What are Warehouse Lease Agreements?
A warehouse lease agreement is a legally binding contract between a landlord and a tenant for the rental of a warehouse. It’s an essential document for businesses looking to lease warehouse space, whether on a short-term or long-term basis. The main purpose of a warehouse lease agreement is to define the rights and obligations of both the landlord and the tenant when it comes to the rental and use of a warehouse .
For any commercial business that needs to store inventory or equipment, signing a solid warehouse lease agreement is a crucial step. These agreements are typically long-term commitments so it is vital that both the landlord and tenant clearly understand their rights and obligations. Before you choose to lease space in a warehouse, it is wise to review the terms of the lease with a knowledgeable attorney who can fine-tune the details and ensure that both parties are protected.
Terms of a Warehouse Lease
Every warehouse lease agreement will contain certain standard components that are critical to both parties—the landlord and the tenant.
Terms and Duration
The first component of a warehouse lease agreement is the terms and duration, which specify the beginning and ending dates of the lease. The terms and duration can be extended if the landlord agrees, but typically are set for one to five years. Just like an apartment lease, subletting may be allowed if the landlord consented to it in writing.
Rent Details
Standard rent is typically paid monthly, and the lease agreement outlines the amount, payment schedule, and acceptable forms of payment, such as check, wire transfer or e-payment. Some agreements also require a security deposit, and the contract stipulates when the money must be submitted and whether it will be refunded.
Maintenance Responsibilities
Who is responsible for upkeep and improvement of the building, equipment, grounds and parking? Most agreements place that burden on the tenant, so it’s important to note what the landlord is responsible for providing and repairing in the lease itself.
Warehouse Lease Agreement Provisions to Consider
When considering the fine print of a warehouse lease, understanding lease agreements clauses to watch is important. The terms of a warehouse lease can have significant financial impacts — now and down the road. A couple of things that demand attention are the way leases address termination conditions; renewal options; security deposit requirements and tenant responsibilities for alterations and improvements.
Termination Conditions
Most leases will have two types of conditions under which a tenant can terminate the lease – both often referred to as default. The first type usually results from a failure to pay rent. The second often involves a material failure by the tenant to comply with the lease. The time frames for default are usually not immediately clear. Leases will often give the tenant the opportunity to remedy the issue within a specified time period. If the tenant misses the deadline and has not fixed the problem, the landlord can terminate the lease without notice.
Tenants need to be aware of the starting point for the timeframe of a particular lease default condition. Many leases make a failure to pay rent as the only default condition that will begin the timeframe when late notices are given. The timing for other defaults might not begin until the landlord’s attorney has reviewed the lease, verified a default has occurred and sent a termination notice to the tenant.
The ability to terminate an expensive warehouse lease and move to a different location can be the difference between success and failure for many businesses. Warehouse tenants should be sensitive to lease default conditions and the start date for the timeframes that could result in a serious problem or loss of occupancy.
Renewal Options
All commercial leases should have a renewal option that sets out the terms of renewal. It’s common for renewal options to set out the future monthly rent but not the length of the future term. In these cases, the landlord reserves the right to allow the renewal and also prevent the tenant from having a future option after the expiration of the renewal term.
Security Deposit
Warehouse leases are likely to require a security deposit. This might be the practice of the landlord to protect itself against future damages that occur while the warehouse is occupied by the tenant. Leases that have pre-printed security deposit provisions probably used a form lease, and the terms may not allow the tenant to earn any interest on the deposit. Tenants can often negotiate additional terms if the lease was specifically drafted. If possible, negotiate for the right to earn interest at a defined rate.
Tenant Improvements
Most warehouse leases will require the tenant to make improvements prior to taking possession or from time to time during the term of occupancy. The tenant may be required to make the improvements as quickly as possible and usually before taking full possession. Failure to comply with any timing provision for making improvements can result in a serious breach of the lease.
The Leasing Process
Research – From start to finish, knowledge is power. Start by knowing the market and comparables for available spaces. This information will help you as you move into a negotiation. Also, find out as much as you can about the landlord. An existing landlord may be more flexible on terms with an established tenant. Their history is the best predictor of future behavior. If you provide a service, or produce a product, that a landlord could use, you may be able to leverage that into a more favorable deal. A good broker can obtain this information for you.
Go In Prepared – Get legal counsel involved at the very beginning of your search. A good lawyer can help you structure your deal to give you the most negotiating power. The earlier your counsel gets involved, the better the outcome.
Negotiating Strategies – Every negotiation is different but a few things stay the same. Remember that you are trying to strike a deal that is mutually beneficial. Know what you are willing to do and what you absolutely need. Go into the negotiation with a clear idea of what will make you walk away. Use information as a weapon and a shield. You can use what you know to get what you want. You should also be cautious about what you give away. If you are flexible on one point, make sure you get something in return. Keep in mind that the strongest negotiation tactic you have is the BATNA strategy (Best Alternative To a Negotiated Agreement) is to have a solid second option for your location. Having other comparable space options will give you the power to walk away from a weak deal.
Legal Issues and Compliance
From a legal standpoint, warehouse leases are generally not overly complicated. That said, there is much more to warehouse leases than just signing a lease and moving equipment in. The main concerns that arise revolve around zoning and insurance requirements. Zoning requirements are often a major factor as to whether a company will be able to legally occupy a warehouse space. In many cases warehousing is not a permitted use for a given building. This can be an issue even if the company has rented only part of the building for their own warehousing needs . However, in some cases, non-permitted warehousing may be possible provided that a company obtains a "variance" or exemption from the local municipality’s zoning office.
The other legal issue that is common with warehouse leases relates to insurance requirements. In some cases the lease agreement will require that the tenant maintain certain minimums of liability coverage. In many cases breakdowns of equipment will be the responsibility of the tenant rather than the landlord or property manager.
Common Errors in Warehouse Lease Agreements
One of the most frequent missteps in warehouse leasing is not understanding the entire lease lifecycle. Nearly every business knows they should have their Chicago commercial real estate attorney review their warehouse lease, but this is typically a passive process where they are just reviewing the language for specific terms, like defining square footage or enforcing rent payments. Your attorney should be looking at the term of the lease from start to finish, including when your rent payments are due, how long the lease lasts, and what happens if you or your landlord breach the lease.
Another common misstep is not keeping up with the facility. Without regular maintenance, the facility may deteriorate over time. This, in turn, may increase rent payments as your landlord needs to spend money on fixing it, or your landlord may evict you as they are leasing space that is no longer inhabitable. Regular maintenance and documentation of any repairs your landlord makes, provides evidence the facility is being maintained and adhering to health and safety codes.
Whatever you do, don’t put off reviewing your lease. The longer you wait, the less negotiating power you might have with your landlord. When you’re nearing the end of your lease, start negotiating a new one, or at least your right to renew. Don’t sit back and hope your landlord addresses the terms of a new lease or renewing your lease on the same terms (if that’s what you want) – address the issue yourself early and save yourself the hassle.
Warehouse Lease Agreements FAQ
What is a warehouse lease agreement?
As with all commercial leases, a warehouse lease simply governs the rights and obligations of the parties in relation to the rental of the warehouse premises. A warehouse lease agreement of course deals with specific issues that arise in the context of a warehouses but it is nonetheless just another type of commercial lease that will be covered by the provisions of the Landlord and Tenant Act (1987) (Scotland) and any card which is lodged with the Registers of Scotland.
Do I need an expert adviser?
Commercial leases are complex documents and generally any business that is dealing with a lease at least needs to have access to legal and tax expertise in order to ensure that the lease is appropriate for the business requirements of the tenants and the landlords. In addition to a lawyer , if there is any sort of construction involved as part of the lease you’ll want an architect to assess that part of the arrangement. Getting a surveyor to check the costs of the alterations highlighted in the lease can also be very useful in helping the tenant to budget accurately for alterations.
Can I exit the lease early?
The terms of the lease will dictate how early you can exit from the lease. The actual length of the lease will also depend on the use of the property and the tax status of the tenant. Once you have signed the lease – you need to stick to the terms of the lease. If you leave early without the correct process being followed you could be liable for the cost of the years remaining on the lease, or worse.