Lease agreements: Ask the right questions

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by DARSHAN PATEL

In 2019, our law firm drafted more lease agreements than in 2017 and 2018 combined. During our year-end close-out meeting, I asked my attorneys what our clients’ motivation was in leasing their properties. The overwhelming answer was the owners of the properties (primarily independent hotels) were getting older in age and were losing their resolve to maintain the operations of the property. My attorneys and I conducted a survey to generate all the possible options for hoteliers in this predicament:

  • Transfer the property to their children to manage.
  • Hire a manager and supporting staff for their property.
  • Hire a management company to maintain the operations.
  • Sell the property.
  • Lease the property.

When asked why our clients chose to lease rather than another one of the options, they answered with the following:

  • For one reason or another, their children were not interested in managing the property, mainly due to different career choices.
  • The labor shortage makes finding appropriate staff and management near impossible.
  • The independent property is not suited for the management style of management companies, primarily due to increased labor costs and expenses.
  • The tax from the capital gain would significantly wipe out the net worth of the owner and would eliminate the recurring income that the property generated.

This left property owners with only one option that makes financial and logistical sense: leasing their property. Additionally, the property owners stated they wanted to maintain ownership of the property so their children would be able to realize that income when the time came.

Whether you plan to lease your property or enter into a lease, there are a multitude of variables that need to be considered. Be sure to reach out to your attorney to fully understand the ramifications of signing a lease agreement.

Darshan Patel founded his firm in 2016 in San Diego, CA. His firm specializes in hospitality law by providing full legal services to hoteliers. You can reach him and his attorneys at (619) 940-6623, questions@lawpatel.com, or at www.lawpatel.com.

WRITING THE DRAFT

If leasing seems like the best option, here are some points to consider when drafting your lease agreement:

  1. What is the term of the lease? Are there windows to exit the lease? What are the liquidated damages should either the lessor or lessee want to terminate the lease?
  2. What is the monthly rent? Are there any increases in the rent? Is the rent tied to economic indicators such as CPI or CPI-U? How often is the rent recalculated?
  3. Is the lease going to be a triple-net? In a standard lease, the lessor is responsible for paying the real estate taxes, maintenance, and building insurance. However, in a triple-net lease (NNN), the lessee is responsible for these expenses in addition to the normal operating expenses of the business.
  4. Are there any specific requirements you have of the lessee that pertain to the property? I once had a client with a 20-year-old mango tree and we specifically wrote that the lessee had to maintain the mango tree. Every season, the lessor had the right to collect 20 mangos and the rest could be enjoyed by the lessee. No detail is too small when looking at agreement requirements.
  5. Are there any special authorizations and confirmations that need to be written into the lease? For example, is the lessee required to get specific approval to change the color of the building’s exterior, change the name of the property, or perform any construction?

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