What Is a Master Lease Agreement?
A master lease agreement contract is not your standard commercial lease agreement. It outlines the arrangement and responsibilities between the owner of an asset and the master tenant, but the underlying investors or actual tenants have separate agreements with the master tenant. Most often, a master lease agreement contract applies to a Build-to-Suit transaction and/or in the context of a net lease transaction.
According to the Cornell Legal Information Institute, a master lease agreement is "an overarching agreement negotiated between a tenant and landlord, particularly when a tenant plans on sub-leasing to multiple sub-tenants. Under the master lease, the landlord will lease the entire property to the initial tenant, who will then lease it back to all sub-tenants. A master lease agreement is commonly used when a company is leasing many branch locations". These contracts are often negotiated to last longer than a standard commercial lease agreement. Instead of renewing the lease with a tenant who may not be ideal for the terms of the lease, one overarching lease is negotiated for the use of multiple properties. In a master lease agreement, one entity holds the entire lease for properties with many tenants, which can make the arrangement easier to navigate overall.
A lease agreement is relatively simple. The agreement may be one page or 50 pages , but the pertinent information is the same. The language is standardized to the property being leased, but most commercial lease agreements have the same basic provisions. A master lease agreement contract is much different. The basic framework of the agreement is the same, but there are many more provisions to craft. This is because the agreement needs to focus on the overarching relationship between the landlord and the master tenant. However, terms between master leases and standard leases are very similar.
When it comes to a commercial real estate property with multiple tenants, the owner of the property can choose to execute standard leases with multiple tenants or a master lease agreement contract with one tenant. In the latter scenario, the property owner negotiates the lease with the master tenant, who in turn negotiates the lease with subtenants (if any). On the other hand, the owner would need to execute separate leases with multiple tenants. Transactions involving a master lease agreement contract are most often associated with Build-to-Suit transactions. This is because a master lease agreement contract provides the owner with flexibility. Although this can increase the level of complexity, this type of flexibility allows the owner of the commercial property to adapt to the personality of the property or business.
Essential Elements of a Master Lease Agreement
A master lease agreement is a contract that encompasses multiple agreements between a lessor and lessee or landlord and tenant. The master lease agreement can outline all relevant terms related to rental properties covered under the lease. In its most basic form, the agreement includes language held in much of any standard lease, including agreements for rent, security deposit payment, use and maintenance of property, and damages. An example of a master lease agreement may be a hotel or resort owned by a corporation that is managed by a leaseholder or operator. In such a situation, the master lease governs the agreement between the operators and the owners. Other examples may include an apartment building owned by a corporation with a property manager that oversees day-to-day operations. The master lease may cover each of the operation agreements for individual residential units. Equally, the master lease may cover an entire strip mall with multiple retail stores and shopping centers leasing space.
There are various different types of master lease agreements. Each master lease has its own unique set of circumstances and guidelines that govern its implementation and management. The specific components of a master lease agreement will depend on the circumstances of the underlying relationship and business. For example, a master lease agreement governed by securities laws may be organized differently than a master lease of a hotel. There are also commercial leases that may require different stipulations than a residential property lease. In each case, the general construction and use clause is similar to that of a standard lease agreement.
The agreement may signal to many issues. A master lease is often used when there is a desire to sell property subject to lease because legal ownership is held but the property is contracted to outside operators. This gives some additional protections to the landlord.
Advantages of a Master Lease Agreement
A master lease agreement contract provides a number of advantages for landlords and tenants. The flexibility and scalability they offer makes them well-suited to meet a variety of business needs without the need to continually draft new contracts or amendments. So long as the parties are in agreement to the specified terms, it is easy to incorporate changes each time an additional asset is to be leased. As such, master leases are a popular choice among those who intend to lease another asset at a later time, or those who are potentially leasing several at a time.
For tenants, master leases provide an efficient method of expanding operations. Sourcing assets from a single landlord also makes company operations easier to manage since the rental rate and payment schedule are consistent, as opposed to relying on varying terms from different landlords.
Landlords benefit from master lease agreements contract because they simplify the leasing process. All assets can be covered under one agreement, making lease administration simpler to manage while obligating the tenant to fulfill all lease obligations for the life of the entire contract.
The flexibility of master lease agreements also provides greater risk mitigation. For example, a tenant that might not have been able to secure financing to lease equipment without a long-term commitment can do so through a master lease and scale back equipment leasing over time based on company performance. For landlords, leasing assets based on a master lease also allows for greater risk control and can include provisions for anything from rent acceleration and termination options to indemnification, maintenance, and insurance.
Common Issues and Risks
As with any generic contract, there are certain problems and challenges with the Master Lease Agreement contract. Above all, both the landlord and tenant should fully understand the terms of the contract before execution. Given the very important nature of the terms and conditions, tenants and landlords are advised to consult an attorney if they have concerns or questions about what the obligations in the contract entail.
One of the most common issues related to the Master Lease Agreement contract is cost control. Repairs, maintenance costs, and other expenditures can lead to large annual financial results. If you are on the tenant side of the lease agreement contract, it is imperative that you also control various aspects of rental space to avoid incurring higher charges for utilities, taxes, and other expenses. Some landlords can be aggressive in controlling costs and may not present you with the best rate. Costly add-ons can occur during construction of the space as well. It is critical that both the landlord and tenant understand the amount of liability that could be incurred for certain goods and services.
Then there is the risk that comes with any generic contract: the landlord or lessor failing to meet their end of the bargain. Sort of like the house built on a poorly laid foundation, if the landlord is disallowed from terminating the agreement, it can have very adverse effects on the lessor. A tenant that defaults through neglect of space can leave the landlord holding the bag on expensive repairs. For this reason, it is critical that both parties monitor the status of the property and abide by the terms of the Master Lease Agreement contract. The best advice is to remain active in the day-to-day aspects of the relationship.
How to Negotiate a Master Lease Agreement
The master lease agreement negotiation process usually begins when someone who is interested in leasing real estate contacts potential lessors. After an initial conversation, the interested person will either submit an offer or request a tour of the property. If the offer is submitted, the property owner has the choice of accepting the offer as it is, negotiating for better terms with the prospective tenant or counter-offering with alternative terms.
When an interested party requests a tour, the property owner shows the prospective lessor the property including discussing any improvements that the lessor may want to make. After the tour the prospective lessor usually submits an offer with the requested terms that the prospective lessor will accept.
In most cases, negotiations can be amicable and end up with both parties obtaining their basic requests. However , it is important to understand that in negotiating any commercial lease, you can expect your lessor to ask for certain provisions that might not appeal to you. Some of these include the following:
We recommend that you never take these provisions, as acceptable as they may seem to be initially. Rather, we believe that you should take the following approach with the above-mentioned terms and provisions:
In all these instances, you should compel the lessor to define what it is that they want. For example, we will reinstate our lease again with the lessor paying the cost to restore the location back to its original condition when our lease terminates.
Sometimes lessors will even seek out to have you indemnify them. The lessor may be open to revisiting any indemnification provisions after it has seen your books and accounting procedures and taught you the standard procedures to be permitted to operate on premises.
Legal Aspects and Compliance
The relationship between parties to a commercial lease is built upon the contours of the master lease agreement contract. Few other contracts can govern such a breadth of relationships both as between lessor and lessee and as between lessee and sublessee. Because of the complex legal implications of entering into a master lease agreement, compliance with applicable federal, state, and local laws must be guaranteed. Failure to comply with these requirements can have devastating consequences for all parties involved, and particularly for the owner and lessor of the property. Compliance can be achieved by contracting with an attorney who is experienced in the complexities of master lease agreements. While the question of what compliance requirements arise out of a master lease agreement may not need to be answered by the lessor or lessee on a day-to-day basis, a dispute between lessor and lessee or lessee and sublessee may require that they able to present satisfactory evidence of their ability to fully perform it obligations under the lease. For this reason, the parties should carefully define the proposed lease relationship in order to understand what obligations they are assuming prior to entering into the agreement. It may be necessary for the lessor to consult the help of an attorney to fully establish the necessary compliance requirements at the outset of the lease.
Master Lease vs. Sub Lease Agreement
Most people confuse a master lease agreement contract with a sublease agreement. A master lease agreement falls more into the lease territory while a sublease agreement tends to fall more into the category of a sublease. However, both of these are a form of lease agreement in itself, distinguishing themselves only by the specific needs of either the person subletting the property or the owner of it. Even so, it’s still important to know the difference and why a person might use each.
A master lease agreement is a preferred form of contract for people looking to be investors without having to make such a huge investment. It’s a lot like a typical rent out contract, except that it gives you the basic right of ownership during the leasing period. To do this, the agreement will lay out the responsibilities of both parties in terms of repairs or liability for damages. Specifically, the best master lease agreement contract should:
A sublease agreement, meanwhile, is typically used when you want to sublet part of your building to someone else. The reasoning behind this is fairly simple: in the case that the unit is big enough for more than one family to occupy, you can actually sublet to someone who plays necessary bills in exchange for a rental fee. This way, you can charge the other family at a reduced rate, which in turn cuts down on your utility bills as they will contribute to them, and possibly even make a little money. Sublease agreements can differ from master lease agreements in that they may have stricter terms concerning eviction and repair/maintenance responsibilities.
Real-World Examples of a Master Lease Agreement
For an illustration of this type of lease, consider a large company such as Microsoft that needs to acquire a certain amount of computer software. It needs to buy a big chunk of licenses, a master lease will allow the company to acquire these licenses in one deal, as opposed to negotiating several different types of agreements with numerous parties.
For another example, consider Conoco, an oil and gas company. Let’s assume that this company had to buy gas from Texas in order to distribute it nationally, the company would enter into master lease arrangements for its properties, and would similarly agree to purchase a certain quantity of gas every year.
A final example may be Hayman Capital Management, an investment firm . All of its limited partners are small investors, all of its assets are somewhat similar, and they all need to be managed in the same manner. In this case, a master lease agreement gives Hayman Capital Management the most buying power.
These examples illustrate the main purpose for a master lease agreement. In virtually all circumstances, the goal is to consolidate the purchase of similar goods and services from a particular supplier. The company then has the ability to distribute the goods and/or services as needed and desired. The master lease agreement is the initial agreement that simply states that a particular commodity will be leased between a specific set of parties. The subsequent agreements that are derived from this initial agreement will stipulate the exact nature of the particular goods and services requested.