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Commercial lease reviews: Avoiding pitfalls when buying tenanted properties

On Behalf of | Oct 9, 2024 | Real Estate & Development

Imagine discovering hidden lease terms that cut your expected returns or, worse, inheriting a legal dispute with existing tenants. These scenarios can quickly turn a promising investment into a costly ordeal. However, a careful look at existing leases can help you avoid these troubles and make a wise property investment. Let us explore the key areas that demand your attention during the due diligence process.

Scrutinize lease terms

Examine the duration, rent structure and renewal options for existing leases. Long leases with low rents can hurt your property’s value and future income. On the other hand, short leases might offer flexibility but could lead to vacancy risks.

Assess tenant rights and obligations

Review who is responsible for upkeep, utilities and shared area costs. Knowing who bears these costs can help avoid surprise expenses and legal conflicts.

Evaluate assignment and subletting clauses

These clauses decide if a tenant can transfer their lease. Restrictive rules can limit your property’s marketability, while overly permissive ones might bring in undesirable tenants.

Verify compliance with current laws

Older leases might contain terms that no longer comply with current regulations. Identifying and addressing these issues early can prevent future legal complications.

Obtain Estoppel Certificates

Request these documents from current tenants to confirm lease terms and the absence of landlord defaults. They provide crucial protection against undisclosed issues.

Protecting your investment

A thorough lease review is an essential step in your due diligence process. It can make or break your commercial property investment, as each part of the lease carries potential opportunities and risks. Given the complexity of commercial leases, consulting with an experienced real estate attorney can provide valuable insights and protection. Remember, the time and resources invested in a comprehensive lease review are far less than the potential costs of overlooking critical details.