Law of the West
June 17, 2008
There have been those times in the past, for one reason or another, that I have ended up owning rental property. I have never been a fan of being a landlord ” too frustrating. And, of course, a fair number of my clients own buildings that they rent out as well.
Inevitably, there is always a love/hate relationship between landlords and their tenants. Each seems to be on an eternal quest for the “perfect” counterpart. The dream of most landlords, in any real estate market, is to find stable tenants; that aspiration becomes a necessity when the market is down. One potential tenant that is always dependable, seems immune to general economic trends, never runs out on a lease, and pays its obligations on a regular basis is the government.
Federal, state, and local governments need lots of rented space. Landlords wonder if such entities may provide advantages over typical commercial or non-profit tenants. The short answer is that the government makes a great tenant ” but, it can still be frustrating.
At the federal level, the United States’ General Services Administration or GSA is responsible for meeting the leasing needs of the government. According to the GSA, the U.S. government leases over 7,300 properties in the Untied States. These leased properties contain half of the U.S. government workforce and contain nearly 170 million square feet of space. Colorado is a key location for the federal government. In fact, only Washington, D.C., has more federal agencies located within it than Denver.
Leases with governmental entities are very different than typical commercial leases and can impose many additional risks on the landlord. This uniqueness often takes landlords out of their “comfort zone” and makes them reluctant to lease to the government. Yet, there is really no reason to steer clear of this highly stable and dependable tenant so long as the landlord understands the key aspects of governmental leasing. Of course, landlords also have to be flexible about the terms of the lease.
Probably the most significant difference between a normal commercial lease and one with a government is that the lease is subject to the governmental budget process and appropriations. This makes the lease subject to the will of the political process ” increasing the level of uncertainty for the landlord.
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A lease with a governmental entity is likely to have provisions referencing specific laws. Some of these provisions will require the landlord to make various certifications or otherwise alter how it conducts business. The landlord will need to evaluate each of these requirements before signing a lease. Another key difference between typical leases and most federal leases is that rent is paid in arrears instead of in advance.
Insurance requirements are also different. Most leases require the tenant to maintain liability insurance on the premises and property insurance on the tenant’s personal property. Many governmental entities choose to self insure for all or part of the usual insurance obligations imposed upon a tenant by a lease. They may also place reliance on statutory provisions that limit the liability of government to others. For Colorado state government, the provisions of the Colorado Governmental Immunity Act and Colorado Risk Management Act impact the need for insurance. Similarly, most commercial leases require the tenant indemnify the landlord for various issues to protect the landlord from certain risks. It is very difficult, however, to get a governmental entity to provide such an indemnity clause in a lease.
What it all comes down to is that leases to government entities are very different than most commercial leases, but they are not to be feared. The landlord must make a business decision which evaluates the stability and dependability of the government tenant against the increased risks. Governmental leases are unique arrangements which require careful and professional analysis. Once the business decision is made to develop the government as a tenant, it is critical that the landlord seek out and obtain competent counsel.
The information provided in this column is based upon general principles of law and should not be relied upon in any manner. It is not the intent of this column, its author, publisher or the Fence Post to provide legal advice to any person. You should address specific legal questions to your family lawyer. In Wyoming, the State Bar can refer you to competent lawyers in your community by calling (307) 634-7823. In Colorado, call the Metropolitan Lawyer Referral Service at (303) 831-8000. Readers in Nebraska can receive referrals from the State Bar Association by calling 1-800-742-3005.