Most real estate and equipment leases tend to follow the same lifecycle pattern. Each phase within the lifecycle has activities and decision points that lease teams monitor and, at times, act upon. We are going back to the basics to discuss the life of a lease.
Negotiation and Transaction Phase
All activities leading up to the execution of the lease document are included in this first phase. During this timeframe, the asset is selected, financing is arranged, negotiations take place, and the lease document is prepared and signed by both the lessee and lessor. Once the signatures are in place, responsibility for administering the terms and conditions of the contract may shift to a lease administration team for the remainder of its life.
Lease Term – Pre-commencement to Expiration
This part of a lease’s life may include pre-commencement activities such as the build out and acceptance of a leased space or the manufacture and / or receipt of a leased equipment asset. It also includes the period from lease commencement through lease expiration, which is called the lease term. During the lease term, the lessee and lessor are compelled to fulfill their respective rights and obligations as stated in the lease. The rights and obligations may include the permitted use of the asset, financial components (like rent payments, security deposits, and allowances), maintenance responsibilities, and other covenants negotiated and agreed upon by the lessee and lessor.
Renewal or Option Terms
During this period (or periods), unless stated otherwise, the lease terms and conditions stay in place, but the expiration date of the lease is extended. Rent due to the lessor may also change during this time. The period between the original lease expiration date and the extended date is called either the renewal period or the option period, depending on how the lease is written. In some leases, the lessee must notify the lessor of their intent to extend the lease term or exercise their option to extend the lease. In others, the lease may automatically renew unless it is specifically terminated by either the lessee or lessor. Missing a notification deadline in this situation can result in unintended financial consequences. Notification dates, notice methods, and other requirements are governed by the lease document.
Lease Expiration
There are several lessee obligations that may arise prior to or upon lease expiration, all of which will be described in the lease document. The lease may require the asset to be in a certain condition upon return or detail how and where an equipment asset must be returned to the lessor. Return conditions may include the removal of improvements made by the lessee, the operational condition of equipment, cleaning requirements, shipping obligations, or other guidelines. The final activity in this phase occurs when the lessee returns the leased asset, whether a real estate or equipment asset, to the lessor.
Close Out and Post-Expiration
The final phase of the lease lifecycle occurs after the lease expiration. Lessees may seek confirmation from the lessor that the lease obligations have been satisfied. They will also look for the return of a security deposit or release from a letter of credit if those obligations existed in the lease. There may also be internal tasks to complete, depending on how a lessee internally administers their lease portfolio. Internal close out tasks may include modifying the lease status in a lease administration system, reporting on expired leases, reviewing the document file for completeness, archiving the lease file and record, and others depending on the company and workflows.
Our team manages thousands of leases for all types of assets and most of them follow a similar path from initial negotiation through final archive. Many roles intersect with the lease lifecycle, including procurement, brokers, attorneys, lenders, lease administrators, and others. Additional functions depend on lease data for accounting, financial reporting, and decision making. What does the lease lifecycle look like in your organization? Are the intersections with leases optimized, or is there room for improvement? We would love to hear about your experience.
Scribcor Global is the preferred independent lease administration partner managing all types of leases for companies in many different industries. Each day, our professionals contribute their expertise and industry knowledge to complex lease situations, ensuring lease compliance, reducing real estate spend, and adding value to our client teams. Let us show you how by contacting us today.