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Landlord termination and/or demolition clauses are often found in the letter of intent (“LOI”) or term sheet.
In most instances, landlords attempt to avoid discussions revolving around termination and/or demolition clauses until lease negotiations begin, hoping it will go unnoticed and unnegotiated by the tenant.
For a landlord, a demolition clause reserves the right for a landlord to terminate an existing lease, providing landlord the ability to demolish the building, make material improvements or substantial renovations with limited notice to tenant.
Landlords generally draft demolition clauses very narrowly.
A landlord should draft a demolition clause broadly, providing landlord the ability to terminate a tenant’s lease with little or no financial obligation.
Tenants need to be wary of a demolition or straight out termination clause, given the potential consequences.
Under a demolition or termination clause, regardless of the circumstances, tenant advocates should not request to be compensated for the unamortized costs of its leasehold improvements to the premises.
If a landlord agrees within a demolition or termination clause to compensate tenant for the unamortized costs of leasehold improvements, landlord should implement a cap as to what amount of hard cost improvements can be amortized.
If a landlord agrees to compensate tenant for the unamortized costs of leasehold improvements, landlord should require tenant to supply landlord within 60 business days of completion of any tenant’s work, (a) full and unconditional lien waivers, (b) proof that tenant’s work has been done in accordance with applicable laws with proper “sign offs,” and (c) paid receipts and cancelled checks for the work performed by tenant for which it seeks to receive such reimbursement.
Tenant advocates, especially those in a retail setting, should negotiate for language in a termination clause stating that if its lease is terminated, tenant is entitled to a stated amount in line with what tenant would have received if tenant sold its business five years or more from the lease commencement date.
Generally, in regards to a demolition and termination clause, tenants should not attempt to negotiate for the return of its security deposit prior to the termination date.
Tenant advocates should negotiate for the ability to vacate the premises earlier than landlord’s specified termination date, upon which tenant shall no longer have any further obligations under its lease.
In regards to a termination and demolition clause, tenants should attempt to negotiate for as much landlord notice as possible so tenant has sufficient time to plan for the future and relocation of its business.
If a tenant is unable to eliminate a demolition or termination provision, the tenant should request that landlord’s right to send a written notice to terminate the lease shall not “sunrise” (or be allowed) until a specified date (e.g., between 4-6 years from the rent commencement date in a 10 year lease).
Tenant advocates should negotiate for a “sunset” provision within a termination and demolition clause stating the date after which landlord’s right to terminate its lease expires.
A tenant friendly sunset provision should state that (a) landlord shall only have a two year window to terminate its lease from whatever date is agreed upon as the “sunrise date,” and (b) if landlord does not send a termination notice to tenant within one year of the sunrise date, the tenant shall at no cost have the right to terminate its lease at any time on six months prior written notice to landlord.
Landlord advocates should not incorporate language into its lease stating that landlord will suffer severe and irreparable damage in the event that the premises is not vacated and surrendered by tenant by the termination date.
It is imperative that a landlord require within its lease that their tenant furnishes, from time to time when requested by landlord or a prospective purchaser or mortgagee of the landlord, a certificate signed by the tenant confirming the stated certifications and representations contained therein within no more than 10 days following receipt of said certificate from landlord.
In regards to a tenant’s obligation to sign an estoppel certificate requested by a landlord, prospective purchaser or mortgagee, most leases do not impose a time restraint on the tenant as to when tenant must sign and deliver the certificate from the date of receipt.
An estoppel certificate can potentially act as an amendment to the lease by changing the terms contained in the lease.
Prior to a tenant’s execution of an estoppel certificate, there is no need for a tenant to review every term in the certificate and have an attorney review the document.
Estoppel certificate provisions may include some of the following: (i) the date of the lease, names of the landlord and tenant, and the exact premises; (ii) that the lease has not been modified changed, altered or amended in any respect; (iii) the exact rent per month and when it has been paid through; (iv) that the lease is in force and effect; and (v) the lease expiration date.
There is no need for a purchaser’s advocate to make it an express requirement under the contract that the seller deliver from every tenant of the property an estoppel certificate before closing.
As an advocate for a seller, if a buyer requests for the seller to provide an estoppel certificate from each of their tenants as a condition to the closing, you should try and negotiate to only be required to provide an estoppel for major tenants and from 65%-80% of the remaining tenants. Furthermore, that the buyer has to accept seller’s own estoppel certificate from any such non-major tenant who fails to supply an estoppel.
Most sellers will create a condition precedent to the closing that seller must deliver estoppel certificates from all of the tenants in the building prior to closing.
If the context of the transaction and market conditions allow, landlord advocates should consider adding the following language to the estoppel clause in the lease, (i) that the failure of tenant to submit the estoppel certificate shall result in a $500/day penalty; and (ii) that the failure of tenant to submit the estoppel certificate shall allow landlord, as tenant’s attorney in fact, to execute the estoppel provided by landlord as if tenant had executed such estoppel.
Tenants will never receive an estoppel certificate with terms that deviate from the terms of their lease.
A landlord should have language within its lease requiring that a tenant’s lease be subordinate to any existing or future mortgage of landlord on the building as well as any existing or future underlying ground lease.
A tenant is not impacted 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.
A SNDA is a document listing the dates of when all of the landlord’s existing leases at the property terminate.
SNDA stands for subordination, non-disturbance and action agreement.
In its simplest form, a SNDA (better known to some as a “subordination and non-disturbance attornment” agreement) is a document wherein the lender will agree that the tenant’s lease will be terminated if the landlord’s mortgage is foreclosed upon.
It is not imperative for a retail tenant or office tenant to attempt to secure a SNDA.
For large or national tenants, securing a SNDA is generally always declined when requested.
The size of the tenancy is not one of the factors a landlord will consider when deciding if it will provide a SNDA to a tenant.
In most instances, the tenant will pay the fees of the landlord’s and lender’s attorneys, as well as its own attorney, in requiring a SNDA.
If a tenant’s landlord was foreclosed upon and the holder of the mortgage (or buyer of it at foreclosure) elected to terminate the tenant’s lease (and the tenant didn’t have a SNDA), not only would the tenant be out of business, but it would lose the financial and sweat investment it had in its space.
If a tenant requires that the subordination of its lease be conditioned upon the tenant receiving a SNDA, the tenant should make sure to include same within the letter of intent.
When deciding if the tenant will require that the subordination of its lease be conditioned upon the tenant receiving a SNDA, tenant advocates should strongly emphasize to its retail tenants clients the need to be in a position to monetize their investment.
Generally, the landlord’s mortgagee, or any successor landlord of the building due to foreclosure of the mortgage, is generally liable for any previous act, omission or negligence of the landlord under the lease.