In the video and written tutorial below, we’ll be walking through a commercial real estate standard industrial lease (triple net lease) with commercial real estate attorney Ron Rohde. The triple net lease is one of the most common lease structures used in the industry today and we’ll go through every provision both here and in the video.
Note from Spencer: This is another post in a growing section we call ‘A.CRE Legal‘. One of Texas’ top real estate attorneys, Ronald Rohde, has graciously offered to share his time, expertise, and open his library of real estate legal templates for the A.CRE audience. Click here to learn more about Ron or to contact him directly.
Video Walkthrough of the Triple Net (NNN) Industrial Lease
NNN Industrial Lease – Introduction
For a legal purpose, the title of the lease doesn’t matter. It can say triple net or it can just say the “lease” and it’s up to a court to interpret what it really means. That’s because “triple net” is a highly subjective, broad term. Brokers who use it want to imply everything paid for by the tenant, when the reality is likely something less. So while the name can be useful and certainly guiding intent; it is not controlling in terms of whether the lease is actually a triple net.
NNN Industrial Lease – Name the Parties
This is a critical part of the lease. Both the landlord and the tenant need to be properly identified. LPs versus LLCs, corporations, etc. If there’s a property manager involved, the actual deed record owner needs to be the landlord. On the other side, the tenant needs to be the entity that’s going to occupy the space. If you’re a landlord it’s important that you properly name the business operating entity or somebody that has a contractual right to perform business.
NNN Industrial Lease – Notice Addresses
Notice provisions are also supercritical when one party fails to perform. Your lawyer will see what type of notices need to be mailed versus a copy. So what this means is, notice is not sufficient if you only mail it to the landlord, you also need to mail a notice to the attorney and it may also be by email. It’s really critical that when you’re trying to comply with the terms of the lease you look at the notice section and fully comply with all of these notice provisions.
NNN Industrial Lease – Property Address
This is typically a street address, but it’s not really defining what the leasehold is. It’s only a quick point of reference. The controlling description is going to be a legal description, maybe a survey as well. That’s what will guide the actual leased premise.
NNN Industrial Lease – Lease Term
We typically denominate these in months (e.g. 72 months) and there’s a little bit of language here depending on how you want to deal with partial months, but pretty standard renewal options you may or may not have this. I’m seeing a lot more landlords now in this industrial market, they don’t want to give any renewals even if it’s a fair market they think that there’s a better opportunity to sign for really lucrative rents, and it seems like every single lease signing is setting a record for new lease rates. Shorter lease terms with no renewals are really becoming the trend to really jack up those rents.
NNN Industrial Lease – Permitted Use
This is pretty important when we start to describe what the tenant is going to be doing. You as a landlord have to think about harmonious uses, maybe you have trouble with the city, the state, and so you really want to know what is this person going to be doing in your building. That’s really the scope of their permitted use.
NNN Industrial Lease – Guarantor
You may have a personal guarantee, it really just depends on the business, how long it’s been around, how much non-family management is there. It’s perfectly normal to see a guarantor, even on an established business, just depending on the perceived tenant risk. You may have a burn-off, that’s something that your lawyer can draft up as a reducing amount of a personal guarantee, either overtime or after a certain number of payments are made.
NNN Industrial Lease – Base Rent
We repopulate with square footage and multiply times the yearly rental amount. This section is useful if you make it straightforward. It’s critical that these calculations are accurate, your lawyer will typically perform some calculations, but it’s always helpful to double-check the math.
Schedule I: Rules and Regulations
A. Description of Property
B. Depiction of Premises
C. Broom Clean Condition and Repair Requirements
D. Tenant’s Work Letter
E. Lease Guaranty
I will not be able to go step by step through the entire contract, but I will make comments on every important clause. Feel free to contact me if you have any questions, I would be glad to do more videos.
NNN Industrial Lease – Default
This is an important section, you want to spend some time on what constitutes a default, do you have a universal cure? Do you have a monetary cure period? that can be something like five days after written notice from the landlord, they only have to give that warning once, but for monetary defaults, it should be a shorter cure period. If you’re going to put anything in versus a universal cure period, which is any other type of default, let’s say it’s a violation of the permitted use, let’s say it’s a parking violation, modifications to the building, that can be default in and of itself, but it’s non-monetary it doesn’t have to do with paying rent, there should be a little bit more generous terms of default for non-monetary. Just go through it and understand if you’re not maintaining insurance, let’s say you’re a day late. It’s that a default? Eventually, it will be but usually, the landlord will have to give you written notice after those 10 days and if you still haven’t obtained insurance, then they can put you in default.
NNN Industrial Lease – Estoppel Certificates
This is important, the ideal lease structure will put a form of estoppel certificate in the lease that the tenant has reviewed and says, I’m okay with this form, I’m willing to sign this form in the future during the duration of this lease. Otherwise, what I see a lot is when you have just this obligation to deliver within 20 days after landlords written requests, there can be reasonable disagreements about the form and the content of that estoppel certificate, and if they don’t agree to what the words of the establish certificate are, the tenant is in a tough spot and so is the landlord.
NNN Industrial Lease – Environmental Requirements
This is important, but you really want to look at their use in general, you as a tenant just have to agree with all these things. The landlord is not going to have much duty to review or research your actual behavior, it’s more kind of after the fact. Only if a third party comes in and makes allegations, will the landlord invoke these clauses. Environmental concerns are a big deal, but I think people don’t put in a lot of time. I certainly don’t modify the environmental clauses very often, we just review them and understand that we don’t have a lot of negotiation power, because we’re the tenant, we should be responsible for what happens to the land.
NNN Industrial Lease – Independent Covenants
This is kind of a new clause. Five or ten years ago we started putting new clauses, that say the landlord is not providing security for the tenant, the landlord is providing security service for the protection of the building, for the landlord’s benefit. It’s really interesting that they’re providing this security, but it’s not for you it’s for the building force major. We’ve seen this particular lease doesn’t have a covid specific exception for a pandemic or other health issues, but this is kind of just a boilerplate force measure and it’s interesting because the forced measure really should cover things that are unexpected things. But once you identify covid and once we know that there could be something like a pandemic occurring, it exits the world of force major, because it’s predictable it’s foreseeable that we could have a covid type incident again and what do we put in the lease, so we need to address it with a specific covid clause or a pandemic or health-related emergency, that sort of thing really should be for covid entire agreement.
NNN Industrial Lease – Brokers
I typically want to see that you either have no brokers or you are agreeing to pay according to a separate agreement. We don’t like to get into a broker fight within the lease, especially because maybe this lease gets recorded or filed for public companies. That’s a pretty standard thing, either we represent no brokers or we identify the brokers and they’re going to get paid tenant agrees to indemnify if some of these brokers on the tenant side sue the landlord for payment.
NNN Industrial Lease – Description Notices
Sending by FedEx, this one may cause some issues. I don’t like hand delivery, it still creates too much ambiguity, just because some property manager says that they handed a document to somebody at the property and I don’t like that. I would much prefer tracking for everything and not allowing either party to try to claim that they did hand delivery. So I would prefer email, plus mailing, but no real hand delivery.
NNN Industrial Lease – Financial Statements
These are some affirmative obligations regarding the tenant, you can decide whether you want just like a compilation, or if you need audited financials. If this is a big company that is already preparing audited financials, why not send all your landlords an extra copy?. Only if they’re already getting audited financials because if they’re not, it’s a pretty big expense. But if they are obtaining those, ask for a copy and you have a higher level of certainty.
NNN Industrial Lease – Signature Pages
They are separate, the signature block is actually pretty critical for all of our landlords, we do review the tenant formation documents and operating agreement to make sure that this signature block is proper authority to enter into this lease. That’s an important issue because if you’re ever into litigation they can claim that the person signing didn’t have authority to bind the company into a lease. For the landlord, if you’re the tenant side council, you want to make sure that the landlord has proper authority for the deed record owner, but you want to just look at some of the operating documents to ensure that the signature block is accurate and they have authority to enter into the lease.
NNN Industrial Lease – Rules and Regulations
These are all pretty standard, but you want to read them. What if your tenant use is some type of veterinarian or some type of medical testing, where you do have mice and cats. Is that a violation of number five? I don’t know, but you want to make sure your rules.f you need to have pallet storage outside, make sure you clear that with the tenant and maybe we put that in the lease explicitly. Really important that you don’t want to be in violation of the rules, and you don’t want to start the relationship on a bad foot. I think that tenants who understand what their use is going to be, and tenants who review the lease for immediate violations and they raise that to the landlord, that’s starting the relationship on a good foot.
NNN Industrial Lease – Exhibit A
The legal description of the property: It’s critical that you have it match exactly what the real property is, and it can be confusing if you have just a street address or if you’re an industrial park. There’s a lot of buildings, it’s not really clear what the address is or they could have multiple addresses on a building depiction of premises. This is basically going to be a drawing with a cross-hatched area, or it says this is the building outline and the boma standard square footage and you get everything in it’s a single-tenant type situation, but this will have a cross-hatch, maybe it’s divided into two spaces, of what your leasing area is.
NNN Industrial Lease – Exhibit B
Description of premise (this is usually a site map and so it’ll be the interior walls a bathroom office garage that sort of thing) and then they typically would do like a crosshatch of the specific area if you don’t have a single-tenant user that’s occupying the entire premise.
NNN Industrial Lease – Exhibit C
Broom clean definition you know that’s really important that we define what this building should be returned in what they’re receiving it and what they’re returning it repair requirements
For triple net leases, it’s critical to identify what the tenant is responsible for and what the landlord is because even if it’s a triple net lease sometimes the landlord is still responsible to maintain the parking, lot to maintain the roof, maybe all the outer membrane exterior of the building. On the other hand, if it’s an absolute triple net, then the landlord really isn’t responsible for anything, the building is completely in the hands of the tenant. It’s important to understand what type of lease are you envisioning
NNN Industrial Lease – Exhibit D
This is the extent that the tenant will do improvements themselves, but the landlord will not reimburse until all of these are completed. You really should understand when you’re going to get paid.
NNN Industrial Lease – Exhibit E
Guarantee: We talked about this earlier if there is going to be a personal guarantee or maybe a corporate guarantee on this lease. If you have a newer company or the parent doesn’t have that strong of financials, you may issue a corporate or a personal guarantee in favor of the landlord. You can have some limits on this one thing, can be the distinction between base rent obligations as well as triple net.
That’s it, I’ve walked through this lease, thank you for your patience. Feel free to reach out if you have any questions. This is really a great base lease and it should give you some idea of what you would want to change for your property, for your particular tenant, and your landlord goals.
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