The Importance of Evaluating a Lease: What You Should Watch Out For

Successful real estate investors know how important it is to sink into the depths of leases in order to assess the extent of opportunity and potential for higher income and/or stability of tenancy.

Researching, analyzing, and evaluating the leases of specific properties can help you to size up the properties and decide whether to investigate them further or move on to other properties.

But what is a lease? A lease is a binding legal agreement between a landlord and tenant or buyer, in which payment is made and rights are granted for the exclusive use or possession of a particular real property during a specified time.

Although a verbal lease can be used by the parties that are bound by a lease, it’s much more appropriate and even safer to have a written lease which clearly defines the rights and responsibilities of the landlord and the tenant or buyer.

It’s important to investigate leases even if you are so excited and overwhelmed by the possibility of owning an attractive or well-maintained rental property or building.

Regardless of the type of real estate property you are interested in buying or investing in, ensure that the seller provides the lease and it contains detailed and all relevant information pertaining to the property.

Don’t just accept a lease based only on a brief summary of it or what you see on the first page of the lease; insist on getting full and complete details along with any guarantees or modifications and written certification regarding the accuracy and validity of the lease/document.

Since you would be legally bound by all terms and conditions of a lease if you buy a property that it is associated with, make sure that you thoroughly understand all aspects of the lease.

A lease could contain a ton of opportunity which, on the other hand, may be detrimental to the property it is linked with and actually bring down its current and future value if it isn’t properly evaluated.

The most common examples of leases that could be detrimental are long-term leases that have below-market rental rates. Some leases could be far above current market conditions; it is advisable to consider or even discount the likelihood that such leases would be in place and legally enforceable in the future.

Also important to take note of is the fact that leases may or may not comply with current laws or issues relevant for specific tenants (or property buyers). In regard to tenants, if one is not careful enough to notice, there could even be charges for late payments, returned checks, or administrative fees; such terms, if present in a lease, may not be clearly defined, or may even be legally unenforceable.

Generally speaking, some leases may be associated with rules and regulations that aren’t be clearly defined, comprehensive, or enforceable. Therefore, in certain cases, one may need to change the onerous terms in a lease, especially upon its renewal in the future.

Tenants or buyers should ensure that they are dealing with property sellers who are honest and can easily disclose every material fact about the property they are interested in renting or buying.

The expiration dates of leases should be noted because leases that are about to expire may have to be evaluated on the basis of current market conditions. Future leases may not be at the same current rent level, and considerations for concessions or tenant improvements may be necessary in order to get leases renewed.

Even if a brief evaluation or analysis of any residential property lease may be fairly straightforward or clear enough, it doesn’t mean you shouldn’t dig a bit deeper and do your homework!

Therefore, review every lease, especially residential leases, to ensure that you understand each term it contains and there aren’t any hidden surprises that could spring up in the future.

Because some mischievous sellers of properties are aware that certain buyers don’t thoroughly review leases, they include future rent concessions in leases in exchange for higher rents upfront in order to make the financial statements of properties look more suitable.

Even if you have a broker, sales agent, or property investigation team that is assisting you to inspect a property and review its lease during a transaction, remember that you are the one who needs to show the most concern for your best interests.

2 comments

  • A good practical post and you mention important issues such as renewal provisions, guarantees, etc. That said, there are many other technical issues – sometimes seemingly minor but important – that would not be readily apparent to anyone but an expert. It’s always advisable in my opinion to at least get an attorney to do a final review of any commercial lease

    Liked by 1 person

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