What to Review in a Lease Agreement Before Buying a Building

28 July 2026 · 6 min read

When buying an income-producing building, you are also buying — and above all — the lease agreement that comes with it. An excellent asset with a poorly structured contract can become a serious problem. These are the clauses every buyer should analyse before closing.

Term, extensions and purchase options

The residual term of the contract is one of the most important data points in the valuation. A building with a tenant who has 18 months remaining is an asset with imminent vacancy risk; one with 8 years is an almost guaranteed income stream. You also need to read the automatic extensions and early termination options: some contracts allow the tenant to break with 6 months’ notice, which radically changes the risk profile.

Purchase options in favour of the tenant are another critical point: if the occupier has a right of first refusal or a pre-agreed purchase option at a fixed price, the building buyer may find themselves constrained when they wish to sell or when the asset has grown in value.

Rent and review mechanism

The current rent is the basis of the yield calculation, but the review mechanism defines what the asset is worth in the future. A rent indexed to CPI with a 3% cap is very different from one indexed to uncapped CPI, or a fixed rent that never updates. You also need to check whether the review is automatic or requires prior notice, as procedural errors can invalidate an increase.

Expense allocation: who pays what

Not all contracts distribute expenses the same way. In triple net (NNN) leases, the tenant bears all operating expenses: IBI, insurance, maintenance and repairs. In more traditional contracts, the landlord covers some of these. The difference can represent 10–15% of net income, and therefore a direct impact on the real return of the asset.

Tenant guarantees

The tenant’s creditworthiness is the primary guarantee, but not the only one. The contract must include formal securities: bank guarantee, security deposit, or parent company guarantee if the tenant is a subsidiary. The equivalent of six months or one year of rent is standard in long-term commercial contracts. These guarantees are the first buffer against non-payment.

Termination and assignment clauses

A well-drafted contract specifies clearly the conditions under which it can be terminated early (repeated non-payment, breach of use, tenant insolvency) and the applicable procedure. Assignment or subletting clauses determine whether the tenant can transfer the contract to a third party — common in corporate groups restructuring internally. If assignment is unrestricted, the tenant you analysed can be replaced by another without your consent.