How can you evaluate financial risks in a lease agreement?

1 Rent and escalation

One of the most obvious financial risks in a lease agreement is the rent amount and how it will change over time. You need to compare the rent with the market value of the property, and consider factors such as location, size, amenities, and demand. You also need to check the escalation clause, which specifies how and when the rent will increase, and by how much. A fixed escalation rate may be preferable to a variable one, which depends on external factors such as inflation or taxes.

2 Security deposit and fees

Another financial risk in a lease agreement is the security deposit and any fees that may be charged by the landlord. The security deposit is a refundable amount that the tenant pays upfront to cover any damages or unpaid rent. The fees are non-refundable charges that the landlord may impose for services such as application, administration, cleaning, or utilities. You need to read the lease agreement carefully and understand what the security deposit and fees cover, how they are calculated, and how they can be refunded or deducted.

3 Maintenance and repairs

A third financial risk in a lease agreement is the maintenance and repairs of the property. Depending on the lease agreement, the tenant or the landlord may be responsible for keeping the property in good condition, and fixing any issues that arise. You need to clarify who is liable for what kind of maintenance and repairs, and what the procedures and costs are. You also need to inspect the property before signing the lease agreement, and document any existing defects or damages.

4 Liability and insurance

A fourth financial risk in a lease agreement is the liability and insurance of the property. Liability refers to the legal responsibility for any injuries or damages that occur on the property, and insurance is the protection against such risks. You need to determine who is liable for what scenarios, and what kind of insurance coverage is required or provided by the tenant or the landlord. You also need to check the lease agreement for any indemnity or waiver clauses, which may limit or release your liability or insurance claims.

5 Termination and renewal

A fifth financial risk in a lease agreement is the termination and renewal of the contract. Termination refers to the end of the lease agreement, which may happen by mutual consent, expiration, breach, or eviction. Renewal refers to the extension of the lease agreement, which may happen by automatic continuation, option, or negotiation. You need to understand the terms and conditions of termination and renewal, and what penalties or incentives may apply. You also need to plan ahead for your future needs and expectations, and communicate them with the other party.

6 Negotiation and review

A sixth financial risk in a lease agreement is the negotiation and review of the contract. Negotiation refers to the process of bargaining and agreeing on the terms and conditions of the lease agreement, and review refers to the process of checking and verifying the accuracy and completeness of the contract. You need to negotiate and review the lease agreement carefully and thoroughly, and seek professional advice if needed. You also need to avoid signing anything that you do not understand or agree with, and keep a copy of the signed contract for your records.

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?