Five Things to Know Before Signing a Lease

By Raul Rivera

This is a fact-based story

It was a joyful day when Restoration Church in Mississippi signed a three-year lease to move into a new facility.  It was 3,100 square feet of an old storefront building that had only a few other businesses and had been mostly empty for the last 3 years.  Restoration Church felt that they got a great deal because, after all, they were paying only $7.00 per square foot, which made their rent $1,808.33 per month.  After putting down a deposit of  $3,616.66, they signed the lease and moved in.  To build out the inside and create a sanctuary with a small platform and room for instruments was the first item on the agenda.  After that, they built out 3 children's classes, an office, and a small kitchen.  For the first 6 months, they enjoyed their facilities.  Then they got a letter from the landlord stating that they had not paid any of their CAM fees and that if they did not pay in the next 30 days, he would begin eviction proceedings.  Because the fees were $3.50 per square foot, that meant they had owed an additional $904.17 per month; but since they had not paid any of those fees in six months, they now owed a sum of $5,425.00 in order to merely catch up and avoid eviction.  To make matters worse, they got the landlord's letter in the last week of the month, which meant that they were only days away from having to pay the upcoming month's rent of $3,100.00, plus its CAM fees of $904.16, and... "What exactly are CAM fees anyway?" they wondered.

The church struggled to make sense of the extra fees, but after speaking with a real estate agent in the area, they understood that the CAM fees were legitimate.  CAM was an acronym for "common area maintenance" which included property tax, insurance, and landscaping.  The church realized that they should have read the fine print of the lease which placed no limit as to how much CAM fees could increase per year and how the accounting for those fees were calculated.  They were at the mercy of the landlord.  They dipped into their building fund and savings to pay the fees.  It was painful but they got through it. 

It got worse

Having adjusted to what felt like an increase in rent, they continued to meet together as a congregation and plan for the future.  Then came the letter from the bank.  The day before their women's conference, the financial secretary received a letter stating that the building had been foreclosed and that the bank was not honoring their lease with the former landlord.  If they wanted to stay, the new lease would be $12.50 per square foot, or they could move out in 30 days.  That would bring the rent total to $3,229.16 plus the CAM fees.  It was an impossible situation for the church. 

Today's world is much different

Since the year 2008 and the days following the great recession, our financial world has changed dramatically.  It has become common for landlords to get foreclosed and lending institutions to not honor the existing lease with the former owner.  The church did not think about the possibility of the landlord defaulting on the mortgage so they did not inquire about a Subordination, Non-Disturbance and Attornment (SNDA) Provision.  This is a clause that addresses the landlord's current and future relationship with his/her lenders in the event he/she defaults on the mortgage.  This provision requires the landlord's lender to agree not to do away with the tenant's lease if the lender forecloses.  Most church leases that I have read (hundreds of them) do not make mention of this.  In today's hostile financial world the SNDA clause is a lifesaver. Below is a list of other considerations.

1.     Tenant remedies:  This clause defines the remedies available to the tenant if the landlord does not keep his/her end of the bargain.   What if the landlord does not repair the AC unit when it breaks?  What if he/she waits two months to do it?  Can the tenant repair it and deduct it from the rent?  If it is not mentioned in the lease, you will not have a remedy option.  How about termination rights? 

2.     Compliance provision:  Many leases require the tenant to pay for current and future alterations to the building to comply with existing or future laws passed.  For example: what would happen if after you move in, you discover that the building needs a new elevator to comply with the American Civil Disabilities Act?  Who will pay for that?  Make sure that the landlord is responsible and that if he/she does not or cannot comply, then the compliance provision allows you to terminate the lease without any repercussions.

3.     Escalations:  It is very rare for a lease to not have escalations.  This provision calls for an annual increase in rent of usually 3%.  That means that if your rent in the first year is $2,000.00 per month, then next year's rent will be $2060.00 and the next year's rent will be $2,121.80.  Because many landlords today will do anything to get a tenant, before you finalize the terms be sure to try negotiating an abatement of escalation until the third year. 

4.     Personal guaranty:  Most landlords will make every effort to get personal guarantees from the officers of the church.  This is a negotiable provision.  I always recommend that you negotiate your way out of having to give personal guarantees because they may have long lasting consequences against you.  If you find a building that you must have, and the landlord requires a personal guaranty, try to negotiate your way out of having to do so, but if that fails, then try a compromise. Offer a guaranty of up to a certain dollar amount.  Let me explain.  Let us say that you want a five-year lease and the monthly rent is $2,000.00 per month.  Offer a personal guaranty for only the first year of the lease.  Many landlords will agree to that.

5.     A lease in your name:  Many churches have signed leases before incorporating.  This forces them to sign the lease in the name of a person, which leaves them personally responsible for any mishaps or liability.  What would happen if someone gets hurt in the building; whom do they sue?  This could be the worst move anyone starting a church could make.  I have seen churches sign a lease in the pastor's name and then sometime later the church incorporates but they forget to ask the landlord for a new lease in the church's name.  This can have disastrous results.

In closing

Remember that when considering a lease, you are the customer.  Especially today with a glut of available commercial space, landlords are competing for your business.  Shop many locations and negotiate them at the same time, and then make each landlord aware of what other offers you are considering.  They will compete, resulting in you getting a better deal.  The difference between a good deal and a bad deal could lie in James 4:2, "You have not, because you ask not."