Warehouse Rental Agreement Defined
As the name suggests, a warehouse rental agreement is an agreement entered into by a landlord or warehouse owner who owns and/or manages a warehouse and one or more tenants wherein the tenants rent or lease space inside a warehouse. Warehouse rental agreements can be for short periods of time, such as when they are entered into on a month-to-month basis or for a fixed period of time which could range from several months to several years depending upon the terms of the agreement. Rental fees applicable to warehouse rental agreements could vary substantially as well.
Warehouse rental agreements may cover just a portion of a given warehouse facility (e.g . , just one floor) or all floors within a warehouse. Tenants are generally subject to rental fees based on the square footage rented (or "footprint") by the tenant.
Warehouse rental agreements are much like commercial leases in that they obligate the parties to act or refrain from certain actions. They typically contain the following key components:
Of course, this is not an exhaustive list and a number of other factors are also relevant when it comes to negotiating the key terms and provisions of a warehouse rental agreement. Such factors include the value of the goods being stored, type of warehouse facility, whether the tenant is a repeat customer, etc.
Essentials of a Warehouse Rental Agreement
Warehouse rental agreements commonly contain many key elements. A lease term, for example, is usually specified in advance, along with rental rates and a payment schedule. In addition, the lease will likely contain information about permitted use and any licensing or zoning requirements that must be obtained. Not surprisingly, subleasing rights are often addressed in detail as well. The method by which the rental fee is paid may also be an important consideration. For instance, some warehouse rental agreements call for a one-time payment up front, while others may allow for monthly payments to be made over a one year or longer term.
Categories of Warehouse Rental Agreements
There are several ways to structure warehouse rental agreements, including fixed-term leases, periodic month to month term rental agreements, and triple net lease agreements. The fixed term lease is probably the most common. This is where a tenant pays a set amount of rent every month for a set period of time. It can be used for leases that are in force for several years or even decades. This type of lease has certain clear advantages, especially if the rental rates are low, or if the market rates for space is generally declining. However, many landlords who own warehouse condominiums prefer short-term leases because they want flexibility in determining which of their properties to sell, and when.
Many landlords are willing to lease warehouse space on a month to month basis. This is called a periodic month to month term rental agreement. A lease for a term that is less than a year, and not fixed to renew after the first term, is typically a periodic lease. These periodic short term rental agreements run from one month, or one week to the next. Obviously, these are popular with tenants with short-term space needs or cash flow restrictions. Landlords who do a fair amount of business in their warehouses may use periodic rental agreements to have flexibility to lease several spaces to different tenants during different periods of time.
A triple net lease is a type of rental agreement that has the tenant paying all property operating expenses for the leased space. They are sometimes referred to as a pass-through lease or an absolutely full-service lease. The three ‘net’ refers to a lease transaction body paying the following expenses:
Almost all commercial leases contain a provision regarding operating and maintenance expenses. More modern leases are now beginning to include reimbursement clauses as part of their procedures for increasing existing rents. One important function of the floor space agreement is to establish how property costs will be charged to tenants. Many states regulate the extent to which costs can be passed through to tenants as well as how those costs must be calculated.
Lawful and Compliance Issues in Warehouse Rental Agreements
Warehousing is a complex industry that is subject to various legal considerations and compliance requirements. Companies renting warehouse space should be aware of these legalities not only to avoid potential problems down the line but also to ensure that they can enjoy the benefits of the warehouse fully. The most important legal issues that tenants should take into account include zoning laws, insurance requirements, and health and safety regulations.
Zoning laws are an important concern for warehouse tenants, as they dictate where certain types of businesses can operate. If the warehouse space is zoned for a different type of business than what the tenant intends to use it for, there may be a risk of zoning violations. Therefore, before signing a warehouse rental agreement, the tenant should check local zoning ordinances to make sure that the warehouse space is appropriately zoned for their business.
Insurance is another significant legal consideration, particularly when it comes to liability. Most landlord’s maintain property insurance on the premises but tenants should also consider carrying insurance to protect their operations. This is especially true if the business activities are potentially risky or if the tenant has valuable property stored within the warehouse. Tenants should check the insurance requirements in the rental agreement and review and adjust the coverage as necessary. Furthermore, tenants should confirm that the landlord is listed as an additional insured on their insurance policy.
Health and safety regulations are also crucial legal considerations for warehouse rentals. Federal law requires employers to provide a safe working environment for their employees. As such, warehouse tenants must comply with OSHA standards to avoid potential legal issues. In addition to complying with OSHA standards, tenants should also review state and local regulations to ensure that their warehouse space meets all health and safety standards. Failure to comply with health and safety regulations can result in severe penalties, including lawsuits and fines.
In sum, it is important for warehouse tenants to understand the legal implications of renting warehouse space. By doing so, they can ensure compliance with all applicable laws and regulations, and enjoy all the benefits of the warehouse without the added stress of potential legal problems.
Negotiation of Warehouse Rental Agreement
It is important to understand that the owner of the warehouse, whether he gives in person or through an agent, is also a businessman. His aim is to get the highest possible rent for his property, not necessarily to your best interests as the tenant. Like a re-seller of any other product, he will first see if he can persuade you to accept a price higher than that which is reasonable. If the negotiation does not break down, he will reduce the price in steps until he comes to the lowest price he can afford to go. But any reduction will be offset by the setting of strict conditions and guarantees so as to ensure that he gets paid his rent on time and in full. It is therefore important to make sure that your own aims are also achieved in the final document. With this in mind, you should prepare a list of the absolute minimum conditions and guarantees you need to make the contract acceptable to your business. You could well accept some of the more onerous conditions or guarantees that the owner will ask for in return for one of the concessions referred to above. In actual fact, a negotiation is often the only way to get a clause changed. But with the help of an expert to point out where the real problems lie and any unfair terms that are hidden amongst the legitimate , and even necessary, conditions, you can at least get an idea of the kind of concessions you should ask for.
In any negotiation between parties, the person making the offer has the advantage, particularly with regard to a lease where most of the main terms and conditions may already have been agreed orally especially on price and if the owner does not believe that you have any alternatives, e.g. if you have already signed a contract with the owner to purchase the warehouse or have given him a deposit, he knows that you will probably be more ready to make concessions than he is. It is therefore his aim to get you to agree to unfavourable conditions as soon as possible after you have already committed yourself. To combat this you should take advice as early as possible and lay out the framework of the proposed contract even before you start negotiations. The result of this will be that when you ask for the following points to be included in the agreement: each party shall bear his own costs, taxes and outgoings, particularly those itemised above in our discussion of the landlord’s main costs and outgoings, you will be in a much stronger position to obtain your aims than if you had signed up to the agreement before even starting your negotiations.
Common Risks Involved with Warehouse Rental Agreements
Many of the frustrations that warehouse tenants encounter are caused by their failure to ‘read the fine print’. A common issue, for example, is the continual battle over maintenance costs. The rental agreement may set out the tenant’s obligations in respect of maintenance, but the scope of these obligations is often so broad that the tenant ends up paying for all sorts of repairs and maintenance that should have been carried out by the landlord at its own cost.
One way of avoiding this scenario is to obtain a copy of the schedule of repair and maintenance costs used by the landlord when negotiating the rental agreement. The tenant will be in a much better position to assess its actual cost exposure in the future and consider adjustments to the rental amount accordingly.
Another issue that the tenant may face on renewal of the rental agreement relates to its rights regarding improvements to the premises. The tenant may want to upgrade the layout and renovate the space to create a more efficient warehouse operation to suit its evolving needs. If the rental agreement states that only the tenant can carry out improvements then the tenant may be stuck with whatever old systems and infrastructure the landlord installed many years ago. Even if the tenant does have the right to carry out improvements, they will often have to be carried out with materials and equipment supplied by the landlord. Since it is too costly to remove these items upon termination of the rental agreement, the tenant may have no choice but to apply cheesy paint and cheap flooring and then leave these items behind when the lease expires.
More importantly, however, tenants should be aware of escalation clauses in leases. Commonly, escalation clauses are linked to the Consumer Price Index. For warehouse tenants, a sudden spike in inflation could result in the rental amount increasing significantly in a very short period of time. Careful drafting of the percentage increase and how it applies is crucial for the tenant. Tenants should also bear in mind that the escalation amount will be calculated on the base rental amount as well as the portion of the rental that is determined by taking a percentage of the tenant’s turnover – resulting in a compounding effect.
In recent years, big warehouse tenants began negotiating lease clauses that limit the escalation mechanism to a fixed percentage or a fixed number of CN$ per square foot (or both). Landlords were not wholly in favour of this and it remains uncertain whether the recent rapid rise in inflation will give them much of an advantage in lease negotiations.
There are many other pitfalls that warehouse tenants encounter. Yet, many of these issues can be avoided if they take the time to examine the fine print in their rental agreements and compare them against industry standards.
The warehouse sector has changed over the years – and the negotiated clauses now need to reflect this.
Termination & Renewal of Warehouse Rental Agreements
It is common practice in Turkey for the rent – either monthly, quarterly, semi-annually, or annually – of a warehouse unit to be paid in advance. Generally, there are no sanctions if payments are delayed. However, in accordance with the relevant article of the Turkish Code of Obligations ("TCO"), any delay, even only by one day, constitutes default and any additional delay leads to the accrual of interest. Therefore, where the parties do not stipulate otherwise, rent payments must be made in advance and it is advisable that the parties agree on a default interest rate.
Termination: If no period of notice has been agreed upon between the parties, the lease will terminate by the expiration of the contract period. If a period of notice has been agreed upon, the tenant who intends to terminate the contract must notify the landlord of such intention no later than the period of notice agreed upon. If such notice is given, the contract may terminate on the day that the period of notice ends. The landlord may also terminate the contract at any time, without any notice, if the tenant fails to pay the rental price or constitutes a disturbance that would damage the leased unit during the performance of work . In addition, if the tenant rents a warehouse without the construction or modification of the warehouse unit, and the contract period is one year or less, the parties have the right to terminate the contract at any time, without giving notice.
Renewal: If the contract period has expired and the tenant has not vacated the unit, the landlord has the right to reject the demand to extend the contract. In such case, the tenant should vacate the warehouse unit within an additional period determined by the landlord. Where the rent is not paid and the tenant continues to possess the warehouse unit, the landlord may increase the rent as per the maximum yearly rent increase rate determined by the Turkey Statistical Institute. If the rental price increase per anniversary year is higher than the rent increase rate, the rental price cannot be increased more than the rent increase rate. In case of an increase in the rent rate by the landlord, the default interest rate shall be applied to such increased amount as stipulated above.