Commercial Real Estate Leases Part 1

Posted by: on Wed, Apr 20, 2016

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National Business Institute: Commercial Lease Seminar

Presented by D. Christ Albright, Esq.

A. ASSIGNMENT AND SUBLETTING CLAUSES

ASSIGNMENT/SUBLEASE RESTRICTION CLAUSE EXAMPLE

Tenant shall not assign, mortgage or encumber this Lease, or sublet or permit the Premises or any part thereof to be used or occupied by any party other than Tenant and Tenant’s agents and employees, without the prior written consent of Landlord, which consent shall not be withheld unless upon commercially reasonable grounds; and any such assignment, mortgage, encumbrance, or sublease without such consent shall be deemed, at the option of Landlord, to be an event of default and a material breach of this Lease. If this Lease is assigned, or if the Premises or any part thereof is sublet or occupied by any party other than Tenant, Landlord may, at Landlord’s option, collect rent from the assignee, subtenant or occupant, and apply the net amount collected to the rent owed by Tenant herein, but no such action by Landlord shall be deemed a waiver by Landlord of Tenant’s default, or an acceptance of the assignee, subtenant or occupant as a tenant, or a release of Tenant from the further performance by Tenant of its obligations hereunder. The consent by Landlord to an assignment or subletting shall not be construed to relieve Tenant, the assignee or the subtenant from obtaining the express consent in writing of Landlord to any further assignment or subletting, or to release Tenant from any obligation or liability, whether past, present or future, for the full and faithful performance of each of the terms, covenants, conditions, provisions or agreements of this Lease on Tenant’s part to be kept and/or performed. A transfer of control of a majority of the ownership of Tenant shall be deemed an assignment under this Lease and shall be subject to all of the provisions of this Article.

FREQUENTLY ASKED QUESTIONS:

What is the difference between an assignment and a sublease clause? In a sublease the prior tenant will remain more directly involved, acting as a new “sub- lessor” in essence a “landlord” as to its lease estate, to a new “sublessee” and will thus need to remain involved in collecting the rent each month and passing it on to the landlord etc. In an assignment the new tenant pays the original landlord directly, having assumed all of the rights and obligations of the prior tenant under the lease (at least as between the assignor and the assignee). Although the original lease will not typically allow the tenant to be released from its obligations under either a sublease or an assignment, some Landlords will restrict an assignment but not a sublease, as they wish the original tenant to remain personally involved in paying rent, and to have to deal directly with its own subtenant in collecting the rent from the subtenant and evicting the subtenant if it fails to pay rent. More typically, however, the two concepts are lumped together and handled in the same, essentially interchangeable manner, in the lease agreement clauses which restrict the same.

What renders a landlord’s refusal to consent to an assignment reasonable or unreasonable? A Landlord might claim the following to be grounds for withholding consent: new user’s business not consistent with the character and nature of other tenancies in the building or the shopping center, or which would negatively impact the image of the plaza or building, or negatively impact the mix of uses at the building or center; a use which conflicts with any “exclusivity” clause which has been granted to another tenant in the same building or plaza; a use which violates some prohibition in the lease; inadequate net worth or business expertise of the proposed assignee or sublessee, or a business which is not reasonably likely to succeed; new use requires substantial new tenant improvements / alterations of the premises.

B. RENEWAL AND EXTENSION OPTIONS

RENEWAL CLAUSE EXAMPLE

Landlord hereby grants Tenant, subject to the terms and conditions set forth herein, the right and option to renew this Lease Agreement for three (3) successive five (5) year Lease renewal terms under the same Lease covenants and conditions as stated herein. This option is conditioned and contingent on Tenant (a) being current under all Lease covenants and conditions at the time the Lease renewal option is exercised, and (b) being so current upon the commencement date of the Lease renewal term, and (c) having substantially and materially abided by all of the provisions of this Lease throughout the prior term. By way of clarification of contingency (c) in the prior sentence, in the event that, on more than three (3) occasions, during the term immediately prior to the renewal term, Tenant has received a valid and required notice to cure any default or delinquency in the payment of minimal rental payments or additional rental payments hereunder, or Tenant has been notified to cure any other default which the Landlord indicated in its notice to cure was a material default, then, in the sole and absolute discretion of the Landlord, the Landlord may decide that the Tenant has failed to substantially and materially abide by the provisions of this Lease throughout the prior term and may reject the Tenant’s renewal notice and decline to renew the Lease for another term. Should Tenant desire to renew this Lease, Tenant must notify Landlord in writing stating Tenant’s intent to renew this Lease one hundred twenty (120) days prior to the expiration of the then effective current term. If Tenant is current under all Lease covenants and conditions at the time of the renewal notice, and as of the first day of the renewal term, and if Tenant is not advised, within thirty (30) days of the renewal notice, that the Landlord is rejecting the notice based on Tenant’s failures to previously substantially and materially abide by the provisions of this Lease, then the Lease shall be considered as being renewed for an additional five (5) year term, as stated above, upon the commencement date of that term.

FREQUENTLY ASKED QUESTIONS:

How does the tenant properly renew? Dangers?
What are the important considerations in drafting the terms for renewal term rent amount increases? Consider who should take the risk of inflation.

C. TERMINATION CLAUSES

TERMINATION CLAUSE EXAMPLE

Upon the occurrence of any Event of Default, as defined elsewhere in this Lease Agreement, which is not timely cured within the cure period, after notice, as set forth elsewhere herein, the remedies available to Landlord shall include the following: … .
(iii) the right, at Landlord’s option, in its sole discretion, to terminate this Lease by written notice to Tenant. Upon receipt of such written notice of termination, Tenant shall then quit and abandon and surrender the Premises, and if it fails to do so Landlord shall have the right, without notice except as otherwise required by law, to re-enter the Premises and dispossess Tenant and the other occupants of the Premises, including without limitation via an unlawful detainer action, or such other summary proceedings as are allowed by law in this jurisdiction, and to remove Tenant’s effects and reacquire possession and control of the Premises. Termination of the Lease Agreement does not constitute a waiver or release by the Landlord of the Tenant’s obligations under this Lease and Landlord remains entitled to seek all of its damages and losses for lost future rental payments and lost future CAM payments, and the like, as a result of Tenant’s breach.

FREQUENTLY ASKED QUESTIONS

To what extent can a termination clause give greater rights to the Landlord than the typical notice and eviction procedures outlined by law? Landlords should not assume they can contract around or agree to proceed other than as outlined by local statutes governing the judicial process for effecting an eviction.
How does one determine whether a material breach has occurred? Tenants may argue that their breach is insufficient to warrant termination. Factors which can be argued on that issue would include whether any clauses in the Lease Agreement render a breach material (“time is of the essence” “it is recognized that this provision [x] was a material component of the consideration which induced Landlord to enter into this Lease Agreement”), whether the statute clearly allows for eviction under the default in question (“failure to pay rent”) or the overall circumstances of the breach.

D. SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT CLAUSES AND AGREEMENTS

FUTURE DUTY TO EXECUTE ESTOPPEL CERTIFICATE CLAUSE EXAMPLE

From time to time, either Landlord or Tenant shall furnish, within ten (10) business days after request therefor, a signed certificate confirming and containing such factual certifications and representations as to this Lease as the requesting party may reasonably request, including without limitation as may be necessary to allow Landlord to effectuate a sale and transfer or refinance of the Building in which the Premises are located. This Lease shall be subject and subordinate to all mortgages or deeds of trust which may now or hereafter encumber the Premises or the Building, and also to all renewals, modifications, consolidations and replacements of said mortgages or deeds of trust. Tenant hereby agrees to and acknowledges such subordination at this time and hereafter. Tenant further agrees that in the event of any sale or transfer of the Building in which the Premises are located, Tenant shall allow the transfer and assignment of its Lease rights and obligations to be conveyed to the new owner of the Building as part of any such transaction, and shall recognize said new owner as the Landlord hereunder. Furthermore, although no instrument or act on the part of Tenant shall be necessary to effectuate such subordination, Tenant hereby agrees to execute and deliver, within ten (10) days of a request for the same, any such further instruments confirming such subordination of this Lease as may be requested hereafter by Landlord, or by any beneficiary of any deed of trust or by any mortgagee, including any current beneficiary or mortgagee, including without limitation, any required estoppel certificate or attornment, non-disturbance or subordination agreement, or similar covenant or acknowledgment.

TYPICAL SNDA / ESTOPPEL CERTIFICATE PROVISIONS

Tenant agrees to all of the following provisions; acknowledges the veracity of all of the following statements, and agrees to be bound by the same; and represents and warrants as follows:
1. Lease Efficacy. The Lease is in effect, and a true and correct copy thereof, and of all amendments thereto, is attached herewith, and no oral or other side agreements exist. The subject Lease has not been modified, altered, amended, changed, supplemented, terminated, or superseded in any manner not shown on the attachments hereto. The subject Lease sets forth all agreements and understandings of Landlord and the undersigned, as Tenant.
2. Premises Acceptance. Any and all improvements and space required to be furnished by Landlord according to the subject Lease have been completed in all respects and accepted by the Tenant. Any and all tenant improvement work has been completed and performed and all of the obligations of Landlord and of Tenant under any Work Letter or other agreement regarding the terms of such work have been satisfactorily completed, in substantial and adequate conformance with the plans and specifications and all contractors have been fully paid and have executed appropriate lien releases and no mechanic’s liens have been recorded or threatened to be recorded against the Premises or the Building arising out of such work.
3. Occupancy. The Tenant has accepted possession and is in actual occupancy of the Premises, Furthermore, the Premises are open for business and are in use by the undersigned, its employees and invitees during regular business hours as defined in the Lease. The existing parking facilities meet the requirements of the subject Lease.
4. No Defaults. Tenant is not currently in default or breach of any of its obligations under the Lease, and is not currently claiming that the Landlord is currently in breach or default of the Lease, nor has the Tenant received or sent any notices of default from or to the Landlord. Any inducements provided to Tenant to execute the Lease have been fully and completely performed and provided by Landlord.
5. Terms. The rental payments and the common area maintenance charges, and any other charges payable by Tenant are as follows: The monthly rental is $__________________. The Monthly CAM charges for the past ___ months have been, $______, based on the calculation formulas set forth in the Lease. . The term of the subject Lease is for _______ years. The primary Lease term commenced on _____________________ and expires on __________________. The number and length of any renewal terms or extension rights, if any, are as follows: [description].
6. No Prepayments/Waiver of Prepayments. The Tenant has made a security deposit in the amount of $______________. The Tenant has paid no rent or other charges more than one month in advance, and waives the right to claim a credit for any advanced rent payments or prepaid charges paid heretofore or hereafter, including upon the transfer, by virtue of a foreclosure or otherwise, to any new owner, of the Building in which the Premises are located to whom a transfer is made. There are no offsets or credit against rentals, and rentals have not been prepaid except as provided by the subject Lease terms, and no periods of free rentals are applicable to the term of the subject Lease The Tenant has no current right to deduct or offset any amounts from the rent. There are no outstanding concessions, rent abatements, or rent rebates due to the tenant. In the event of any future transfer of the Building to a new owner, the Tenant shall waive any right to deduct or offset any amounts from the rent then claimed, as well as any concessions, rent abatements, or rent rebates due to the Tenant, as against such new owner or transferee.
7. Confirmation. The subject Lease is in full force and effect, is not in default, and is hereby ratified and confirmed; The Tenant has no defenses to the enforcement of the Lease Agreement.
8. No Subleases or Assignments. The Tenant is not subleasing any portion of its Premises and its rights have not been assigned to any assignee.
9. No Option or First Rights. The Tenant has no option to purchase its leasehold Premises or any other portion of the Building, nor any right of first refusal, right of first offer, or other expansion rights with respect to any other premises within the Building. Tenant shall waive any such rights it may hereafter acquire in the event of any subsequent transfer of the Building to any new owner or transferee, as against such new owner or transferee.
10. Hazardous Materials. The Tenant’s use of the Premises has not involved and will not hereafter involve the generation, storage, treatment, disposal or release of any hazardous substances or toxic materials, and the Tenant is and shall remain in compliance with all state, local, or federal environmental laws.
11. No Lease Modifications. The Tenant acknowledges that it cannot and will not enter into any modifications of the existing Lease with the Landlord, without first obtaining the prior consent of the party in whose favor this certificate is executed, and further acknowledges that Lender (as described in the recitals above) may require Landlord to obtain its prior approval before entering into any modifications or settlement agreements with Tenant as to any provisions or breaches of the Lease hereafter. The undersigned agrees that without your written consent, the undersigned will not: (a) modify or in any manner alter the terms for the subject Lease; (b) pay the rent or any other sums becoming due under the terms of the subject Lease more than two months in advance; or (c) accept Landlord’s waiver of or release from the performance of any obligations of Tenant under the subject Lease.
12. No broker or other intermediary is entitled to receive any leasing, brokerage or other compensation out of or with respect to rentals of any kind under the subject Lease.
13. The undersigned Tenant agrees to notify [lender / you / new purchaser] at the above shown address, or such address as may hereafter be specified by [lender / you / new purchaser], of any material default on the part of Landlord after the date hereof unless the undersigned is advised by you that the contemplated transaction between you and the Landlord will not take place.
14. In the event Tenant should be advised by [lender / you] that Landlord is in default in the indebtedness and should [lender / you] request that payment of all future rentals be made directly to [lender / you] pursuant to an Assignment of Rents or other similar clause in the deed of trust, the undersigned Tenant agrees that it shall make all future rental payments under the subject Lease directly to [lender / you] until instructed otherwise by [lender / you].
15. None of the following events have occurred: (a) the filing by or against the undersigned Tenant of a petition in bankruptcy, insolvency, reorganization, or an action for the appointment of a receiver or trustee; or (b) the making of an assignment by the Tenant for the benefit of creditors.
16. The entity, person and/or officer executing this certificate is empowered by action, resolution or at law to execute the same, and this certificate shall be binding on the undersigned, its successors and assigns.

FREQUENTLY ASKED QUESTIONS

What are the dangerous clauses for a tenant to be on the lookout for and to possibly want to contest or object to or try to renegotiate? Discuss.
What happens in the event the actual estoppel certificate / SNDA is far more specific than the clause requiring execution of an SNDA in the Lease (IE: Does the tenant have to sign an SNDA which is not aligned with the Lease language)? If a tenant refuses to sign an SNDA or Estoppel Certificate because of an objection over certain language in the certificate that goes beyond the generic requirements of the lease, the landlord or the bank may be willing to negotiate and omit the clause; or if it went into litigation, the court would look at reasonableness factors: Was there a reasonable basis for the objection? Was the language of the Estoppel Certificate overly expansive and unreasonable in comparison to what the lender / landlord reasonably needed or what the tenant had agreed to provide in the lease, or might reasonably have known it would be expected to provide. The tricky element of these disputes is that the bank is not in privity of contract with the tenant, and does not have to enter into a new loan or refinance with the landlord except on its own terms: and so the party driving the issue may not end up being the party in court.

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