Warehouse Leases: The Basics

If you have only leased offices, the biggest surprise is how much of the building becomes your job. LP, a law firm, compares the two directly. In a multi-tenant net office lease, the tenant maintains the interior of its premises, the landlord handles common areas, structure and base building systems, and the tenant does not typically perform capital repairs or replacements. In a multi-tenant industrial project, the landlord maintains common areas and structure, but the tenant takes on much more.

• Repairs. Tenants commonly maintain, repair and replace the premises and the systems that exclusively serve them, including HVAC, dock equipment, doors, plumbing and the floor slab.
• Capital costs. In an office lease, capital expenditures are typically excluded from operating expenses with limited exceptions. An industrial tenant's obligation often includes capital expenditures whose benefit may extend past the term.
• Use. An office use clause rarely needs much attention. A warehouse tenant may need specific rights for its operations, equipment, storage and any hazardous materials.
• Building specifications. Clear height, dock doors, truck access and power capacity can make or break an operation, and they do not arise in the same way in an office.
• Environmental. Contamination is a real exposure in an industrial setting, and lease language may need to allocate it in detail.

LeasePilot, a lease software company whose CEO is a former commercial real estate attorney, makes the same point: industrial leases are often thought of as simple, but they carry specialized provisions that generic templates miss.

A warehouse lease covers the familiar business terms, but these deserve particular attention.

• Premises and measurement. Check exactly what is included, such as the truck court, trailer parking, yard and any outside storage rights.
• Base rent and escalations. Check how and when rent rises, and whether free rent affects any other payment.
• Operating expenses. In a triple net lease, you pay a share of taxes, insurance and maintenance. McCormick, a law firm, explains that landlords usually bill estimates and reconcile after year end, so look for audit rights and exclusions.
• Repair and replacement. This is often the costliest clause. Definitions matter, since LP notes that "roof" may mean only the membrane or may also include the deck and structural members.
• Permitted use. Make sure it covers what you will do now and plausibly later.
• Alterations. Racking, anchors, power upgrades and office changes may all need landlord approval.
• Surrender. Check whether you must remove racking, repair anchor holes, or take out any alterations.

LeasePilot lists several industrial issues that a general lease template can overlook, which makes a useful checklist for reading a draft.

• ✓Is clear height stated with actual measurements at defined points, and not as an approximate number?
• ✓Are dock doors, door sizes and truck court dimensions specified, with a diagram attached if needed?
• ✓Does the lease state electrical capacity, in amperage and voltage, and who pays for any upgrades?
• ✓Are gas, water pressure and HVAC specified, or is the absence of HVAC clear?
• ✓Are the hazardous materials we will use listed, with quantity limits and storage requirements?
• ✓Is there a process for adding a new material later, and does the landlord have any right to refuse?
• ✓Is existing contamination separated from anything we might cause, with a baseline assessment?
• ✓How long does our environmental indemnity last after the lease ends?
• ✓Do insurance requirements fit our actual operations, including any pollution coverage we need?

EPA describes All Appropriate Inquiries, the process tied to a Phase I environmental site assessment, as evaluating a property's environmental conditions, and explains that liability under the federal Superfund law can reach those who operate a property as well as those who own it. LeasePilot notes that without a baseline at the start, there may be no way to separate what was already there from what a tenant caused. Your attorney and an environmental consultant can advise whether one makes sense for your use.

The building type changes the document. In a multi-tenant park, the landlord typically operates the project and passes costs through. Each tenant pays a share, and you may share yard space, driveways and sometimes docks. Check who controls those shared areas and how your share is calculated.

In a single-tenant building, LP explains that the tenant typically maintains, repairs and replaces nearly everything. A common drafting technique is for the landlord to take a short list of items, such as the roof structure, foundation and exterior walls, with everything else falling to the tenant. At the far end sits the absolute or "bondable" lease, where the tenant must rebuild after a casualty and keep paying rent after a condemnation, with no right to end the lease. If you see those words, stop and get legal advice before going further.

In a single-tenant lease, read the landlord's list of duties, not yours. Anything not on it may belong to you.

1. Write down your operating requirements before you look at a form, including height, doors, power, materials and hours.
2. Put the main business points in the letter of intent, especially repair responsibilities, condition at delivery and allowed use. They are harder to raise once a lease draft is circulating.
3. Have HVAC, the roof, docks and electrical systems inspected before you take on responsibility for them.
4. Check zoning and your use with the municipality, and fire protection with your engineer, insurer and fire official.
5. Ask your insurance broker to review the insurance and indemnity sections.
6. Have an attorney who knows your state's law review the full lease. Lease rules vary by state and the wording decides who pays.

Tenant Advisory Group represents tenants and buyers. We help you compare proposals, surface the repair and exit costs that a rate quote hides, and coordinate with your attorney on the points that have the most money behind them.