Beware the tricky lease For property investors.

Posted On Monday, 03 March 2003 02:00 Published by eProp Commercial Property News
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A lease in its most simple form is a cash stream for a defined period of time, and for tenants it is a commitment to providing that cash stream.

Rodney LuntzBut despite efforts to treat leases as bond-like instruments with no ambiguities, no lease is ever that simple, says Rodney Luntz of property consultancy Abro Luntz.

Perhaps a better way to look at a lease is a cash stream with options for both the tenant and the investor, he says.

A lease agreement must not be rigid. It needs to allow for foreseeable possible changes in the tenant's needs and should be priced accordingly.

Luntz says the legal implications of a lease need to be understood.

The loose term "option to renew at rentals agreed between parties" rather than specifying a percentage increase and its composition is unenforceable and a recipe for conflict between tenant and landlord.

Breaking a lease before maturity is an "option" of sorts for the tenant and the landlord has the option of raising the rent every five years in line with market levels, he says.

Then again the tenant may want to write the option to sub-let into his lease, which at face value is all well and good - but with the current over-supply of office space, it must be seen in the context of its true "value".

The question of pricing options of various kinds remains controversial, says Luntz. It's also a potential area of conflict between investor and tenant. However, steps can be taken to minimise disagreements.

Standard lease agreements will cover the majority of issues, but every property is different, with its own nuances, he says.

Generally, from a tenant's point of view, it makes sense to have the legalese of a lease and its practical implications checked by an attorney.

"Also, don't simply bury a lease once signed. Rather keep a watching brief on critical dates. It also makes considerable sense to include a clause covering arbitration, on condition that both parties accept the finding."

Last modified on Monday, 26 May 2014 13:30

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