Category: Real Estate

Tenants: negotiate the default clause, not the late fee

Here’s a lease tip for small tenants: don’t argue about the late fee, but read the default clause carefully. Why? It’s not worth your time to negotiate a 10% late fee down to 5%. If you spend $400 of your time or your lawyer’s time arguing with the landlord and the monthly rent is $2000, then you have to be late with the rent four times before you break even.  Being late with the rent is a bad way to make up your business’s overhead costs.

You have a lot more to lose if the landlord can lock you out for a default. Why negotiate default and not the late charge? If you don’t pay on time and incur a late fee, you’re still in business. But if the landlord can lock you out without warning if you don’t pay on time, you’re out of business. Insist on a notice and a cure period before the landlord can change the locks. If you don’t, and if the landlord takes a dislike to you, then the landlord can call a minor breach a default, lock the doors on your business, leaving you without income but on the hook to pay rent until the landlord finds another tenant.

Propose a “three-strikes” clause: for the first two late payments in a 12-month period, the landlord must send you a notice of default and allow you a few days to pay the back rent and a late charge. Only with the third strike – the third late payment – can the landlord lock you out.

We like “Landlords.” Here’s why.

A tip on drafting leases:  Embrace the “Landlord” — no, not that kind of embrace.  Embrace the word.  

William Nickerson, in his classic work on investing in real estate, recommended using the terms “Lessor” and “Lessee” in leases.  He thought that “Landlord” sounded like a relic of the feudal era, and that it offended tenants.  

He may have been right about the effect on tenants, but he was wrong about the effect on contracts.  If you use “Lessor” and “Lessee” to identify the parties to a lease, you’re much more likely to mistake one term for the other when you’re proofreading the agreement.  No one mistakes “Landlord” for “Tenant,” but casual readers can easily mistake “Lessor” for “Lessee.”  It’s a whimsical mistake to make — unless you’re the “Lessor” to whom the lease assigned maintenance and repair responsibilities that you wanted to be the tenant’s responsibility, and that your tenant now wants you to fulfill.   

Don’t be afraid to be the “Landlord” in the lease: it’s a lessor evil (sorry) than being mistaken for the tenant.

A bad contingency clause can produce a dissatisfied buyer

Almost every real estate sale agreement includes some contingencies: conditions that, if not met, will allow the seller or buyer to cancel the sale. The two most common are a financing contingency and a property inspection contingency.

Be sure when you’re writing a contingency that you identify what the contingency actually is. Don’t write “Buyer’s obligation is subject to Buyer obtaining a property inspection,” or (even worse) “This transaction is subject to Buyer obtaining a property inspection.” The actual contingency isn’t the inspection, but the buyer approving the inspection. What if the buyer obtains an inspection, but doesn’t like what the inspector has to say?  The buyer has satisfied the contingency, but is dissatisfied with the property, and likely to be dissatisfied (or worse) with the attorney or agent who drafted the contingency clause.

Instead, write “Buyer’s obligation is subject to Buyer obtaining and approving a professional inspection of the property on or before _______, 2018.”   When the actual contingency is the buyer being happy, say so.

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