Purchase the right NNN lease property with a well-structured agreement, and your exit strategy practically executes itself. Purchase the wrong NNN lease property and you’ll discover the problem years later when you try to sell. The property itself might be excellent: strong location, quality tenant, solid fundamentals. But, buried in the lease agreement are clauses that make future buyers walk away or demand significant price concessions.
At Westwood Net Lease Advisors, we review hundreds of lease agreements annually on behalf of our buyer clients. Through this extensive due diligence process, we’ve identified specific lease provisions that consistently create problems at resale, even when the underlying property performs well during ownership.
Understanding these problematic clauses before you purchase protects your investment and ensures strong exit opportunities when you’re ready to sell. Here are the five lease provisions that destroy resale value and the specific strategies to avoid them.
1. Missing Financial Reporting Requirements
The absence of a financial reporting clause is the single biggest deal killer we encounter during buyer due diligence when it comes to franchisee tenants. Without contractual rights to review your tenant’s financial statements, you have no ability to monitor their financial health or demonstrate their creditworthiness to future buyers.
When a prospective buyer asks to see three years of tenant financial statements and you can’t provide them because your lease doesn’t require disclosure, that buyer moves on to properties where financial transparency exists. They’re not willing to accept the risk of an unknown financial situation, particularly in uncertain economic environments.
Why this matters: Tenant financial health directly impacts property value. A Burger King location generating $120,000 in annual rent looks identical whether the specific franchisee is profitable or struggling, but future buyers need verification of financial stability.
How to avoid this: Ensure the presence of lease language that states annual financial statement delivery (typically audited or reviewed statements) within 90-120 days of the tenant’s fiscal year end. The majority of NNN leases are already signed and as the investor you simply inherit the terms of the lease. Investors are unable to require reporting language be installed in the lease if it is not a sale- leaseback scenario. The lease should specify consequences for non-delivery, typically allowing the landlord to obtain statements directly from the tenant’s lenders or declare a lease default after appropriate notice periods.
Sophisticated leases include language like: “Tenant shall deliver to Landlord, within 120 days after the end of each fiscal year, annual financial statements prepared in accordance with GAAP, audited by an independent certified public accountant.” This single clause protects resale value immeasurably.
2. Overly Restrictive Assignment and Transfer Provisions
Some leases make it extraordinarily difficult to sell the property by requiring tenant consent for any ownership transfer, limiting buyers to specific entity types, or imposing unreasonable conditions on assignment.
Why this matters: Future buyers need certainty that they can complete their purchase without tenant interference. Leases requiring tenant consent create closing delays, negotiation leverage for tenants, and deal uncertainty that sophisticated buyers won’t accept.
How to avoid this: Ideal lease language allows assignment without tenant consent as long as the new owner meets basic financial qualifications (typically net worth equal to or greater than the purchase price). The lease should state explicitly: “Landlord may assign this Lease without Tenant consent, provided the assignee has a net worth of at least [purchase price amount].”
Some tenant consent provisions are reasonable, particularly for corporate tenants protecting their brand. But the criteria for approval must be objective and specific, not subjective standards that give tenants veto power over legitimate buyers.
3. Tenant Termination Rights and Early Exit Clauses
Leases containing tenant termination options create uncertainty that destroys buyer confidence. A 15-year lease with a tenant option to terminate after year 7 isn’t really a 15-year lease from a buyer’s perspective.
Why this matters: Buyers underwrite NNN properties based on contractual lease terms. A property with 12 years of remaining lease term commands premium pricing. If the tenant can terminate after 5 years, buyers will only pay for the value of that 5-year certainty, significantly reducing your sale price. However, this scenario is not overly common in NNN transactions. There are a small subset of tenants with these closes such as payday loan tenants.
How to avoid this: Avoid leases with tenant termination rights entirely unless the termination penalty is substantial enough to make the option economically unattractive. If a termination clause exists, it should require 12-24 months advance notice plus a termination fee equal to 6-12 months of remaining rent, making early exit financially painful for the tenant.
Understanding lease structure fundamentals helps identify these provisions during initial property evaluation rather than discovering them during your own exit process.
4. Ambiguous Maintenance and Repair Obligations
Triple net leases should clearly assign property taxes, insurance, and maintenance to the tenant. But poorly drafted leases create gray areas about who handles structural repairs, roof replacement, parking lot resurfacing, HVAC systems, and other major capital items.
Why this matters: Buyers won’t pay triple net pricing for modified gross obligations. If your lease requires you to handle major repairs, buyers will discount your property value by $50,000-100,000+ to account for these future capital expenditures. According to commercial real estate analysis, capital reserve requirements significantly impact property valuations.
How to avoid this: Absolute triple net language is essential: “Tenant shall be responsible for all maintenance, repairs, and replacements to the Premises, including but not limited to structural components, roof, foundation, parking areas, mechanical systems, and all other aspects of the Property, regardless of cost.”
Some landlord responsibility for structural issues is common, but if it exists, there should be high dollar thresholds ($50,000+) before landlord obligations trigger, and tenants should handle everything below that threshold.
5. Percentage Rent Clauses Without Protective Caps
Some retail leases include percentage rent provisions where the landlord receives base rent plus a percentage of tenant sales above certain thresholds. While this sounds attractive initially, poorly structured percentage rent creates problems if the tenant’s business declines.
Problematic structures include: percentage rent that can fall below initial base rent if sales decline, vague language about what constitutes “gross sales” for calculation purposes, no minimum rent floors protecting landlord income, or complex reporting requirements that create disputes. This type of language is predominantly applicable to fast food franchises and other retail service franchisees.
Why this matters: Buyers want predictable income. Variable rent structures create uncertainty that buyers discount heavily.
How to avoid this: If percentage rent exists in your lease, ensure base rent represents a floor that never decreases regardless of tenant performance. The percentage component should only provide upside, never downside risk.
Acceptable language includes: “Minimum Annual Rent shall be $150,000, plus 5% of Gross Sales exceeding $3,000,000. Under no circumstances shall Annual Rent be less than the Minimum Annual Rent.” This structure protects your income floor while allowing upside participation.
The Due Diligence Difference
These five problematic clauses share a common characteristic: they’re all identifiable during property evaluation before you purchase. Sophisticated buyers invest time in thorough lease review precisely to avoid these issues that become expensive problems at resale.
At Westwood, our due diligence process includes detailed lease analysis by experienced advisors and legal counsel who identify these provisions before our buyer clients commit to purchase. We’ve walked away from properties that looked attractive initially but contained lease clauses that would have created exit challenges years later.
Protecting Your Investment From Day One
The time to address lease clause problems is before you purchase, not when you’re ready to sell. Working with experienced buyer-exclusive advisors ensures you’re evaluating lease structures with the same scrutiny future buyers will apply years later.
We can’t change lease clauses after you own the property without tenant cooperation (which is expensive or impossible to obtain). But we can identify problematic provisions during evaluation and either negotiate improvements before closing or walk away from deals that will create future resale challenges.
Your investment quality isn’t just about location and tenant. It’s about lease structure that protects your capital and ensures strong exit opportunities when the time comes to sell.
