‘Basic Property Manager Obligations During A Business Lease” written by Mike Marko
What are the obligations of a property manager during a business lease?
It depends on the terms of the lease in question, of course. But generally speaking, there are quite a lot of obligations involved.
Most of them have to do with ensuring that the terms of the lease are observed, e.g. collecting rent, maintaining common areas, etc.
This tells you that being an effective property manager can involve a lot of work. It’s not something you can just forget about at your own convenience.
Today, we will be talking about some of the basic property manager’s obligations during a business lease. This may help you figure out what’s involved if you want to start a rental property business.
Five Property Manager Obligations during a Business Lease
Before we get into some of the most common obligations property managers have in a business lease, let’s get something else out of the way.
Let’s talk about how a business lease is different from a residential lease.
A business lease differs significantly from a residential lease. A residential lease is for property in which people intend to live. A business lease is for property out of which people intend to operate a business.
Take note that some residential lessees actually operate businesses out of their rented properties. Still, this differs from those using a business lease.
After all, business lessees don’t generally live in the same space they use for their business activities. In fact, there are even a lot of states where doing that would be illegal.
A commercial property is usually used only for that: for commercial purposes.
Now every business lease has at least five obligations that need to be covered and followed when negotiating with a potential tenant.
Here are some general duties and services that property managers must provide.
Obligation to Manage Security Deposit or Prepaid Rent
Managing security deposits is the very first obligation a property manager has. This is actually true whether the property manager is dealing with a property under residential or business lease.
As a property manager, you have the right to ask for a security deposit from your commercial tenant. In fact, it’s pretty much expected.
This deposit is a form of security in case the tenant fails to pay rent. Take note that property managers must follow the local laws regarding security deposits in their area.
In most states, those laws only cover how much time a property manager has to return a security deposit once the tenant moves out.
That’s because there aren’t laws imposing a limit on the amount a landlord can demand for a security deposit… unlike with residential leasing situations.
Several states actually cap the amount of money a landlord can require as a security deposit in residential rentals or leases.
Obligation to Disclose Owner
The next thing an effective property manager is obliged to do is to disclose to their tenants certain information about the owner of the property.
When negotiating and finalizing a commercial lease, you need to agree to certain legal terms. Disclosing the names of the owners of commercial properties to other parties is one of those. This responsibility lies with the property manager signing the lease agreement with the tenant.
Basically, disclosing the names and addresses of the individuals who own a property is okay. However, before disclosing any information, you should also review leases with legal advice.
Your standard business lease may also require you to disclose the following to tenants:
- The building’s name and address,
- The terms of collection of rent,
- The terms regarding making repairs, and
- The terms of addressing complaints.
Now, how do you disclose these things?
Disclosures should usually be made in writing. That provides all parties to the business lease with a legal document they can call on if needed.
Disclosing information like this is necessary to render a business lease legally valid.
If the property owner’s name isn’t disclosed in a business lease, for example, the validity of the lease contract could be called into question at any time.
Obligation to Deliver Possession of Unit
Another important obligation of the property manager is delivering possession of the premises.
The property manager will deliver possession of the premises to the tenant upon finalization of the business lease. To be exact, it’s his obligation to do it in the way and during the date or time set by the business lease.
This is important because it’s a crucial part of the contract in a business lease. If a property manager fails to do it in some way, it could be grounds for a suit claiming breach of contract.
In fact, some commercial tenants have sued for such failures on the part of their property managers.
So, for example, let’s say a property manager has delayed conveyance of possession of the premises to the tenant for 3 days.
The tenant now has the right to take the owner of the property to court for that breach of contract.
Worse, he can even demand damages because of lost revenue or expenses caused directly by the delay in transfer of possession.
This is why this obligation is so important. If a property manager fails to discharge it, even the tenant’s business could suffer. A day of lost production or office time is costly for any business.
Obligation to Maintain the Unit
This is subject to the terms of the business lease, of course.
Generally speaking, though, the property manager is responsible for maintaining the property until possession of it has been delivered to the tenant.
This is the very important obligation that a property manager must discharge in order to comply with a business lease.
That’s because most business leases specify the condition in which a property must be during the transfer of possession/start of tenancy.
The property manager should make sure the property is clean, safe and habitable before the transfer.
Depending on what terms are in the business lease, that may involve ensuring the following:
- Adhering to building codes,
- Performing repairs, and
- Ensuring vital services are functioning.
Basically, anything that involves making all repairs and doing whatever is necessary to ensure the property is ready for its new tenant.
Again, this depends on the terms of the business lease. Some tenants may require landlords to do a little more to prepare a commercial property for their use.
Whatever the case, all that matters is that the landlord or property manager sees to all of those things prior to the transfer of possession.
Some tenants may be willing to give landlords a grace period to see to those, though. Usually, they specify the grace period in the business lease itself, e.g. the landlord is given 45 days from the start of tenancy to ensure X or Y.
What about maintenance during the leasing period itself? Well, most commercial leases don’t actually leave that in the purview of the property manager or landlord.
The only areas these have to maintain are usually common areas. Everything else is usually the responsibility of the tenant instead, at least in a business lease.
Note that this is another way residential leases differ from business ones, by the way. In residential leases, property managers usually handle maintenance on the building even after the tenant has taken over.
Not so in a commercial lease, where tenants are typically expected to pay for their own maintenance on the property.
There are other obligations of a property manager, specifically one who also happens to own the leased property he is managing. Several of these have liability limitations, particularly as a result of certain events.
For example, let’s say the property manager (who’s also the landlord) of a commercially-leased property decides to sell the property.
Let’s say he does it before the property’s tenant has moved out or concluded tenancy.
His obligations to the business lease of that tenant are now limited. That’s because most of them have been transferred by the sale to the new owner of the property.
This means the previous owner of the property is no longer liable for the obligations laid out by the business lease.
In most cases, there are some obligations that remain with him (the previous owner), however.
For example, there’s the security deposit. If he collected a security deposit from the tenant with the business lease, he’s still responsible for that amount.
In other words, he still needs to manage the security deposit legally.
Most property managers choose to transfer the deposit to the new landlord to discharge this obligation. They just make the necessary (and legal) deductions to it before the transfer.
The remaining money is then transferred to the new landlord. Take note that the tenant has to be informed of that transfer. Ideally, the property manager does it in writing, to provide the tenant a legal notice of the action.
Others choose to make deductions to the deposit, then return it to the tenant instead. Again, it is best for the property manager to have proof of this in writing.
Some may even require a witnessing document to be signed by the tenant to prove they returned the deposit.
The new landlord or property manager will than have to collect a new security deposit from the tenant. Naturally, the former landlord will no longer be liable for managing that.
Instead, it becomes the new landlord’s duty from then on.
Final Thoughts on Property Manager Obligations During a Business Lease
In this article, we discussed the important obligations a property manager must see to during or before a business lease.
To sum up, an effective property manager must see to certain duties that include the following:
- Obligation to manage security deposits,
- Obligation to disclose owner,
- Obligation to deliver possession of property,
- Obligation to maintain the property, and
- Other obligations.
These are just some of the most important obligations property managers have. There may be others, of course. Depending on the business lease in question, they may also be of genuine importance.
This should have given you an idea of what’s involved in acting as the property manager for a property under a business lease. If there’s anything else you need to know with regards to business lease, share it with us in the comments section below.
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