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Below
are my own subjective top ten list of issues.
1.
Reasonableness and Good Faith.
In
a typical Lease, there are numerous provisions in the Lease
where the Landlord has the right to exercise discretion,
make an allocation or determination and where the Tenant
is prevented from taking certain action without obtaining
the Landlord's consent. The Landlord typically has numerous
statements in the Lease providing that the Landlord can
act in its sole and absolute discretion and a major "markup"
of the Lease would have to take place unless the Tenant
is successful in asking the Landlord to always act reasonably.
Accordingly, for small Tenants and large Tenants alike,
we recommend a Reasonableness
and Good Faith provision which you can view by clicking
here.
2.
Approval Criteria for Tenant Improvements.
When
a Tenant leases space, the Tenant has in its mind an idea
of what it wants to construct in the way of improvements.
Some Landlords are more fussy than others, but there are
many Landlords who will not want a Tenant to make improvements
if they think that those improvements will make the space
less attractive to the next Tenant. These issues need to
be cleared up right away. Many Tenants like to have exposed
ceilings. Would it be reasonable for a Landlord to say deny
consent to such a request? We don't want to speculate as
to what would be reasonable under the circumstances and
instead suggest that the Tenant insert a provision as the
"Approval
Criteria" for the Tenant's improvements. Click
here to view it.
3.
Operating Expenses.
Operating
expenses have become more and more complicated. A contest
has developed to see which attorney can come up with the
longest list of operating expense exclusions. When I look
at most of the exclusions, if the item was not listed as
an exclusion, then absent a specific provision in the Lease
which expressly sets forth that item as an inclusion, the
item would still not be considered an operating expense.
For example, brokers commissions, tenant improvement allowances,
ground lease rent, interest on loan payments, charitable
contributions, etc., are almost always listed as operating
expense exclusion, but if they were not listed as an exclusion,
then they would still not be an operating expense absent
a specific reference in the Lease to such item as an inclusion.
That
being said, there are other exclusions which are imperative
in a Lease, otherwise a Tenant can be hurt and surprised.
Examples are major increases in operating expenses because
of capital expenditures, large deductibles (i.e., in the
event of an earthquake), Proposition 13 tax increases, failure
to address Proposition 8 decreases (for base year Leases)
and failure to include a proper gross-up provision in base
years Leases. The provisions, if included in a Tenant's
Lease, will minimize the chances that a Tenant could get
hurt on operating expenses.
To view
a provisions, which if included in a Tenant's Lease, will
minimize the chances that a Tenant could get hurt on operating
expenses, see
Mike's Very Abbreviated List of Operating Expense Exclusions.
4. Condition
of the Premises.
The
Tenant wants to make sure it is not surprised by the condition
of the Premises or "hidden" costs that it might encounter
once it starts to construct its tenant improvements. Any
smart Landlord would like to have the Tenant agree that
the Tenant will accept the premises in its "as-is" condition.
The
term "as-is" might mean different things to a Landlord and
to a Tenant. What the Tenant needs to do in order to make
sure that it is getting a reasonably fair deal is to insist
that the Landlord agree that, notwithstanding the fact that
the Tenant has otherwise agreed to accept the premises in
its "as-as" condition, the Landlord will make sure that
when the premises are delivered to the Tenant for the commencement
of business operations (in situations where the Landlord
is going to construct the tenant improvements at no charge
or cost to the Tenant because the Landlord envisions that
the cost of doing the improvements is minimal), or at the
start of the construction of the tenant improvements (in
situations where the Tenant is granted an allowance and
either the Landlord or Tenant is constructing the tenant
improvements with the Tenant agreeing to pay for the cost
of the construction in excess of the allowance), with the
Building and the Premises, including the Building Structure
and Building Systems (as defined below), seismically sound,
in first class condition and operating order and in compliance
with all laws applicable to new construction, disregarding
variances and grandfathered/grandmothered rights. By obtaining
this minimal protection, the Tenant at least knows that
the air conditioning and lights will be working and that
to the extent the Landlord has received variances for code
work (i.e., the ADA) that would be lost once the Tenant
started to construct its tenant improvements, the Landlord
would pay for the cost of bringing the building up to code
prior to the Tenant paying for the other costs of installing
its tenant improvements. Accordingly, the Tenant should
seek a Building Structure and Building Systems provision.
For an example of a "Building
Structure and Building Systems" provision, click
here.
5.
Commencement Date.
It is
seldom that the commencement date is properly addressed
in a form lease. In a typical Small Lease, the Landlord
will construct the tenant improvements. If the Landlord
agrees to construct the tenant improvements at no cost to
the Tenant, then it is important for both the Landlord and
the Tenant to make sure that what constitutes the tenant
improvements that will be constructed by the Landlord at
no cost to the Tenant is accurately described in the Lease.
In a situation where the Tenant pays nothing for the construction
of its tenant improvements, then to view how the commencement
date on a Small Lease should read, click
here.
This
provision is fair because the Tenant will not get free rent
since the Tenant will start to pay rent on the day it commence
business operations, and yet it will make sure that the
Tenant isn't sitting at its desk on a Tuesday morning when
its receives a telephone call from the Landlord advising
that the tenant improvements have been substantially completed
and the rent starts. Most Tenants find it more convenient
to move in over a weekend and need the five day notice in
order to get the telephones installed, to arrange for the
delivery and installation of its furniture and equipment
and to move into the Premises. The installation of furniture
and equipment is seldom included within the work that the
Landlord is going to perform.
Tenant
Delays under this scenario seldom occur, but to make sure
that there is no unanticipated Tenant Delay because the
Tenant forgot to sign off on plans, etc.,
insert the provision you can view by clicking here.
The
inclusion of this provision will help the Landlord establish
that a Tenant Delay occurred and the Tenant was aware of
it, but most importantly, it protects the Tenant from surprises.
The
same commencement date provisions should be used when the
Tenant receives a tenant improvement allowance and the Landlord
is going to construct the tenant improvements. To the extent
the Tenant receives a tenant improvement allowance and the
Landlord is going to construct the tenant improvements,
the Tenant needs to ensure that there is some price protection,
especially in situations where the cost of construction
will exceed the allowance. Normally, it is not practical
or realistic to bid out small jobs for a Small Lease. Nevertheless,
the Tenant needs to secure reasonable price protection and
we recommend utilizing the
provision you can find by clicking here.
6.
After-Hours HVAC/Extra Services/Extra Utilities.
Many
Landlords look at the supplying of after-hours HVAC, extra
services and extra utilities as a separate profit center.
Since the Tenant has no choice as to where it is going to
get its after-hours HVAC, the Tenant needs to be protected.
We typically ask for, and receive, the protection for a
Tenant which provision can be found
by clicking here.
7.
Renewal Rights.
If a
Tenant has leased space and the space works for the Tenant,
the Tenant may over a period of time put its own money into
the space and certainly does not want to be put to the inconvenience
of having to move. Accordingly, a Tenant should be comfortable
in requesting a right to extend the term of the Lease and
asking that the Landlord allow the Tenant to exercise that
right at a fair definition of market.
Typically,
Landlords try to "finesse" this issue by coming up with
a definition of market that excludes all concessions, which
at a minimum causes a great deal of confusion and at a maximum
produces a bad result for the Tenant.
In addition,
typically Landlords insert a provision stating that the
rent will be at the higher of market (which is fair) or
the rent in effect during the last month of the Lease term
(which is not fair). Under these circumstances, in a marketplace
such as the one we are experiencing in 2001, any Tenant
who thought they were getting a renewal right finds, because
the real estate market has collapsed in many parts of the
country, that their right to renew at the higher of market
or the rent in effect during the last month of the Lease
term is in effect no right to renew at all because market
rents are less than half of the rent currently being paid
by the Tenant. Accordingly, Tenants should not be bashful
about requesting rights to renew, utilizing a realistic
definition of fair market rental rate, and not agreeing
that the rent cannot be below the rent the Tenant is paying
during the last month of the Lease term.
In addition,
many Landlords want this right to be "personal" to the Tenant,
but this is something that a Tenant should resist because
the Tenant's ability to find an assignee will be greatly
increased if the Tenant can transfer the entire Lease along
with the renewal right. However, the Tenant should be very
careful about transferring the entire Lease to someone who
could renew because the Tenant would not be released from
liability in the event of a renewal and the Tenant does
not want to be in a position where it seeks to avoid or
minimize a rental obligation for the last two years of the
Lease term only to find that its assignee exercised the
renewal right for another four years and then defaulted,
thereby increasing the Tenant's liability to a significant
extent. Accordingly, we recommend inserting the provision
that can
be found by clicking here.
8.
Assignment and Subleasing.
Tenants
frequently have a change in business plan and find that
they either have too much space or too little space and
need to get rid of the space that they have leased. Most
Leases impose unreasonable restraints on a Tenant's ability
to assign or sublet. The Landlord's primary concern should
be to make sure that in connection with any assignment or
subletting, it is not accepting a sublessee or an assignee
who would cause the Landlord to be in violation of an exclusive
that the Landlord has granted to another tenant or which
would allow the Tenant to sublease or assign to somebody
who is not comparable in quality and stature to the then-existing
Tenants of the project, or to a Tenant who would violate
the use restrictions. Accordingly, the Tenant needs to focus
on the assignment and subletting provision and I suggest
that the Tenant propose the provision
you can find by clicking here.
9.
Defaults.
Most
default sections of the Lease are unreasonably broad and
contain many outdated default provisions which are either
unenforceable (bankruptcy), unrealistic (vacancy in an office
project) or overly harsh (incurable defaults). Accordingly,
I recommend the use of the
provision you can find by clicking here.
10.
Hazardous Materials.
The
hazardous materials section of most leases are lengthy and
difficult to read. However, the Tenant in a Small Lease
can provide for itself the essential protections by negotiating
for the inclusion of the provision
that can be found by clicking here.
11.
Subordination, Non-Disturbance and Attornment and Subordination
Agreement ("SNDAA").
While
this article is about my top ten issues, I am throwing in
this section about the receipt of an SNDAA as a wildcard
issue. While it is very difficult to obtain a SNDAA in a
Small Lease transaction, if a Tenant in a Small Lease transaction
can obtain one from any current lender, this is a great
protection to receive.
Typically,
if there is a loan, ground lease or prior encumbrance recorded
with respect to the building (collectively and individually,
"Recorded Encumbrances"), the Lease could terminate
in the event of a foreclosure by the lender or holder or
the encumbrance. Almost always, the typical Recorded Encumbrance
is simply a loan. Since the last downturn in the economy,
lenders have been much more willing to enter into SNDAA's
with a tenant because most foreclosures occur when there
is a downturn in the economy, and lenders want to be in
a position where they can make sure that the tenant will
not be released from its liability under the lease merely
because there has been a foreclosure. Obviously, in a short
term lease, there is less risk.
In addition,
in situations where the tenant has not paid to construct
its tenant improvements, a foreclosure by a lender, even
if the lease terminates, is not the unmitigated disaster
that would occur with respect to a large transaction where
a tenant may have put hundreds of thousands or even millions
of dollars into its tenant improvements. Requesting and
obtaining a SNDAA from a lender will significantly increase
the protections available to a tenant. In a major lease
transaction, the inability of a tenant to receive a meaningful
SNDAA would be a deal breaker, but in a Small Lease, the
Tenant and its lawyer have to evaluate the practical circumstances
in order to determine how hard to press to receive an SNDAA.
When a tenant desires to obtain an SNDAA, I recommend using
the provision
that can be found by clicking here.
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