, Luntz says.

Breaking a lease before maturity is an option of sorts, but not without ramifications. A landlord usually has the option of raising the rent every five years in line with market levels.

Then again, the tenant may want to write an option to sublet into his lease. But with the current over-supply of office space, this must be seen in the context of its true value unless the property is particularly sought after, Luntz says.

'The question of pricing options of various kinds remains controversial. It is also a potential area of conflict between investor and tenant.'

Steps can be taken to minimise disagreements says Luntz.

'Clearly, it is most important to spell out as many contingencies as possible in a lease agreement. Standard lease agreements will cover the majority of issues, but every property is different, with its own nuances.

'Don't bury a lease once signed. Rather keep a watching brief on critical dates to ensure that all clauses are exercised timeously,' he says.

Last modified on Monday, 26 May 2014 13:49

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