REDUCING EXPOSURE RIGHTS, RESPONSIBILITIES OF TENANTS AND LANDLORDS; AND IMPORTANT LEASE PROVISIONS
HOW TO REDUCE EXPOSURE FOR MY CLIENT? • Ensure the Lease reflects the deal made by your client (memoranda; letter of intent); • Legal activists; • Broker activists; • Client activists. • Team in place early; • The right team for the deal; • Start early; the time necessary to do a fully negotiated transaction is often underestimated.
SOME LEASE PROVISIONS ARE MORE EQUAL THAN OTHERS? • Each Lease is a unique transaction and the forces that will govern the negotiation are as varied as the Landlord, Tenant and the property at issue. • The Parties need each other but their respective positions in a Lease negotiation can be diametrically opposed. • Negotiations by and between the Landlord and Tenant are controlled by many factors and all must be considered.
HOT MARKET - LANDLORD IS LORD • The hotter the market the less likely a Landlord will negotiate its standard form Lease; • If you will not sign the Lease the Landlord has five other Tenants that will; • When the market is hot the Landlord will desire to minimize its costs by reducing attorneys’ fees; • Time is money and if another viable Tenant will take the Lease as is, why spend the time negotiating.
COLD MARKET – TENANT IS KING • The cooler the market the more precious a viable Tenant becomes; • The Tenant now has several options and if this Landlord will not negotiate the next one will; • The Landlords standard Lease form becomes highly negotiable.
NORMAL MARKET - EQUAL AS IT GETS • Alternatives may be available but not desirable; • In this situation the Landlord and Tenant still need each other, time becomes a critical factor; • The Landlord’s standard Lease form is negotiable but all issues are vigorously defended.
FINANCIAL WHEREWITHAL • He who has the gold makes the rules; • Large well funded Tenants - own parameters for any real estate transaction; • Sophisticated in house real estate department - certain legal and financial parameters; • Real estate department exceptions. • Exceptions are rare but not unheard of. • governing committees; • or different operational executives with the organization. • The larger and more sophisticated the Parties, the more demanding they will be during the Lease negotiations.
ORDER OF MAGNITUDE • Small Transaction • a lease less than 5,000 rsf with a duration (including options) of less than 3 years would be considered by most a relatively small lease transaction. • Medium Transaction • a lease greater than 5,000 rsf up to 30,000 rsf with a duration of at least 5 years. • Large Transaction • a lease greater than 60,000 rsf with a duration of at least 5 years would be considered by most a major transaction.
DIRECT VS INDIRECT • Direct Leases - more hotly negotiated than assignments and subleases; • Landlords are not excited about expending extensive legal fees and time to accommodate an assignee or subtenant. • As between the Sublandlord-Assignor-Subtenant the Assignor-Sublandlord will be reluctant to make major changes from the Master Lease.
DURATION OF LEASE • The longer the commitment the more likely that the parties will vigorously negotiate. • The shorter the commitment the less likely either party will expend considerable time and effort negotiating; • Even a small lease could be fully negotiated if for a relatively long duration.
BUILD OUT VS. EXISTING • Two types of build-out; • Entire Building; • Tenant Improvements. • The more complex transaction involves the construction of a new Building; • Tenant Improvements to raw space; • Tenant Improvements to finished space; • Minor improvements to finished space.
OWNERSHIP • The more parties involved the more complex the negotiations; • When the Landlord owns the Building and the Land upon which the Premises sits; the Landlord controls its own destiny and can be more flexible in its negotiations.
SOPHISTICATION OF REPRESENTATION • Representation by a sophisticated broker and attorney is essential; • If one party is well represented and the other is not then anything can happen; • a great deal of time and effort over issues of little import or significance; • While spending little to no time on issues of great significance. • When both parties to the transaction are properly represented by experienced brokers and counsel there is at least afair opportunity to address most of the major issues.
THE XV COMMANDMENTS • The perfect Lease does not exist; • Most provisions of a Lease assume bad things are going to happen; • Entrance strategy fun to negotiate exit strategy a dread; • Landlord’s know their standard form Lease very well; • No such thing as a pure legal or business provision; • Most standard form Leases are drafted by Landlords and greatly favor Landlords (what a shocker);
THE XV COMMANDMENTS • Landlords do not sign Tenant’s standard form Lease; • Never say never; or take it or leave it; • Do not concede a point because of the current law; • What does the Lease say; • Do not ignore boilerplate;
THE XV COMMANDMENTS • Statutes that favor Landlord are sacred; and statutes that favor Tenant are evil or vice versa; • Leases should be read at 4:00 a.m. slowly with strong coffee; • Most provisions are written in a lawyers blood. • Leases are not written for the lawyers but the users.
BIG NINE OR MORE • Description of Premises • Use; • Lease Term and Lease Commencement Date; • Rent and Operating Expenses; • Assignment and Subleasing; • Damage and Destruction; • Parking; • Options (Additional Space and extension of the Lease Term); and • Tenant Improvement.
PREMISES • Related provisions. Rent, Operating Expenses, Use, Rules and Regulations, Insurance, Parking, Damage and Destruction, Condemnation, Property Taxes, Signs, Compliance with Law and Options (Space and Term); • One of the most overlooked provisions of the Lease.
PREMISES - TENANT • Must specify what you are getting; • Common areas - how important? • Telecommunication access - needs; • Measurement of space. • Rentable tied to Rent; • Usable tied to Tenant Improvement Allowance; • Architects, BOMA; • Other standards (NYC, D.C., Industrial etc.)
PREMISES - LANDLORD • Common areas - must have the flexibility to meet the needs of the market; • Telecommunications access – reasonable; • Measurement of space; • The Rent is what it is; • Measure now or waive.
PREMISES - RESIDENTIAL • Typically not an issue in the residential Lease. The typical residential Lease will provide a street address only and very little else.
USE • Related Provisions. Description of Premises, Building Services and Utilities, Rules and Regulations, Assignment and Subleasing, Hazardous Waste, Damage and Destruction, Condemnation, Indemnity, Insurance, Abatement of Rent, Non-Competition, Tenant Improvements, Compliance with Law and Options (Space and Term); • The importance of this provision cannot be overstated; • Entrance and exit strategy.
USE - TENANT • “any legally permitted use.” • most Tenants’ would not want a Topless Bar across from their business office; • any legally permitted purpose that is consistent with the character of the Tenants in the Building and that is not prohibited via another tenant’s exclusive use. • Warranty fit for use; • Building’s Systems (HVAC, electrical, structural, plumbing, lighting, etc.); • Zoning. • Assignment & Subletting - Use provision to be as permissible as possible.
USE - LANDLORD • Control of Tenant mix; • Maintain the quality and character of their Building; • Class A Building where professionals are housed; • Exclude Tenants that are inconsistent (e.g. drug rehabilitation center).
USE - RESIDENTIAL • Landlord must at all times be wary of use that he does not desire on the Premises. • prohibit illegal activities; • prohibit many undesirable activities which may be legal (e.g. kennel, child care, telemarketing, etc.). • Home office - technology - Tenants have computers, printers, fax etc., and some operate a business out of the residence. • overload on the electrical or HVAC system of the residence. • Waterbed or other water filled furniture, California Civil Code §1940.5 “An owner or an owner's agent shall not refuse to rent a dwelling unit in a structure which received its valid certificate of occupancy after January 1, 1973, :……………”
USE - RESIDENTIAL • As a general rule animals can be restricted except a seeing-eye dog or signal dog for the hearing impaired; • Occupancy limits - discriminatory against families with children? • When business to business disputes occur the Courts and Arbitrators are less likely to become “judicial/arbitrator activists,” than in the residential arena.
LEASE TERM • Related Provisions. Rent, Operating Expenses, Tenant Improvements, Options, Default, Damage and Destruction, Condemnation, Assignment and Subletting, Notices, and Hold Over. • Leases contain several dates of importance.
LEASE TERM - DATES • “for reference purposes only – for identification;” • The Effective Date – Lease is viable and enforceable; • Lease Commencement Date – the date the Term commences; • Rental Commencement Date – the date Tenant must commence the paying Basic Rent under the Lease • Additional Rent Date – the date the Tenant must commence the payment of operating expense pass throughs; • Operating Expense Adjustment Date – the date upon which the Landlord may adjust the operating expense pass–throughs;
LEASE TERM - DATES • Beneficial Occupancy Date - the date in which the Tenant is allowed to occupy the Premises; • Free Rent Period – the period of time in which no Basic Rent and/or Additional Rent is payable under the Lease; • Delivery Date - the date the Premises are delivered to the Tenant to occupy or to commence the construction of Tenant Improvements; • Option Date – the date upon which Tenant must exercise an option set forth in the Lease; • Expiration Date – the date the Lease Term ends on its own terms.
During any Early Occupancy Period or Beneficial Occupancy Period – clarify what is payable if anything; Date Confirmation - the ability to dispute any Landlord confirmation of a Lease/Rent Commencement Date or any other rental trigger date in the Lease; Lease Extensions discussed in more detail below. LEASE TERM - TENANT
LEASE TERM - LANDLORD • Tenant occupies – must pay Rent • The most sacred provision in the Lease to the Landlord is Rent Commencement Date. • Does not desire to debate this issue with their Tenant’s. • May allow some sort of ADR process so long as the Tenant pays the Rent (even if he pays it under protest).
LEASE TERM - RESIDENTIAL • Most of the time the Term of the Lease is not an issue in a residential situation; exception poor documentation. • Notice requirements for termination have changed. The month to month tenancy only required one months prior written notice to terminate. The California Civil Code §1946.1 requires the owner of a residential dwelling to provide at least sixty (60) days' notice of termination if the Tenant has lived in the residence for a year or more.
ACCEPTANCE • Existing Space – • No TI’s - walk through by Tenant and Landlord – confirmed in writing; • TI’s – • Tenant constructs – walk through on Delivery by Landlord; • Landlord constructs – walk through on completion.
ACCEPTANCE • Defects • Patent; • Latent; • Punch list. • Documentation is King – Honeymoon vs. Divorce
ACCEPTANCE - TENANT • Latent defects excluded; • Patent defects some grace period; • Punch list – • Diligently • Timely • No disruption • Off Tenant hours • Fumes • Noise • Access • Large vs. small transaction
ACCEPTANCE -LANDLORD • Latent defects – Tenant must • Promptly report when discovered; • Diligently investigate; • Not cause loss of warranty. • Patent defects – one time shot. • Punch list – • Reasonable • During Building Hours • Minimize disruption • Memorialize • Cannot be Tenant caused (move in) • Large vs. small transaction
ACCEPTANCE RESIDENTIAL • Very seldom documented • Exception – property managers • No inspections • Mostly visual walk through • Punch list usually carpet, paint and necessary repairs
RENEWAL, EXPANSION AND TERMINATION • Related Provisions. Premises, Parking, Term, Rent, Security Deposit, Use, Hazardous Waste, Tenant Improvement Allowance, Broker’s Fees, Notices, Default, Surrender and Hold Over. • This provision normally takes an inordinate portion of the time devoted to Lease negotiations. • Rarely exercised as set forth in the Leases. • Each party is insistent that the rights are clearly defined; • The process of exercising these Options must be specifically identified with a timetable that actually works.
RENEWAL, EXPANSION AND TERMINATION • Types • Renewal & Expansion • ROFR • ROFO • NEGOTIATE • Early Termination
RENEWAL - TENANT • The extension and expansion options can be very critical to the Tenant. • When committed? • Transferable to an Assignee or a Subtenant? • What is the expansion size? • All or a part thereof?
RENEWAL - TENANT • How many extension options? • Is it a real option or does it only occur if space becomes available? • Is it a right of first refusal or a right of first offer? • What triggers this right? • Types: • (i) expand or reduce the Premises, • (ii) extend or early terminate of the Lease Term, • In Options (i) and (ii) the first issue that must be resolved is the Rent.
RENEWAL - TENANT • In Option (i) & (ii) if during the Lease Term or any renewal or extension period thereof, the Rent should be the lower of • the Rent in the Lease; or • the Fair Market Rental Rate; • a percentage of the Fair Market Rental Rate (e.g. 90%). • Transferable to • Any Transferee; • Subtenant/Assignee; • Affiliates/Subsidiaries.
RENEWAL - TENANT • Disputes as to Rent. • Negotiation, Mediation, Arbitration • Baseball; • Averaging; • Arbitrator determined. • Fair Market Rental Rate - comparable: Premises, Buildings, size, location, floor, Term of Lease, parking, brokers fee and other privileges and all forms of market concessions currently available. • Additional Space and Upgrades • Sign rights; • Parking privileges
RENEWAL - TENANT Two articles on Renewal available at: • TO RENEW OR NOT TO RENEW? THE MEDIUM LEASE http://www.dirtatty.com/publications/Renewal_VOL_I_%20RV_7-17-03.pdf • TO RENEW OR NOT TO RENEW? THE MAGNUM LEASE http://www.dirtatty.com/publications/Renewal_Vol_II_rv_7-18-03.pdf
RENEWAL - LANDLORD • Landlord’s are not in the business of selling options in their Buildings; • Landlords are often forced to concede this point to a significant Tenant that anticipates growth and longevity in the Building. • Landlord’s generally attempt to restrict the Tenant’s options assuming that nothing has changed, that is extension of Term OK if Tenant has not sublet or assigned and occupies all of the Premises.
RENEWAL - LANDLORD • Expansion of space only if Tenant has not sublet or assigned. • No right to reduce space. • At Landlord’s then applicable Building Rent. • No Transfer of rights. • No upgrades. • Will agree to negotiation, mediation and arbitration. • Must take – is this really an option. • Early determination – timing • Lack of default. • Never vs. oops but cured
RENEWAL - RESIDENTIAL • Tenant’s are seldom granted a right to renew; • Most become month to month rentals pursuant to the Terms of a written Lease.
RENT, ADDITIONAL RENT, SERVICES • Related Provisions. Description of Premises, Tenant Improvements, Security Deposit, Operating Expenses, Damage and Destruction, Condemnation, Abatement of Rent, Assignment and Subletting, Late Charge, Interest on Past Due Obligations, Compliance with Law, Repairs and Maintenance, Utilities and Services, Insurance, Transfer of Landlord’s Interest and Options.
RENT, ADDITIONAL RENT, SERVICES • Types • Base Rent – this number is generally the absolute bottom line figure that the Landlord desires to recover on a monthly basis and all other Rents are in addition to this Rent. As a result this is the first real number the Tenant and Landlord discuss and frequently the most negotiated Rent in a Lease. Unfortunately the myriad of Lease forms that call themselves Gross or Net (labels mean little) make it impossible to determine exactly what the Tenant gets for the payment of the Base Rent, without a thorough reading of the Lease. • Caution – in a long Term Lease it is not unheard of for the Operating Expenses, Additional Rent to exceed the Base Rent.