Drafting the Right Lease Agreement

Part 10 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

Congratulations, you have a space to lease and someone interested in leasing it. Now you need to define the rules and requirements which will control the relationship between you, as landlord, and the tenant – you need to draft a lease. (Of note, it is possible to have an unwritten or oral lease, but we strongly discourage that practice as it significantly increases the likelihood you’ll end up in court with a tenant arguing who is responsible for what and when). This could be the starting point for a one-year, 10-year, or longer relationship with your tenant, so it is important that everyone understand the parties’ respective rights and obligations from the outset.

The full scope of items you might or should consider incorporating into your lease will depend upon many factors, including the nature of your property and whether your tenancy is residential or commercial. Here are a few items to consider, regardless of your company’s particular circumstances.

1. Identify and Include the Appropriate Parties.

Landlords: The lease should identify your company as the landlord and the party to whom rent should be payable. If you operate several companies which each own a leased property and you set up another company to manage those companies (streamlining rent and other issues), please ensure you have a written property management agreement in place between your two companies and each tenant lease identifies and distinguishes each of your company’s roles.

Tenants: If your company is leasing residentially, ensure that everyone that is going to live at your property is made a party to the lease so they can be made jointly responsible for the lease’s requirements. Co-signers (often parents of the individual tenants) should also be properly identified and required to sign the lease. If your tenant happens to be another company, you may want to consider requiring the managers or members of that company to sign a personal guaranty – depending on how secure you feel that the company will fulfill the obligations of your lease.

2. Identify What the Rent Covers and What It Doesn’t.

You will want to clearly identify whether utilities, insurance, taxes, maintenance items, and property management services are covered by the monthly rent payment. These additional costs can have a significant impact on the net income your property can generate.

For commercial leases, pure gross leases – where the tenant pays a base rent and the landlord must use a portion of that rent on operating expenses – are one option. More common options though are net leases – where the tenant reimburses the landlord for all of its ongoing operational expenses so that the landlord ensures a net amount – and modified gross leases – where the tenant reimburses the landlord for some of its ongoing operational expenses. Depending on the nature of the tenant’s business, percentage rent leases – where rent is calculated by multiplying tenant sales by a certain rent – may be appropriate.

3. Identify Responsibility for Repairs and Improvements.

To avoid he-said, she-said issues down the line, you should put into writing any scope of work you agree to do before the tenant moves into the space. The lease should also identify who is responsible for permits and construction at your property generally. For commercial leases particularly, your lease (or an exhibit thereto) should memorialize whether there will be a build-out, whether the tenant is permitted rent allowances, and when rent payment obligations will commence (during or after the build-out).

The lease should also identify whose responsibility – both the actual work and payment for that work – it will be to make repairs once the tenant moves into the space. If the lease will permit the tenant to make improvements at the property, the lease should also identify whether those improvements need to be removed at the end of the lease.

Finally, the lease should address whether the tenant is obligated to carry insurance (highly recommended) and if so, what type and what level of insurance will be required, and whether tenant must name the landlord as an additional insured on any required policies.

As indicated above, these items are just a few of many items your company should consider when drafting an appropriate lease agreement. Lease drafting is another area where it may be particularly helpful to consult with an attorney whose experience can help identify what lease provisions are appropriate for your company and property. That attorney can also help ensure you understand the contract your company will be entering into and be bound by for the duration of the tenancy. If you do not consult with an attorney, we highly recommend you carefully review each provision of any internet samples to ensure not only that you understand the effect of each provision, but that the sample you choose is appropriate for residential or commercial tenancies and is legal in the state of Missouri.

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This post is part of a series designed to help people understand and navigate the various pitfalls and legal considerations of real estate leasing. If you would like to assistance drafting a lease or in learning more about lease agreement considerations, one of our experienced real estate attorneys would love to meet with you.

In the next post, we’ll discuss what happens when things don’t go plan and how litigation can impact your company. If you would like to go back and re-read any of our earlier posts, you can find links below.

Introduction
Part 1: Do I Need a Legal Entity?
Part 2: What Type of Legal Entities are Available?
Part 3: Tax Treatment Considerations When Selecting Your Entity
Part 4: Your Entity’s Governing Documents
Part 5: Operational Considerations – Purchasing Real Estate – Title Insurance
Part 6: Operational Considerations – Purchasing Real Estate – Indenture Review
Part 7: Operational Considerations – Purchasing Real Estate – Loan Documentation
Part 8: Observing Corporate Formalities
Part 9: Insurance Considerations
Part 10: Drafting the Right Lease Agreement
Part 11: Litigation Considerations
Part 12: Should I Employ an Attorney to Assist my Real Estate Business?