How to get the most value from a commercial lease
Commercial real estate is a complex business for lessor and lessee alike. A commercial lease agreement is more than a document. It is a network of interlocking rights and responsibilities for both sides. To get the most value from a commercial lease, implement three changes to your lease management system : 1. Manage the entire document package, 2. Track auto-renewals, and 3. Collaborate with stakeholders.
Document management for commercial leases
Commercial lease agreements often consist of many documents, including:
- Letter of Intent (prior to execution of the agreement)
- Lease Agreement (the main agreement)
- Personal or Business Guaranties
- Landlord Estoppel Certificate
- Schedule or Exhibit for property description
- Certificates of Insurance
- Other documents necessary for the deal
Classify lease documents
To make reports meaningful and easy to generate, classify documents with a consistent method. A common mistake is to substitute folder structure or deal name for document classification.
Folders are a method for storing documents in a location. Folders might be located on your internal network, in a document management system, or with an online service like Microsoft Sharepoint. At the most basic level, folders create a path to a file so computers can find and reference the file. They do not, however, support reporting of documents by type across folders.
Organizing commercial lease documents by deal name makes sense for getting the full history of the deal. Like a folder structure, tagging the documents in a deal with just the deal name will only allow you to report on documents by deal name. If you want to find all the insurance certificates or bonds among all your leases, then classifying documents by deal will not reveal the certificates because they will be hidden behind the deal name.
What about full-text search? There are three problems with full-text search in this context:
- Search is not a report. At best, it returns a list of files. In contrast, a report provides a list neatly organized with meaningful metadata like expiration date and deal name.
- Search is over- and under-inclusive. Slight misspellings or alternative terms produce search results which include more documents and fewer documents than you want. More importantly, you have no way to know whether the results are complete or not.
- Search has a limited scope. To search, you must specify where to search: network directories, local computer, or online services? The document you might want could be in any of those locations, but your search mechanism only covers one.
Document classification solves the problems of full-text search. The objective of document classification is to design a scheme that coves each type of document regardless of the nuances of a particular deal.
Here is a sample document classification scheme for commercial lease deals:
- Schedule (or Exhibit)
- Statement of Work
- Insurance Certificate (or Bond)
- Estoppel Certificate
- Letter of Intent
This list is not exhaustive, but it illustrates the idea that the types of documents should transcend any particular deal.
Set expiration dates as needed
Commercial lease agreements have lots of moving parts. Some documents in the deal package have no expiration date; others do have expiration dates.
An easement to the property likely has no expiration date; a bond or certificate of insurance does. The expiration dates on these ancillary documents differ from the end date for the lease itself.
You need an automatic alert before an insurance certificate, which is independent of the underlying lease. For example, if you sign a three-year lease on January 2, 2019, it expires on January 2, 2022. The commercial liability insurance policy, however, expires on June 2, 2019.
In this example, you need an alert 30 days before June 2, 2019, to make sure the insurance gets renewed and a new certificate is delivered. You also want an alert in 2021 for the lease renewal.
Commercial leases typically contain auto-renewal provisions. There are many types of contract renewals and terminations.
To create actionable alerts from auto-renewal provisions, we need to turn the language into data. There are four elements to an auto-renewal:
- Length of Renewal Period,
- Type of Renewal Period (days, weeks, years),
- Indefinite or Limited, and
- (If Limited) Number of Renewals.
The renewal period is the length of each new period. With commercial real estate leases, renewal periods are measured in years. A small retail space in a mall might be one year periods, while a large industrial property might 5, 10 or more years.
The type of renewal period is just the unit of measurement: days, weeks, months, or years.
Each renewal is either indefinite, making the contract evergreen, or limited to a certain number of renewals. When there is a limited number of renewals, it is important to capture the number of renewal periods.
Once you have rendered the description of the auto-renewal provision as data, some contract management software can automatically update the lease expiration date and advance the lease expiration notifications.
Collaborate with lease stakeholders
During the term of a lease, it helps to collaborate with colleagues, counterparties, and service providers on a single platform.
Collaboration can be simple or complex. On the simple end of the spectrum, your system can send automatic alerts to anyone in your organization or outside about leases, documents, or compliance requirements.
Lease collaboration can also take the form of task workflows. Workflows might facilitate approvals and decisions in a variety of circumstances among others:
- Lease amendments approvals,
- Review options for extension extensions, and
- New lease approval requests.
Whatever the situation, workflows embedded in your lease management software can save time and money while reducing legal risk.
To get more value from the lease agreements manage the documents effectively, track auto-renewals, and collaborate with colleagues.
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