How can you analyze lease clauses to reduce risk?

1 Lease structure

The lease structure defines the basic elements of the lease, such as the rent, the term, the security deposit, the renewal options, and the termination rights. To analyze the lease structure, you should compare the market rates and conditions for similar properties, and evaluate how they align with your business goals and budget. You should also consider how the lease structure affects your cash flow, your exposure to market fluctuations, and your ability to exit or extend the lease if needed.

2 Rent escalation

Rent escalation is the increase in rent over time, usually based on a fixed percentage, a consumer price index, or a market review. To analyze rent escalation, you should calculate the present value of the rent payments over the lease term, and compare it with the initial rent and the market rent. You should also assess how rent escalation affects your profitability, your competitiveness, and your negotiating power in the future.

3 Operating expenses

Operating expenses are the costs of maintaining and operating the leased premises, such as utilities, taxes, insurance, repairs, and management fees. Depending on the type of lease, operating expenses can be paid by the landlord, the tenant, or shared between them. To analyze operating expenses, you should review the lease clauses that define which expenses are included, how they are calculated, and how they are allocated. You should also monitor the actual expenses and verify their accuracy and reasonableness.

4 Maintenance and repairs

Maintenance and repairs are the activities that keep the leased premises in good condition and working order. Depending on the type of lease, maintenance and repairs can be the responsibility of the landlord, the tenant, or shared between them. To analyze maintenance and repairs, you should inspect the physical condition of the premises, and identify any existing or potential issues that may require attention. You should also check the lease clauses that specify the standards, procedures, and obligations for maintenance and repairs.

5 Alterations and improvements

Alterations and improvements are the changes or additions that the tenant makes to the leased premises, such as partitions, fixtures, or equipment. Depending on the type of lease, alterations and improvements can be subject to the landlord's approval, ownership, or reimbursement. To analyze alterations and improvements, you should plan your space requirements and design preferences, and estimate the costs and benefits of making them. You should also review the lease clauses that regulate the rights, restrictions, and responsibilities for alterations and improvements.

6 Clauses and contingencies

Clauses and contingencies are the provisions that address specific situations or events that may affect the lease, such as subleasing, assignment, co-tenancy, force majeure, indemnification, or arbitration. To analyze clauses and contingencies, you should anticipate the possible scenarios or risks that may arise during the lease term, and evaluate how they would impact your interests and obligations. You should also negotiate the lease clauses that protect your rights, limit your liabilities, or grant you flexibility or relief.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?