The lease contract is the list of rights and responsibilities that the landlord and tenant have during a specific time. The document itself is the best place to start. You may have a hard copy in your file cabinet somewhere, an electronic copy, or a software system populated with all of the pertinent information. If you can’t find yours, ask your broker or landlord for a copy.
What is important is that you have the entire agreement. Your company may have started its lease 15 years ago, when you were a lower-level employee, and initially signed for five years with a simple 8-page lease. After five years, you were promoted to a mid-level manager. You were aware of your senior leadership team extending the contract for another five years, and you were even able to negotiate a month of free rent and the installation of a new HVAC unit at the landlord’s cost. Another five years go by and you are in a leadership position. Now you want to extend the lease one more time and pitch in to have the roof repaired since it is getting older. Do you have the initial lease? Do you have the first addendum? Do you have the second addendum? Do you have the third addendum? In order to begin your review, you need to do your best to have one source of truth.
Once you have your lease, you might find is that there were changes made in subsequent agreements that were different than what was initially negotiated and included in the first lease. Furthermore, you may be new to the company and not know who negotiated the lease on your company’s behalf in the first place. For example, your landlord could have sold the building, making your new landlord a different person than the one who signed the first lease. When you have people, who are dealing with agreements where they were not present during the initial creation and intent of the contract, you have room for ambiguity, and ambiguity creates friction.
One example I worked on recently was with a high net worth family that owns a handful of industrial buildings in East Side Costa Mesa in Southern California. The current landlord had inherited the properties from her mother, and the mother had only managed the properties after her spouse passed away, who was the person that first bought and operated the property. Over 20 years, the tenant’s security deposit had increased, credited, increased again – not mentioned in one of the subsequent agreements – and then mentioned again in an illegible handwritten note. The landlord brought me in to help modernize all of the documentation and rent structure, and I found out that the landlord’s records and the tenant’s records were both incomplete and conflicting in multiple ways. How can you expect to achieve a win-win scenario when there isn’t one source of truth?
The goal of reviewing the lease is to have clarity on you, and your landlord’s, remaining lease obligations. You also want to know if there are any outstanding credit or debits to your account that you are unaware of so that you can plan for them. Review the document and make a list of outstanding issues and concerns. Was there a maintenance request that never resulted in a satisfactory repair? Do you have to repave the parking lot when you move out? Do you have to place the roof? Replacing the roof is something some companies are on the hook for on longer-term leases.
Before talking with the landlord, review the lease for the following lease objectives:
- Double-check the original commencement date
- Review each lease extension
- Double-check the rent figures with your accounting records
- Review the changes made during each extension that modify the original lease document
- Verify the security deposit that is on file
- Confirm the lease expiration date
- Read through your options to further extend the lease and make sure you are aware of the option rental adjustment terms
- Identify what the penalty is for remaining in the property month to month (holdover)
Review the Physical Condition
Next, think through the physical condition of the property inside and out, top to bottom. Start with the office, move to the warehouse, look at the floors, walls, and ceiling in every space. Then walk around the outside of the building. Look at the landscaping, the parking lot, the truck court, the drainage areas, the roof drain spouts, the joints in the tilt-up panel, the dock doors, the dock bumpers, the truck well sump pump if you have truck wells, the roll-up door, etc.
Think about the condition of the property when you first moved into the building. If you can’t remember or you weren’t there when your company first moved into the building, evaluate if everything is in good working order. That will be the condition you’ll have to return the property.
In the event that you go through the process and decide that moving isn’t warranted, the assessment of the physical condition can be used as a list to think through what the landlord needs to do to get the property into a condition in which you would consider renewing your lease. Talk with your team and anybody that has had experience dealing with the landlord over the years. Ask yourself the question, “if we had to lease the current building again, knowing what we know now, what would we change to be satisfied with this property?”
Review Your Operations
Talk with your COO, VP of Operations, General Manager, Facility Manager, and others in this realm of your company. These are all the people who will be able to tell you about how the current operation fits into the current facility.
Start with your people. How do people feel about the feel of the office space? How do they feel about the image it portrays to customers? What do they like? Why do they like it? What would they do differently if they had to design it all over again? You will get more feedback than you expect because this is a very relevant topic for every employee. Some will tell you that they hate having to use a space heater when they get cold every day, but there is no other option because the thermostat isn’t oriented correctly. Others will tell you that they feel closed off due to the way the private offices are laid out. You may even have a few people tell you that they avoid certain areas where there is no natural light. No building is perfect, but it is helpful to hear your employees and understand their needs.
Once you discuss the office, move to the warehouse, followed by the truck court, the exterior of the property, and finally the parking lot. With the warehouse, you will be discussing the flow. Your specific industry will dictate specific operational concerns. Most companies fit into manufacturing, production, storage, distribution, food, and life sciences. What is common amongst all of these is the need to get materials to the building, bring those materials inside the building, and move them to the place within the warehouse where these materials are stored. This is until they are either assembled, consolidated, broken down, picked, refrigerated, tested, sewn, printed on, packaged, palletized, and then stored again before the finished product are put back on a truck and taken to the customer. When discussing flow with your team, ask them what is working and what is not for each component on the path that materials travel throughout the building. Are there any bottlenecks? If they could design the entire facility – with any size, shape, and equipment – how would they set it up?
Review the Market
An integral part of reviewing your lease is reviewing a market report, which can be provided by your broker. This is a gut check whereby you can understand how well your initial intent lines up with the realities of the market. If you find that there are plenty of properties available that fit your need and budget, you will have the confidence you need to proceed. On the other hand, if you find that your needs will only be satisfied by finding a needle in a haystack, you might want to think about budgeting extra time, looking in a larger geographic area, increasing your budget, or renewing and forgoing a relocation at this point in time.
It is likely that this early in the process, the properties that are available might not be the same properties available once you are ready to engage in the market, but they still provide insight into what the current market environment is like. Dipping your toe into the market will also help you understand whether it is a landlord or tenant market, what kind of incentives are being negotiated, and the market velocity.
Assessing your future needs, reviewing your lease, and inspecting the physical condition of your property will set you and your team up for success as you decide what to do next. Many of my client ask me to help them on some or all of these items.
Pro-Tip: Find a copy of your current lease, including any addendums that have been made in the past. Before speaking with your landlord, review the lease and make a list of outstanding issues and concerns. Then review the building’s physical condition, your operations, and the market to determine any additional points of conversation.