A new infographic released by Cushman & Wakefield looks at the past 10 years of commercial real estate growth in Portland. With so much demand for office space from the multiple industries fueling our region's growth, I’m not surprised to see that 85 million square feet of new development has been added to the inventory over the past decade. Yet even with that much growth, competition is fierce for tenants. Any company searching for new space (whether it’s to hang their first shingle or expand to a multi-floor hub) needs to be ready to move fast and secure a lease that is structured to serve as the bedrock for a business, and not a millstone around its neck. It’s going to be interesting to see if the rise of short term leasable coworking spaces will affect the balance of power between landlords and tenants for traditional spaces, but so far we’re not seeing any big disruptions.
As we near the finish line for our Real Estate Review Miniseries, here is an introduction to some of the more common legal elements of commercial leases in Oregon. Additional details are included in our Chambers Regional Real Estate Guide.
Legal Differences for Lease Types
Legally, there is no distinction between the different types of commercial leases commonly used in Oregon. The most typical commercial lease structures are Gross Lease, Modified Gross Lease, and Triple Net Lease (although names often vary, so don’t judge the book by its cover). Here’s a good breakdown of what each lease type involves. Generally, the landlord chooses the type of lease on offer for a property, but it’s always advisable for tenants to propose provisions that make the lease work best for their business situation.
In it for the Long Haul? Lease Terms
In Oregon, there are no statutes or regulations that dictate commercial lease terms. While a new business may prefer a one- or two-year lease to start, a typical short-term lease will range from three to 15 years and will often include an option to renew. Long-term leases that extend into decades are commonly structured as ground leases that place more responsibilities of ownership onto the tenant.
Oregon’s new rent control law doesn’t extend to commercial leases. Landlords often entice tenants with a period of free rent at the outset of a lease, and the fine print will detail if this rent will be retroactively due and payable upon lease default. Rent changes are usually baked into the lease based on a fixed percentage or tied to a specific consumer price index, and will be frequently renegotiated during a lease extension.
Clarity on Ongoing Expenses
One of the top benefits of a well-drafted lease is that it clearly spells out tenant and landlord responsibilities for ongoing expenses. During lease review, this is an area where a business new to leasing needs to spend additional time combing through the details to ensure there are no surprises when their monthly bills start arriving.
For a single-tenant property, depending on the lease type, regular tenant expenses commonly include rent, personal property and liability insurance, maintenance, and repair. Property tax responsibility is detailed in the lease as well. Improvements are generally allowed with prior approval, however a lease may state that improvements under a certain cost and that don’t require structural changes and aren’t visible from the street, are allowed without approval. Tenants should be aware that, unless the lease states otherwise, fixed improvements made to the premises become the property of the landlord after a lease ends.
In a multi-tenant property lease, a landlord will typically pay up front for common area maintenance, third-party services, utilities, and property and liability insurance which are then recouped in an equitable manner from all tenants.
Spoilers Allowed – Know the Endgame
One of the most important things to know at the beginning of a lease is how it will end. The lease will spell out the rights of both parties to end a lease agreement by expiration, termination with advance notice from either party, or eviction.
Similar to the lease term, early termination is not regulated by Oregon law and is often settled by both parties through negotiation. If a tenant stays on the premises after a lease expires, and without prior agreement by the landlord, it becomes a holdover tenant and subject to holdover obligations outlined in the lease. Generally, a holdover tenant in Oregon will be charged a significantly increased rent rate and is subject to eviction. It’s not uncommon for a lease to state that if a landlord accepts payment of holdover rent, the lease will convert into a month-to-month periodic tenancy lease.
An Oregon landlord who seeks to forcibly evict a tenant must follow an expedited court procedure called forcible entry and detainer (FED), which determines only if the tenant has the continued right to possession of the premises, and doesn’t consider other claims such as damages. An uncontested FED judgment can be obtained in 10-15 days, while a contested case may take 30-45 days. Local county sheriffs are tasked to execute evictions.
Another way that a lease might be terminated with little notice to the tenant is through the power of condemnation by a third party. If a privately-owned property is condemned by a federal, state, or local authority, leases of the property will terminate when the government takes title, unless the government otherwise agrees. Moving expenses might be awarded directly to tenants by the courts, but a landlord is not obligated to pass along any part of a condemnation award unless stated in the lease.
Although many tenants and landlords like to use form leases for convenience, the reality is that there are many variables to consider for a lease to be a productive document for both parties. A landlord is allowed to include use restrictions in a lease, so special care should be made when drafting a lease to ensure a business can operate within its rights. This is especially true for Oregon businesses in emerging industries, such as cannabis, where regulations regularly shift. We recently posted a blog article recommending specific considerations when negotiating a cannabis business lease. Commercial businesses with a residential component, such as hotels, nursing homes, or vacation rentals, may be subject to additional local use regulations, but are largely exempt from the Oregon Residential Landlord Tenant Act.
A commercial lease can be long and dense, but it’s an important document to have clarity on. Since rent is one of the largest expenses for a business, and a steady income source for the property owner, signing a lease without a clear understanding of the terms is a way for both tenants and landlords to get into tough situations. Any agreement that will be in effect for a long time makes specific problems difficult to predict, but three issues seem to recur often. First, the right of the tenant to assign the lease to a new tenant, or to sublease the space. If this is prohibited or landlord consent is required, unanticipated changes to the tenant’s business plan may be harder to implement. Second, the right of the landlord to make improvements to the premises – this can be particularly important for tenants like retail that rely on walk-in traffic. Ugly scaffolding or construction zones make the premises less inviting, so be sure the lease spells out rules to minimize the impact of construction on the tenant. Third, calculation of the rent upon any future increase – do not leave this open to negotiation, particularly if agreement on a new rent is tied to a right of the tenant to extend the lease term. The best option is to have a mathematical formula by which rent increases will be calculated, but if that fails, at least include a provision to arbitrate the fair market rent with a neutral third party if landlord and tenant cannot agree.
Whether you are the landlord or the tenant, if leasing is not your regular business then you should have a realtor, attorney, or commercial lease consultant go over the lease terms, and you should ask as many questions as you can. When it comes to sticky points, remember that it’s in the best interest of both parties to have a lease that is mutually beneficial. Owners want their space occupied and paid for, and tenants want a stable location that allows them to meet their business goals.
This article is Part 6 of our Oregon Real Estate Review Miniseries.