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A subordination provision is incorporated by the landlord to ensure that the tenant’s lease is subordinate to any existing or future mortgages (and ground lease, if any) of the landlord on the building.
The terms and provisions of a subordination clause affects a tenant when a landlord’s mortgage is foreclosed on by its lender, or a ground lease against the building is terminated by a ground lessor due to a landlord’s uncured default.
Simply stated, a SNDA is a document wherein the landlord’s lender will agree that the tenant’s occupancy will remain undisturbed (and as such its lease will not be terminated), notwithstanding the foreclosure of the landlord’s mortgage on the building.
Given that for the majority of retail businesses, location is one of the most important driving forces behind the traffic and revenue it generates, it is not important for a retail tenant to receive a SNDA.
In the vast majority of retail deals, a landlord provides little or no tenant improvement allowance or landlord’s work, and as a consequence thereof, the retail tenant will not have a chance to “monetize” its business if the landlord is foreclosed upon.
A basic tenant SNDA LOI provision may state that, “Landlord shall provide a SNDA to tenant from landlord’s current mortgagee and from any subsequent mortgagee.”
Landlord advocates should make sure to include in the letter of intent that the tenant shall not cause or permit any hazardous substances to be brought, kept, or used in the building.
In the lease, landlords should shift the responsibility to tenants to (a) comply with any future laws relating to hazardous materials, and (b) in the event that the tenant fails to comply with such laws, the tenant should remedy the situation at its sole expense.
Landlord advocates should include language in the letter of intent and lease that during the period that tenant cannot operate within, or perform its initial build-out of, the premises as a consequence of non-compliant hazardous materials in the premises, tenant’s base rent shall abate, or its free rent period shall toll (as the case may be), until such time as landlord completes its remediation and tenant commences its business operations.
The LOI should provide whether the tenant or landlord will clean the premises, which party will pay for such cleaning, and the frequency and manner at which the premises will be cleaned.
The following is a LOI cleaning provision for tenant advocates: “Landlord’s cleaning contractor, at Landlord’s sole cost and expense, shall clean the Premises five (5) nights per week in accordance with Landlord’s cleaning specifications annexed hereto as Exhibit “A”.”
A landlord should require the tenant, at a tenant’s own cost and expense, to diligently keep the premises free and clear of any odor, rats, mice, insects and other vermin.
In most commercial leases, landlords, in a seemingly subtle yet relentless manner, shift the legal and financial burden of compliance with applicable laws pertaining to its space to tenants.
In many instances, landlords try to shift the financial and legal burden of compliance with laws on to tenants regardless of whether the compliance is in accordance with present or future laws, and in many cases, regardless of whether a tenant’s space, when delivered by landlord, was in fact even in compliance.
A fairly typical pro-landlord compliance with laws LOI provision can be along the lines of, “Tenant is taking the space “as-is” with no work or representations of any kind or nature required of landlord.”
Tenants should agree to be responsible to remedy any non-compliance of the premises with applicable laws as of the lease commencement date, whether or not caused by tenant.
Tenant advocates should include the following in the letter of intent: “Tenant shall not be required to comply with any law or to cure any illegal condition if the illegality or necessity to comply existed or arose before tenant took possession of the premises or at any time by reason of any act or omission of landlord.”
The following is an example of pro-landlord permitted use language to include in a LOI for a tenant who is going to be operating a nail salon at the premises: “Tenant shall use the premises for a nail salon and any other lawful purpose.”
The following is an example of pro-landlord language to include in the LOI with regards to assignment and subletting: “Subject to terms and conditions to be contained in the lease, landlord may unreasonably withhold or delay its consent to a tenant’s request to assign its lease or sublet its space.”
The following is an example of pro-landlord language to include in the LOI with regards to a good guy guaranty: “Tenant’s principals to sign landlord’s standard good guy guaranty.”
As to a landlord’s LOI drafting mantra, the goal should be that of getting your prospective tenant into the lease negotiation stage, where they no longer possess the leverage that they once held during the LOI stage where they were being seduced to relocate to, or remain in, a landlord’s building.
Wherever the situation permits, tenant advocates need to be as broad and detailed as possible when it comes to drafting their LOI provisions.
If a use provision provides for any lawful retail purpose, including but not limited to a nail salon, subject to how the assignment and good guy guaranty provisions read, the nail salon tenant could effectively assign its lease to virtually any assignee whose use is permitted by applicable laws, rules and regulations.
From a landlord’s perspective, the LOI provisions need to contain a high degree of broadness.
If a tenant’s principal and its team do not properly negotiate an exit strategy in the good guy guarantee (“GGG”), the tenant’s principal who signs as guarantor of the lease will generally remain subject to personal liability for the full term of the lease and any renewals thereof, even after his or her business is sold (despite the fact that he or she no longer possesses control over what may or may not transpire relative to that space during the period subsequent to the effective date of the lease assignment).
Tenant advocates should include language in the LOI along the lines of, “Hazardous materials existing in the premises and/or the building subsequent to the lease commencement date, if not introduced to the property, the building and/or premises by or through tenant, tenant’s agents, employees, invitees, contractors, customers and/or vendors and accordingly, any cost associated with the removal or remediation of same, shall be the expense of the tenant.”