Lease Commencement vs. Rent Commencement
Not All Commencements Are Created Equal
If you’ve ever been involved in securing a lease as a healthcare tenant, you’re likely familiar with the concepts of lease execution date, delivery date, lease commencement, and rent commencement.
These concepts, while simple to define, are some of the more important business points of a lease negotiation. When it comes to both lease and rent commencement specifically, achieving the best possible terms can help your practice start the new lease in a strong financial position.
The following are basic definitions of important dates within a lease you’ll want to know:
Lease Execution Date: This is the date that both parties, typically the landlord and tenant, sign the lease. Often times the parties sign on different days. In this case, the latest date is the official lease execution date. This can be done in person or electronically (authenticated with a service like DocuSign).
Delivery Date (Date of Possession or Delivery of Premises): This is the date the landlord provides the tenant access to the space (i.e. gives the tenant the keys). This occurs after the space is free of all other rights of possession, existing or prior tenants have moved out, and the landlord’s work which was agreed upon in the lease has been completed. Tenant improvements can then begin after the delivery date.
Lease Commencement Date: This is the date that the lease term begins. For example, if the lease term is five years, then day one of the five-year term is the lease commencement date.
Rent Commencement Date: This is the date upon which monthly rent begins for the space. Rent commencement does not necessarily occur on the same day as the lease commencement. In a long-term lease that is properly negotiated, a tenant may receive concessions in the form of a free rent or rent abatement period, meaning the rent commencement date may take place months down the line after the lease commencement date.
Lease Expiration Date: This is the date that the original lease term expires.
It is critical for each of these dates to be clearly defined in the Letter of Intent and, ultimately, within the lease draft that follows. As a side-note, it is possible for any of these dates to occur on the same calendar day. For example, a lease commencement date may also occur on the same day as the rent commencement date. This would not typically be the goal; however, every lease has its own schedule of dates.
Contingencies to Consider with Lease and Rent Commencement Dates
If a particular lease contains contingencies that pertain to the lease or rent commencement dates, it’s critical that the lease also defines them in detail.
For example, imagine a healthcare practice executes a lease but cannot take possession immediately because an existing tenant still occupies the space. This is a contingency that needs to be noted clearly in the lease document. In another scenario, what if the existing tenant is obligated to vacate within thirty days but due to delays cannot vacate for 60 days? This could create several problems with planning, scheduling, construction, etc. If the lease commencement date, as defined in the lease, doesn’t accommodate changes to the date of possession, the tenant could be shortchanged on their free-rent build-out period.
An attorney should be consulted for the completion of any lease, and they can expertly translate the business points in a letter of intent into lease language that protects the tenant’s interests. The following factors should be considered when defining commencement dates within leases:
- Fixed dates vs. floating dates
- Delivery of premises by the landlord
- Work to be completed by the landlord
- Applying for and receiving permits
- The landlord’s approval of plans and work
- Completion of construction
- Force majeure, pandemics, etc.
- Lender requirements (timeline, rate locks, etc.)
- Agreements already in place (non-competes and radius restrictions)
Case Study Timeline:
The following timeline example features a strategic use of commencement dates:
Day 1: Lease Execution Date.
Healthcare practice A and the landlord have executed and notarized their lease agreement establishing a contractual relationship between them. This legally secures the space for the practice.
Day 90: Date of Possession (Delivery Date).
Due to an existing tenant who was unable to move out for 75 days, the landlord could not make repairs and install new HVAC as promised. The 75 days plus an additional 15 days for landlord work pushes the schedule to 90 days for possession. Now the practice has keys and can begin the process of construction with their chosen design and build team. These situations are perfect opportunities to work on design and permitting.
Day 150: Lease Commencement.
The Tenant was smart and utilized the wait time between lease execution and the date of possession to complete architectural plans and acquire city permits. Construction began immediately upon possession (Day 90). In this example, construction is limited and will only take 60 days. At the end of the 60 days, Certificate of Occupancy is issued. At Day 150, the lease commencement date occurs with the receipt of Certificate of Occupancy.
Day 330: Rent Commencement.
The healthcare practice negotiated and received six months of free rent as a concession upon lease commencement, which means the rent commencement occurs on Day 330, allowing the practice time to get up and running, offset moving costs, collect on insurances, and ease into the new space.
Competing Interests Regarding Commencement Dates
From this example, it’s apparent how important strategic planning regarding dates are during the lease negotiation. There are clear competing interests between the landlord and the tenant regarding commencement dates; the landlord typically wants rent to commence as soon as possible, focusing on the bottom line and income as soon as possible. The tenant typically wants to delay rent as long as possible both for reasons of profitability as well as the opportunity to complete the project well ahead of opening for business.
By delaying rent in a new location, a tenant is able to offset heavy upfront expenditures associated with a move or a startup practice, such as tenant finish improvements, FFE (furniture, fixtures and equipment), marketing campaigns, and cash flow delays associated with collections on accounts receivable.
Creating a strong negotiation posture for a tenant is essential to achieving a delayed rent commencement and gaining the best possible terms and concessions. Such a posture is best created by using an expert healthcare commercial real estate agent for representation in site and property selection, and most importantly, in the negotiation. That agent should competitively procure lease terms from multiple properties for review and ultimately assist in selecting the top property by the tenant. The winning offer should have the best possible terms in the market you are searching in that will set your practice up to succeed from the very start.