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Generally speaking, the majority of landlords consider their calculation of the rentable square footage (“RSF”) of a space to be non-negotiable.
From a tenant’s perspective, although not necessarily pleased to do so, the vast majority take an “it is what it is” mindset as to a landlord’s calculation of the loss factor (also referred to as “load factor”).
In certain markets, such as New York City, due to loss factor calculations including such things as the elevator shaft, a building’s lobby, stairways, public bathrooms, multi-tenanted floor hallways and other common areas, the rentable square footage a tenant is charged generally runs from a relatively low of 20% to quite possibly 40% or more over and above the usable square footage of a space.
“USF” stands for unusable square footage.
“RSF” stands for rentable square footage.
The “common area” of an office building can include such items as the building lobby, stairways, management office, a tenant’s private bathroom, hallways and elevator shafts.
A loss or load factor calculation is higher for space on a divided, multi-tenant floor when compared to that of a single-tenant user floor.
A loss or load factor calculation is greater for space on divided, multi-tenant floors because there is more common area on a divided floor.
Depending on the nature of the deal, marketplace, financial strength of the tenant, size of the space, and negotiating leverage that a tenant brings to the bargaining table, a large prospective tenant may request both (a) a verification of the RSF calculation by way of re-measurement or architect certification and (b) that the loss factor (also referred to as “load factor”) calculation be based on a locally, regionally, or nationally recognized measurement standard.
In certain markets, it would not be unusual for a tenant to request the inclusion of language in their letter of intent requiring the percentage used by the landlord for the loss factor calculation to not exceed a certain set amount.
If a retail space in an office building does not have access through a door within the space to the lobby of the building (effectively rendering their retail space void of any building common areas), a reasonable argument can be made by the tenant that the rentable square footage calculation be equivalent to the usable square footage calculation for their space.
As a general rule, a tenant improvement allowance being provided to a tenant by a landlord should be calculated using the space’s usable square footage, and not its rentable square footage calculation.
A carpet vendor or contractor should base their proposal for flooring of a space on the carpetable area of the space, and not the landlord’s rentable square footage calculation.
If a tenant is receiving an improvement allowance from its landlord, although it would most definitely prefer to have its space measured with a low loss factor (also referred to as “load factor”), one benefit of a higher loss factor is that attributable to the fact that its calculation is based on the higher rentable square footage calculation, and not a lower usable square footage calculation.
Generally stated, virtually all commercial landlords feel that it is their right to (a) receive all or the majority of rental profits from the space it leases to a tenant, and (b) control the “tenant mix” (i.e., who will occupy space in its building).
It is important for a landlord to insert language into its initial lease draft which allows a landlord the right to recapture and/or leaseback a tenant’s space if and when a tenant requests to assign its lease or sublease its space.
It is important for a landlord to insert language into its initial lease draft which allows a landlord the right to consent to a tenant’s request to assign its lease or sublet all or a portion of its space.
It is important for a landlord to insert language into its initial lease draft which allows a landlord the right to require the tenant entity, and any lease guarantors, to remain liable in the event of a lease assignment.
From a tenant’s viewpoint, in the case of an assignment of its lease involving (1) a sale of a tenant’s assets or business, or (2) a transfer to a related entity such as a parent, affiliate, subsidiary or franchisor, or a sublet to a permitted subtenant such as one for a permitted desk sharing arrangement, landlords should waive their right of recapture, leaseback, profit sharing and, subject to terms and conditions agreed to by landlord and tenant in advance, the need to obtain landlord’s consent.
From a tenant’s viewpoint, a narrowly defined “permitted use” provision limits a tenant’s right to sublet its space or assign its lease.
A tenant should counteract a narrowly defined “permitted use” provision in the initial draft of a lease by amending the language to be as broad as possible (e.g., changing “a nail or hair salon” to “a nail, wellness, hair and/or beauty salon, and/or other retail uses pertaining to the health, appearance, and/or fitness of both men and woman, with the ancillary sale of men and woman’s clothing and health related products”).
Tenant advocates should attempt to secure language that states that if the majority principal or principals of the assignee sign a guaranty similar in form to the straight, limited or good guy guaranty signed at lease execution by the principals of the assignor, then the assignor’s principals (i.e., the original guarantors) will no longer have any personal liability subsequent to the effective date of the assignment.
A common landlord condition and restriction found in a renewal option provision is to limit the exercise of the renewal and expansion options of tenant to the original named tenant only.
In a retail lease, the longer that remains on the term of the lease, the harder it will be for a tenant to extract a greater value from its assignee.
Tenant advocates should attempt to secure language that states any renewal and expansion rights contained in the lease must extend to any related entities and permitted assignees of the named tenant.
Subject to previously agreed upon terms and conditions, tenants should attempt to secure the right to a partial sublet (i.e., a desk sharing arrangement for up to 20% or more of the tenant’s space) without the landlord’s prior consent.
S.I.P. (“SIP”) stands for search, identify, and plan.
The S.I.P. (“SIP”) process should take at least 9 months.
If your lease is expiring in roughly nine (9) to twelve (12) months (or less) and you have no intention to renew, you should believe that it’s too early to start looking for new space that is suitable for your business and financial needs.
From a tenant’s perspective, the preference would be for a tenant to hire a broker who has a “goal line-to-goal line” mentality, with the ability to take you through the dizzying process of securing the perfect space, steer you away from bad buildings and less than desirable landlords, operationally speaking, and relentlessly pound the pavement for you.
If you are a retail tenant, the tenant advisor you select should be cognizant of every location in the market with good retail mixes and appropriate foot traffic and have the perfect blend of demographics suitable to your business.
Once the space search has been accomplished, a tenant should prepare a matrix or spreadsheet comparing the various costs, amenities, locations, pros and cons of the spaces searched by the broker on behalf of the tenant.
Many landlords will do a test fit for a tenant at little or no cost, although others might not depending on the context of the deal and the market. A number of furniture vendors, with the hope that the prospective tenant will ultimately use their services, will prepare a space fit design plan for a tenant at little or no cost as well.
Tenant advocates should consider submitting only one proposal to create an “air of competition” around their leasing process.
The “E” in the “ACNE” principle refers to Emancipation.
In the “ACNE” principle, the “A” refers to analyzing the counter-proposals or RFP’s.
In the “ACNE” principle, the “C” refers to counter-propose. After analyzing the proposals and RFP’s, tenant representatives should not prepare counter-proposals to submit back to the landlord.
According to the “ACNE” principle, the “N” stands for negotiate and refers to negotiating the counter proposals or RFP’s, and later on in this stage, the lease itself.
In the “ACNE” principle, the “E” targets the landlord, among other things, to evaluate the tenant responses, engineer the potential space layout and ultimately execute the letter of intent for the space selected.
Budgeting and the preparation of design and/or construction documents for the space are paramount in the “ACNE” principle.
With regards to the construction build-out and move-in stage, one of the first steps and top priorities for tenants is to review and approve construction drawings, regardless of whether the drawings are prepared by the landlord’s or tenant’s architect.
As part of the construction build-out and move-in stage, one of the steps for tenants is to order any long lead items, and new equipment or furniture, and given that the majority of landlords will want to be involved with your telephone and internet wiring, let the landlord handle the work with tenant’s telephone and internet wiring.
If the landlord is building out the space, tenants should make sure, if the context of the deal so dictates, it will be on the hook financially for all of the build-out cost.
One of The Lease Guru’s Six Pack Program of Steps for the construction build-out and move-in stageis to have a kickoff meeting with all parties who will be part of the construction and build-out process in order to set expectations and get on the same page.
One of The Lease Guru’s Six Pack Program of Steps for the construction build-out and move-in stage notes that during the construction process, the parties involved should have weekly or bi-weekly periodic meetings – whether by phone, video conference or at the job site.
When the construction is deemed “substantially completed” by either the landlord or tenant’s contractor, tenants should arrange an inspection of the space and make sure that only minor punch list items (e.g., those which do not impact the tenant’s ability to move in and enjoy the space but for minor inconvenience) which the contractor cannot complete within 30 days remain.
A landlord will never have “substitute space language” first appear in their initial draft of the lease without also including the language in the term sheet.
It is common for a landlord’s “substitute space language” to first appear in their initial draft of the lease without including the language in the term sheet.
By incorporating space relocation language into the lease, it provides a tenant with a greater amount of flexibility.
A landlord’s right to relocate a tenant’s space allows the landlord the flexibility to (i) provide a current tenant the ability to expand its space by combining with an existing tenant’s space on the same floor, and/or (ii) attract a “big fish” tenant by being able to relocate a “small fish” tenant.
Whenever there is space relocation language in the lease, a tenant should either strike the language in its entirety, or heavily negotiate the language so as to share in some of the benefits that inure to the landlord when exercising its relocation right.
Generally speaking, a smaller tenant has greater negotiating power than a larger tenant with regards to a space relocation clause.
If a tenant does not possess enough negotiating power to entirely strike the space relocation language from the lease, the tenant should attempt to make it so that the landlord can’t exercise the relocation right until at least 24 to 36 months after the lease commencement date.
If a tenant is unsuccessful in entirely striking a relocation provision, the tenant should try to include language that the relocation space must be comparable to its existing space in terms of finishes, the amount of overall windows, bullpen space, windowed offices, useable square feet; and if in a high rise building, the location of the space in terms of the view; and if retail space, in a still visible and well trafficked location.
If a tenant is required by its landlord to have relocation language in the lease, the tenant should secure language stating that the tenant shall be reimbursed for any and all costs associated with the move, including but not limited to, wiring, cabling, data, moving, stationery and other out-of-pocket costs.
If a tenant is unsuccessful in entirely striking a relocation provision, the tenant should seek to include language that if the rentable square feet of the substitute space is bigger than its existing space, the base rent, additional rent, electricity inclusion factor and tenant’s pro-rata share of CAM and/or real estate taxes will be increased.
It is imperative that tenants include language in the relocation clause that it shall have no obligation to remove or restore any improvements made to the space from which it is relocating.
By bringing tenants to a landlord’s building, effectively, brokers help a landlord pay its and its employees’ salaries and other expenses.
Given that a tenant’s broker has (or should have) access to listings of essentially all spaces in the sub-market that fit a tenant’s needs, the use of a broker will save a prospective tenant time, money and opportunity costs in searching for a suitable space.
Generally speaking, if a tenant doesn’t have a broker in a retail deal, landlords will pay less than a full broker commission on the lease.
Brokers can add value for a tenant by (i) knowing which landlords have a reputation for being “tenant friendly,” (ii) helping tenants secure favorable lease concessions during the letter of intent negotiations, and (iii) acting as a trusted consiglieri to the tenant’s attorney during lease negotiations based on that broker’s knowledge as to what the landlord has granted on prior deals.
Given that a broker is only paid if the deal is consummated, a broker has an incentive to reconcile the parties’ differences during negotiations, and accordingly should have a “we can work it out” mindset to help ensure the transaction closes successfully.
When representing a tenant, rarely will a broker make inquiries about the financial status, character and reputation of the landlord.
Brokers aid landlords and tenants when there is competition for a tenant or a space by helping the side they advocate for to convince the other party that the tenant or space they represent is right for the other party.
A business’s ability to make an informed decision about their real estate needs is only enhanced by the knowledge a good commercial tenant representative brings to them, not only about the marketplace, but also about how to navigate the leasing process and choose among the many attorneys, architects, contractors, designers, furniture providers and other trades a business will need to rely on when looking for new space.
In the event of a lease renewal, a good tenant’s broker has the ability to work with a landlord while advocating for its client by convincing the landlord (as well as its client, the tenant) that it should never give up on a good thing (even if the space needs some cosmetic improvements and/or space efficiency reconfiguration).
Brokers can help a tenant trying to restructure their lease by conveying to the landlord that unless it is willing to grant the tenant some sort of temporary rental relief to help the tenant weather the economic distress it is currently confronted with, the landlord very well may soon be confronted with vacancy turnover, loss of revenue and a myriad of other turnover costs (i.e., a full brokerage commission for the next incoming tenant as well as tenant improvement build-out allowances, free rent concessions and professional fees).
Given that landlords and their listing agents generally have far more experience in negotiating letters of intent and leases than a tenant does, it is in the tenant’s best interest to hire a broker to look out for their best interest.
A broker can save a tenant’s or landlord’s company money in terms of valuable time and salaries not spent on staff whose primary responsibility would otherwise need to be managing the leasing process.
Generally speaking, a landlord’s or tenant’s company is likely to save more money in terms of both time and salaries spent managing the entire leasing process on its own versus hiring a broker.
It is generally in the tenant’s best interest to not hire a broker, and negotiate with the landlord on its own.
A tenant becomes a holdover tenant if they fail to vacate the premises as required under the lease at the expiration of the lease term.
Landlords should include in their lease that the tenant indemnifies and agrees to defend and hold the landlord harmless from and against any claim of loss derived from tenant’s delay in surrendering the premises.
Landlords should include in their lease that if the tenant holds over its possession after the expiration or earlier termination of the original term or any extended term, such holding over shall not be deemed to extend the term or renew the lease, but such holding over thereafter shall continue upon the covenants and conditions set forth in the lease, except that the charge for use and occupancy of such holding over for each calendar month or part thereof (even if such part shall be a small fraction of a calendar month) shall be the sum of 1/12 of the highest annual rent rate set forth in the lease, times 200% to 300%, plus all other additional rent due under the lease.
Tenant advocates should try and negotiate that the holdover rent is no greater than 150% of the highest annual rent rate set forth in the lease.
Ideally for a landlord, the lease should include a rental penalty, but not indemnity language, in the event of a tenant holdover.
Ideally for a landlord, the lease should include both indemnity and rental penalty language in the event of a tenant holdover.
Tenants should not try and delete any indemnity language in a holdover clause.
Many landlords will require that a tenant’s wiring and cabling must be tagged by the tenant and removed by the tenant prior to the lease expiration or earlier termination of the lease.
Tenants don’t need to worry about their wiring or cabling being removed from the premises at the lease expiration or earlier termination of the lease.
An argument can be made by the landlord that the wiring and cabling left in the premises by a tenant after lease expiration should be considered a holdover due to tenant not fully vacating the premises.
One way older buildings compete with newer buildings, where it’s hard to compare in terms of their physical amenities, is by providing enhanced tenant services.
Most landlords believe that a comprehensive and creative amenities package can be used to (i) seduce current tenants to remain as such and (ii) attract new tenants to the building.
A structured amenities package may include: (i) on-site massage therapy, (ii) general wellness classes, (iii) sleep pods for power naps, (iv) a fitness center, and (v) dry cleaning and laundry pick up services.
It is advisable for landlords to have an “it is what it is” mindset in relation to tenant services, and not go beyond delivering HVAC to a tenant’s space Monday through Friday.
Landlords must be creative in terms of the tenant services and amenities packages they offer when attempting to retain current tenants and also attract new tenants.
Landlords should include language their lease that states that the tenant has sole right to prescribe the weight and position of all machines, mechanical equipment, and ventilation systems within the space.
Whether you are a retail or office tenant, use of vibration absorption materials need to be part of the equation when designing and building out your space.
Public establishments such as restaurants and bars should have echo-absorbing panels on walls and ceilings.
A tenant’s creation of noise and vibration disrupting other tenants in the building has no effect on a tenant’s right of quiet enjoyment of its space.
Landlords should require that a tenant immediately notify landlord of any noise complaints a tenant receives.
Tenants who are concerned about privacy during business meetings and negotiations should consider installing extra insulation, sheet-rocked ceilings, and/or extended walls in their office space.
A landlord advocate should include in a lease that if a tenant does not promptly rectify poor performance involving noise and vibration complaints, landlord has the right, at landlord’s own cost, to install sound and vibration attenuation countermeasures to stop the disturbance.
The following remedies are commonly found in leases to help a landlord deal with noise and vibration issues from a tenant:
A tenant should request that its landlord install solid wooden doors, as opposed to hollow doors, to cut down on noise emanating from its office space.
If a tenant’s operations are known to be louder than a traditional office space, a landlord should include language in its lease stating that tenant will use commercially reasonable efforts, and will cooperate in good faith with landlord, to address any issues that arise in this regard. But, so long as tenant uses commercially reasonable efforts, no such noise or similar issue will be grounds for any claim of a default or breach to tenant of this lease.
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.
Upfront costs to a landlord incurred on a typical office lease transaction may include, free rent concessions, a tenant improvement allowance and brokerage commissions.
The following are among the primary factors that determine how much free rent a landlord may give to a tenant: (a) current market conditions; (b) whether the lease is for office, retail or industrial space; and/or (c) the length of the lease term.
Although there is no hard or fast rule of thumb, depending on market conditions, the deal type (office, retail or industrial) and other concessions being granted to a tenant, it would not be unreasonable for a tenant locking into a five year deal to receive two to five months of free rent and those committing to a ten year deal to receive four to nine months of free rent.
Tenant advocates should only consider asking landlord for one hundred percent of the free rent concession to be granted up-front.
Landlords, as a rule of thumb, prefer to grant free rent concessions versus that of tenant improvement allowances.
Tenants should include language providing the return of the full amount, or the unamortized portion of, any free rent concessions granted in the event of their uncured default, lease termination by landlord, or as a condition to get out of a straight, limited or good guy guaranty.
The amount of security deposit requested by a landlord should be based upon how much risk the landlord feels it should have given its due diligence and financial outlay incurred in entering into the lease.
The amount of fixed rent should cover a landlord’s operating costs for its building and financing costs for its mortgage on its building.
Unless the cost of such is considered in the calculation of fixed rent, a landlord should make sure that its tenants pay their proportionate share of real estate taxes based upon the amount of square footage tenant is leasing in proportion to the total square footage of the building.
An operating expense escalation is a provision within a lease which provides that as a building’s operating expenses increase above what they were in the base year of the lease, tenant agrees to pay its pro-rata share of those increased expenses.
A real estate tax escalation is a provision in a lease agreement wherein the tenant agrees to pay its pro-rata share of any increase in real estate taxes on the leased property over and above a pre-established base tax year.
Most operating expense definitions within a commercial lease are very broad, and many include a number of costs of a capital nature as well as those with built-in profit components.
An important carve-out for a tenant to request for an operating expense provision may include an annual cap (typically around five percent) on an operating cost escalation increase or, at a minimum, on those costs that are considered “controllable” by a landlord.
An important carve-out for a tenant is to include capital expenditures in the operating expense definition.
As a landlord, the percentage increase in base rent the tenant pays should be on an annual compounded basis.
From a tenant’s perspective, in order to limit its costs to those actual in nature and without markup from a landlord, utility charges should be direct from the local utility.
From a landlord’s perspective, if the space that is being delivered does not then have direct meters in place to measure the tenant’s consumption of utilities, its lease should provide that the cost to install the meter shall be paid by landlord.
Some landlords include language within a compliance with law provision to have its tenants pay a portion of the costs associated with landlord complying with applicable building code laws, rules and regulations.
From a tenant’s perspective, tenants should be obligated to “comply with law” and remedy any current non-compliance of the premises, as of the lease commencement date.
At the bare minimum, a landlord should have tenant reimburse landlord for any costs that landlord may incur as a consequence of tenant’s request to assign its lease or sublet its space.
Examples of cost reimbursement and protective language for landlords to include in its good guy guaranty may include: (a) guaranteeing that all work started by a tenant will be completed and paid for lien free (in short, the equivalent of a construction completion guaranty); (b) the tenant being required to give landlord between sixty and one hundred eighty days written notice prior to its space being surrendered; and (c) requiring tenant’s owner to reimburse landlord for those costs initially incurred by landlord relating to its lease of the space if surrendered within the first three to five years of the lease term.
Tenants should negotiate into its lease that its security deposit will be reduced in one or two month increments after a period of two to four years from the lease or rent commencement date (provided it is not then in default of its lease beyond the expiration of any applicable notice and cure period).
Essentially, all activity relating to marijuana is illegal under federal law.
Cannabis is a controlled substance, therefore, federal authorities may enter business establishments and charge those involved with forfeiture proceedings.
It is advisable for landlords with tenants in the cannabis business to create a profit sharing scheme, such as percentage rent from tenant’s revenue.
Landlords cannot have a financial stake in a tenant’s cannabis business because it is technically an illegal business.
Landlord advocates should incorporate language into its lease outlining the time for which a tenant must get a cannabis license in relation to the lease commencement date.
Although there is a high potential for a tenant’s licensing application to not comply with the changing state or local marijuana laws, cannabis related termination language in its lease is not imperative.
Landlords with tenants in the cannabis industry tend to have a lack of stable and secure cash flow due to the uncertainty in the cannabis and real estate industry with regards to how state and federal regulations will be decided.
Most landlords, along with tenants in the cannabis industry, would prefer to have leasing disputes resolved by the way of arbitration, as opposed to litigation.
In a cannabis related lease, both parties must waive, acknowledge and agree that any defense of “federal illegality” will be prohibited from being raised by either party to any landlord or tenant breach or default under the lease by the non-breaching/non-defaulting party.
Landlord advocates should include language for tenants in the cannabis business that are non-growers and non-processors along the lines of, “The sale of marijuana and marijuana-related products shall not be included in the definition of hazardous substances.”
In a cannabis related lease, in regards to the use clause, landlords would prefer to have a broader use clause to allow tenants to have an exit strategy by way of an assignment or sublet.
In a cannabis related lease, tenant advocates should add the following language to the use clause, “Notwithstanding anything herein to the contrary, landlord acknowledges and agrees that the use of the premises for the permitted use (including the sale of marijuana and marijuana-related products) shall not be a violation of this lease (subject otherwise to the terms and conditions of this lease).”
In a cannabis related lease, language relating to landlord’s access to the premises does not need to be in conformity with state and local cannabis laws.
Generally, in regards to a cannabis related lease, institutional lenders will lend on the property, regardless of the “illegality activity” concern.
There are many financing and banking concerns for the landlord in leasing space to a tenant.
Landlords and tenants, in particular tenants who are growers, must take into consideration Department of Building regulations, and decide whether tenant’s fixtures and equipment comply with applicable code.
Generally, in cannabis related lease negotiations, tenant advocates should not incorporate language in its lease requiring landlord’s assistance in the event that new laws or rules are enacted relating to a myriad of items, including licensing.
In most instances, landlords should take a liberal stance in complying with tenant’s request to grant a tenant improvement allowance for a stated amount when negotiating the terms of a cannabis related lease.
When negotiating with a cannabis tenant, landlord advocates should include the following language in its lease, “Landlord shall not lease to or permit any other occupant, concessionaire or tenant within the building or property adjacent to the building owned or controlled by landlord or any affiliates thereof to operate a marijuana dispensary or similar use to that of tenant.”
In a cannabis related lease, it is imperative that the landlord specify the proper method of payment from the tenant, as the landlord cannot accept cash payments.
In lease negotiations with a cannabis tenant, it is in the landlord’s best interest to maintain the right to terminate its lease if a change of law or prosecution of law concern arises.
In most instances, a fire and casualty clause creates significant exposure to a landlord due to the lack of protective language for the landlord.
A landlord is usually allotted a significant amount of time to inform the tenant of whether or not they will rebuild after a fire or casualty.
Tenant advocates should include an option for tenant to cancel its lease if (a) the casualty occurs during the last two years of the lease term, or (b) the casualty occurs at any time, and the restoration will take between 90-180 days from the fire or casualty, depending on the type of tenancy.
Whether due to it being required by the landlord, inadequate abatement of rent language contained in the lease and/or because you need temporary space, tenants should maintain insurance against loss of rent or rental value due to a fire or casualty in an amount equal to the annual rental for the demised premises.
In the event of a fire or casualty, generally, a landlord will provide a tenant with a rent abatement, regardless of fault.
Many landlords will include in the initial draft of the lease that if a fire or casualty is caused by tenant’s negligence, not only will tenant not receive a rent abatement from the date of casualty through the date of restoration, but tenant will also be liable for restoration costs.
Most fire and casualty clauses effectively allow a landlord to take advantage of a casualty that occurs by being able to cancel a tenant’s below market lease in a market that has risen significantly since lease execution.
Tenant advocates should attempt to delete language in the lease that makes tenant liable for restoration costs in the event of a casualty caused by tenant’s negligence.
To protect against a landlord being able to take advantage of a casualty that occurs by canceling a tenant’s below market lease, tenant advocates should include language in its lease that provides that in order for the landlord to cancel the lease, they must concurrently terminate leases affecting at least 35%-50% of the rentable area of the space leased to tenants in the building exclusive of any rentable area leased by landlord.
Generally, tenants are afforded a full rent abatement following a casualty or fire, regardless of the amount of damage caused.
If the lease states that tenant shall be entitled to a full rent abatement only in the case of a substantial casualty, tenant advocates should try and insert language that provides that the premises shall be deemed substantially damaged if more than 20% of the premises are damaged, if the premises are not accessible, or, if in tenant’s reasonable judgment, the premises is not usable for the proper conduct of tenant’s business operations.
Generally, in a fire and casualty clause, a landlord’s restoration obligation extends to delivering the premises back to tenant with the improvements made by tenant prior to its occupancy.
Generally speaking, a landlord’s restoration obligation after a fire or casualty includes delivering the premises back to tenant as a vanilla box, without the improvements made by tenant prior to its occupancy.
In order to give tenant time to perform its work, tenant advocates should attempt to negotiate language in its fire and casualty clause which states that tenant’s liability for rent shall resume 30 days after landlord has performed its work and delivered the premises to tenant.
Most leases allow a landlord a maximum of 150 days after a casualty to inform tenant whether landlord will demolish, rebuild or terminate the lease.
Tenant advocates should include language in the lease that requires landlord to inform tenant of its decision to demolish, rebuild or terminate the lease within the earlier of (i) 90-120 days of the casualty date, or (ii) when landlord is notified of how much insurance money it will be receiving.
Most leases provide for a rent abatement between the casualty date and the landlord work substantial completion date, regardless of whether tenant is then in default of its lease.
Tenant advocates should at a minimum, insert language into its fire and casualty clause stating that as long as tenant shall not be in monetary or material nonmonetary default under the lease after the expiration of any applicable cure period, then tenant will receive a rent abatement between the casualty date and landlord’s substantial completion of the restoration work.
Generally, a landlord is liable to a tenant for any loss or damage resulting from any other tenant occupying the space adjacent to or adjoining the demised premises.
A tenant advocate should make sure that the lease requires the landlord to maintain insurance on the building for no less than 95% of its replacement value against loss or damage due to fire and other casualties.
In deciding the amount of security deposit to require from its tenant, a landlord will, among other things, evaluate its initial costs (such as how much landlord is paying for any tenant improvement allowance and brokerage fees) and review the tenant’s and its principal’s financial statement, historical track record and business plan.
A tenant’s financial standing is the sole factor a landlord will use when calculating the amount of security it will request and whether or not they will ultimately agree to a future reduction of a tenant’s security deposit.
Generally stated, the shorter the lease term, the greater the tenant concessions and the greater the risks uncovered during a landlord’s due diligence, the greater the amount of security deposit a landlord should demand.
A “burndown” clause essentially states that, so long as tenant is not in default of the lease at a particular point in time during the lease term, then tenant’s security deposit will be reduced (either by way of a return of such reduction or a rent credit).
A “burndown” clause is a useful vehicle for a tenant to negotiate when a landlord requires a security deposit, which is significantly larger than what the tenant anticipated or can afford to lock up for the full term of the lease.
In order to do a “burndown” of the security deposit in the form of a letter of credit, tenants will usually need to provide the landlord with the instruments and authorizations required by the issuer of the letter of credit.
Landlords should require as little security deposit from a tenant as possible to partially mitigate against its short and long term risks.
When negotiating a “burndown” clause when the security deposit is in the form of a letter of credit, it is essential for tenants to negotiate for language stating that upon receipt of the instruments and authorization from the issuing bank, landlord must promptly execute and deliver an amendment to the letter of credit reflecting the reduced security deposit amount.
Tenant advocates need to ensure that the security deposit burndown is applicable so long as tenant is not in default “beyond any applicable notice and cure period.”
Generally, landlords prefer to warrant that the building is in compliance with the Americans with Disabilities Act (“ADA”).
If tenant is unable to negotiate language reflecting landlord’s warranty that the building is ADA compliant, tenant should at least attempt to secure language stating that the premises leased to the tenant is ADA compliant.
Tenant advocates should negotiate for language expressing that landlord is solely liable for existing and future compliance under the ADA, and should indemnify and hold tenant harmless from and against all damages, claims, liabilities, actions and proceedings relating to any failure by landlord to comply with the ADA.
Tenant advocates should negotiate language stating that tenant has no obligation to comply with ADA except and only to the extent that it is applicable to the interior of the premises and only if required as a result of tenant’s alterations or manner of (as opposed to permitted) use.
Landlord advocates should provide in the letter of intent and in the lease that not only shall tenant take the premises “as-is,” as of the lease commencement date and at all times thereafter at tenant’s sole expense, tenant must comply with all present and future laws, rules, codes, orders and regulations of all governmental and quasi-governmental entities, boards, departments and commissions (including but not limited to the ADA).
Landlord advocates should include the following within its lease: “Tenant hereby acknowledges and agrees that notwithstanding anything to the contrary contained in the Lease, it shall be Tenant’s sole responsibility, at Tenant’s sole cost and expense, to install (or modify, as the case may be) any additional restrooms (or modify a bathroom that is in compliance with the American with Disabilities Act, if required) within the Premises as required by any rules, regulations, laws and/or codes of any governmental or quasi-governmental agency prior to the opening of Tenant’s business operations.”
Tenant advocates, if the context of the transaction permit, should wherever possible insist on the following language: “Landlord represents and warrants that the common area and the Premises as of the Lease Commencement Date are (or will be) in compliance with all applicable governmental and quasi-governmental laws and regulations (including, without limitation, ADA Requirements).”
It is in the landlord’s best interest to provide language stating that tenant shall have no obligation to comply with ADA, and landlord shall perform any acts necessary or appropriate to comply with ADA.
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.
At a minimum, landlords should include language in their lease that allows the landlord to enter the tenant’s premises at any time upon reasonable notice, or without notice in the event of an emergency, in order to examine the premises and make any repairs or improvements landlord deems desirable or necessary.
A tenant should attempt to negotiate into the provision that allows landlord access to the premises that in addition to the landlord being required to provide prior reasonable notice prior to any intended entry (unless in events of emergency), that the tenant or his representative must accompany the landlord upon any such entry and that landlord will use “commercially reasonable efforts” to minimize interfere with the tenant’s use and occupancy of the premises.
A tenant should readily agree to allow its landlord to include in its lease that in any situation, landlord is allowed to enter the premises when the tenant is not present.
Tenants should attempt to negotiate language within its lease requiring its landlord to provide a partial or full abatement of rent during any period the landlord is making improvements to the premises and landlord is materially interfering with the tenant’s use and enjoyment of the premises.
Landlords should include in their lease that if the tenant vacates its entire premises during the last month of the term of the lease, landlord has the right to (i) enter the premises and (ii) make any improvements and alterations without any rent abatement or liability to the tenant.
Landlords shouldn’t make sure to have the right in the lease to change any common areas and entrances in the building without the consent of tenant.
A tenant should request in their letter of intent and the lease a provision permitting them access to the property prior to the start date of its lease for the limited purpose of installing furniture, workstations and cabling and/or wiring and for storage purposes, provided it supplies landlord with its certificate of insurance prior to such entry).
Tenants should include a provision within its lease that gives them access to the premises 24/7/365.
A “failure to deliver possession clause” can be described as when a landlord fails to give access of the premises to a tenant by the commencement date stated in the lease.
An “as-is” condition provision does not relieve the landlord of any liability as to the condition of the premises at lease commencement.
An “as-is” condition provision effectively allows a landlord to make no representations or warranties of any kind or nature as to the fixtures, equipment and systems serving the premises.
Except if provided for otherwise in a lease, a commercial tenant will have no recourse against an unsatisfactory condition of the premises, if it has agreed to accept the premises “as-is.”
In a letter of intent and lease, a landlord advocate prefers to include language that states, “Tenant acknowledges that tenant’s taking of possession of the premises shall be conclusive evidence that the premises were in good and satisfactory condition at the time such possession was so taken.”
It is in a landlord’s best interest to include language in a LOI and lease stating, “Landlord shall be responsible for making any improvements or alterations therein or for spending any money to prepare the premises for tenant’s occupancy.”
A tenant advocate prefers to include language in a LOI and lease stating, “Landlord shall not be responsible for making any improvements or alterations therein or for spending any money to prepare the premises for tenant’s occupancy.”
A tenant should attempt to negotiate for language that the landlord represents that on the lease commencement date, landlord shall have substantially completed all of the work landlord is required to complete as described in the lease.
Landlords and their representatives should advocate for language along the lines of, “Landlord represents that landlord’s work will be free of defects for a period of one (1) year after the lease commencement date.”
Landlords and their representatives should advocate for language along the lines of, “Tenant represents that the premises and all electrical, heating, ventilating, air conditioning (if any), plumbing and other systems affecting the same have been inspected by tenant and by tenant’s engineers (or that tenant has waived such inspection or will conduct said inspections by the lease commencement date).”
If a landlord is providing air conditioning and heat, the majority of the time the lease does not address what minimum temperature must be maintained by the landlord in the winter or what maximum temperature is permissible during the high temperature months.
In most office leases, HVAC is provided by a landlord on weekends.
The American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) have a comfort chart of recommended maximum and minimum temperatures that should be maintained in a building.
Tenant advocates should either negotiate building temperatures, or request that the landlord comply with the chart of American Society of Heating, Refrigerating and Air Conditioning Engineers (ASHRAE).
Most office leases provide HVAC during the hours of 8:00 AM – 6:00 PM, Monday through Friday.
Tenant advocates should negotiate with the landlord to provide some combination of: (a) HVAC to tenant’s space from 8:00 AM- 1:00 PM on Saturdays; (b) for the landlord to install a supplemental HVAC system in highly used and/or “after-business hours” areas of tenant’s space; and/or (c) reduced after-hours cost for heat, ventilation and air conditioning.
Landlord advocates should insert language into its lease that provides that tenant shall be required at their own cost and expense to: (i) maintain the air conditioning system, equipment and facilities; and (ii) maintain an air conditioning service repair and full service maintenance contract with an organization approved by the landlord.
If the lease is silent on the issue, at lease expiration, the tenant automatically remains in possession of the entire A/C system.
Landlords should put into its lease that at all times the A/C system remains the property of tenant.
Landlord advocates should make sure that the lease provides that at lease expiration, tenant shall surrender the entire A/C System in good working order and condition to the landlord.
Tenants should try and negotiate that the landlord is responsible for any required replacement of the HVAC system, including without limitation, for major parts and components, to the extent that same is not caused by the negligence, wrongful acts or omissions of tenant.
In many leases, lighting and electricity through wall outlets will be provided by a landlord 24/7/365.
If a landlord charges for any electric usage in excess of 55-60 hours per week, tenants, at a bare minimum, should make sure that the electrical service through the electrical outlets is supplied to the space 24/7/365.
Generally speaking, a tenant’s utility expense would be greater if charged directly from the local utility company, rather than charged by the landlord.
From a landlord’s perspective, if electric is being supplied directly from the local utility provider and a space does not have direct meters in place to measure tenant’s consumption of electricity, the lease should provide that the cost to install and maintain the meter is on the landlord.
The use of sub-meters as a means of measuring a tenant’s electric or water consumption can act as a profit center for a landlord.
In a situation where the landlord provides electric and water to the tenant as measured through sub-meters, it is not uncommon to find a five percent (5%) to fifteen percent (15%) surcharge added to the cost of a tenant’s electric or water bill to cover not only the cost to landlord of having the meter read by a third-party, but also to cover what landlords like to refer to as their “administrative fees.”
In a situation where the landlord provides electric and water to the tenant as measured through sub-meters, tenants should make sure that any administrative fee charged by the landlord is added on to the landlord’s actual cost of purchasing the utility.
Tenant advisors need to confirm whether or not the landlord has sufficient power in the building to meet the tenant’s required electrical capacity, and if the landlord does, whether the landlord is willing to provide it at a reasonable cost.
A landlord advocate should state in its lease that landlord shall be liable or responsible to tenant for any loss, damage or expense which tenant may sustain or incur if either the quantity or character of electric services is changed or no longer available.
Landlords should insert into their lease that tenant covenants and agrees that at all times its use of electric current shall never exceed the capacity of existing feeders to the building or the risers of wiring installations.
Landlords should insert into their lease that landlord may never discontinue any of the utility services under any circumstance without a decrease in tenant’s rent.
For a tenant in a more suburban setting, having prominent monument and/or building signage is a must (assuming tenant has the requisite negotiating power to request same).
For tenants in urban settings or multi-floored suburban buildings which periodically require scaffolding, tenants should negotiate that (i) the scaffolding must double-height; (ii) the landlord should produce and hang the signage for the tenant at its sole cost and expense; and (iii) if the tenant is near a street corner, replacement signage will not only be hung over the store, but on the scaffolding of the cross street to that of the tenant as well.
Tenants in urban settings or multi-floored suburban buildings should not worry about negotiating any rights with regards to the landlord putting up scaffolding at its building.
Where zoning permits signage on a building’s roofs or sides, it is in the landlord’s best interest to not readily give away the space to tenants. A building’s roof and sides can become profit centers for a landlord in the way of signage placement for those wishing to advertise.
When making a decision as to what signage will be allowed on its building, landlords don’t need to consider the fabric, culture, demographics, ethnicity and/or politics of the community before allowing a particular sign to be hung by its tenants.
Listings on the first floor lobby directory are generally limited to the tenant’s proportionate share of the building based on the square footage of its space.
Tenants should consider requesting the right to lobby signage during the negotiation of the letter of intent.
Landlords should include language in the lease stating that tenants may install any sign at the premises at tenant’s sole option.
Landlord’s consent to a tenant’s proposed signage should be subject to and conditioned upon compliance with all applicable codes, laws and regulations of any governmental or quasi-governmental entity.
Tenants should consider having a schematic or picture of its proposed signage pre-approved by its landlord and annexed to its lease.
Signage includes any words and/or designs on windows, doors, canopies, awnings, billboards and other areas outside of the premises.
Landlord advocates should negotiate that the landlord, and not the tenant, is responsible for obtaining any necessary licenses and permits for any of tenant’s signage.
Where appropriate, landlords should consider the insertion of language in its lease requiring tenant to hire landlord’s competitively priced building signage company.
Landlords should make sure they have the option, upon prior notice, to compel tenant to remove any sign in the event such sign, in landlord’s sole but reasonable discretion, interferes or conflicts with landlord’s overall scheme of decoration or décor of the building.
Tenant’s should attempt to delete any right that landlord has to remove signage that landlord deems interferes or conflicts with landlord’s overall scheme of decoration or décor of the building, or at the very least, make sure any such removals, signage redesign and hanging is at landlord’s expense.
Landlords should negotiate the right, at any time, to remove any sign or other attachments to the premises, including canopies or awnings, at such times as it may be necessary or desirable to make repairs to the structure of which the premises forms a part, provided landlord will replace same at landlord’s own cost and expense.
Landlords only need to worry about tenant’s initial signage installation and not about tenant placing any further signage at the premises.
In most cases, the tenant has more leverage in the lease negotiating process after the letter of intent is fully negotiated.
A lease becomes effective once the LOI terms have been agreed to.
One of a landlord’s primary goals is to avoid vacancy of its space.
One of the reasons a tenant loses a significant portion of its negotiating leverage following the LOI stage is because it has gotten a bit “financially pregnant” by hiring its leasing attorney, architect and other third party professionals.
The LOI is a legally-binding document.
The LOI sets the playing field on which the parties will be negotiating the lease.
Most initial lease drafts are arguably among the more one-sided, offensive legal documents known to mankind.
Although a commercial lease is a legal document, most of the language within a lease is of a “business nature.”
Generally, LOI’s are negotiated between attorneys and owners.
When advocating for a tenant, you would prefer to keep the LOI and whatever definitions found within it as narrow as possible.
When advocating for a landlord, leasing professionals should be as detailed yet as broad as possible wherever possible when it comes to preparing and/or negotiating the LOI provisions.
When advocating for a tenant, leasing professionals should be as detailed, yet as broad as possible when preparing and/or negotiating LOI provisions.
Although there is no hard and fast rule as to how large or small the LOI should be, as a general statement, the preferred length of a tenant’s LOI is around one (1) page.
As a tenant advocate, it is imperative to create exit strategies from the lease for clients in the initial draft of the letter of intent.
A tenant should not agree to language within a LOI stating that the premises may be used for any lawful use.
Given that landlords should want the use clause to be as narrow as possible, for a tenant that is going to use the space as a nail salon, the landlord’s draft of the letter of intent should state that the premises may be used as a nail salon and for no other purpose.
As a tenant advocate, where the lease commencement date is tied to landlord’s substantial completion of landlord’s work, at a bare minimum within the letter of intent, the “substantial completion” definition should provide that it shall be deemed to have occurred when landlord’s work has been completed except for minor items which (1) shall not cause interference with tenant’s business operations or the use of the premises and (2) can be completed or remedied by the landlord’s contractor within a reasonable period of time thereafter not to exceed thirty (30) days.
Where the lease commencement date is tied to landlord’s substantial completion of landlord’s work, tenant advocates should insert the definition of substantial completion in their LOI.
If the landlord is performing work to prepare a tenant’s space, from a tenant’s perspective, it is not necessary for the definition of “substantial completion” to be included in the letter of intent.
A property’s lack of a certificate of occupancy that conforms with a tenant’s intended use is not a substantial risk for tenant.
Tenants should negotiate for “outside date” language by which the landlord must substantially complete landlord’s work by an agreed upon date (the “outside date”), and if landlord fails to do so, tenant will receive a day of free rent for each day of delay in landlord delivering the space beyond the “outside date.”
If deleting “outside date” language from a LOI and lease is not an option for a landlord, landlords should make sure that before “outside date” penalties can arise, such penalties are subject to force majeure and tenant delays.
If the lease commencement date is tied into the date landlord’s work is substantially completed, landlords should attempt to have the lease commencement begin on whatever day the premises are actually substantially completed (as opposed to 3-5 days after giving tenant notice of substantial completion).
If the premises are being delivered to a tenant in “as-is” condition, landlord advocates should attempt to have the lease commencement date be the date that a fully executed lease is delivered to tenant or its attorney.
A landlord will generally prefer to amortize any of its costs associated with the lease over the term of the lease, rather than to pay them upfront.
The longer the lease term from a secure and rent paying tenant, the better for the landlord when it comes to refinancing and/or selling the property based off of the net operating income of the building.
From a broker’s perspective, the free rent period should be added to the desired term of the lease (rather than subtracted from the lease term), given that the longer the term of the lease, the larger its commission will be.
When advocating on behalf of a tenant on a potential 10-year deal, try to secure a 5-year lease term with a 5-year option period to provide the tenant flexibility.
Whether you represent a tenant or a landlord in a lease negotiation, it is important to recognize that free rent concessions generally are part of the equation.
In determining the amount of free rent a landlord will give a tenant, a landlord will evaluate current market conditions, the type of use (retail, office or industrial) and other concessions being negotiated such as if there is a tenant improvement allowance and the amount of landlord’s work being requested by a tenant.
Depending on the market, deal type, and other concessions being granted to a tenant, a reasonable amount of free rent for a tenant agreeing to a 5-year deal is between 1 to 2 years.
When a tenant vacates a space, the landlord will incur loss of revenue from the vacancy turnover.
Instead of asking for one hundred percent of a free rent concession to be granted up-front, to make it more appealing for a landlord to grant more free rent, tenant advocates should consider offering to bifurcate the free rent requested by spreading it out over a period of months in either full or one-half month increments.
Landlords should consider adding to its initial lease draft that upon the occurrence of an uncured default by tenant, any rent abatement, concession or other allowance given to the tenant shall be deemed of no further force or effect; and the unamortized amount (calculated on a straight line basis over the initial lease term) of any rent concession, brokerage fee or other allowance should be immediately become due and payable by the tenant to the landlord.
Tenants should attempt to negotiate that any landlord recapture provision relating to free rent should “sunset” (become null and void) after a pre-specified date in the lease (e.g., the 2nd or 3rd anniversary of the rent commencement date).
From a landlord’s perspective, the LOI should limit the ability to exercise the renewal option right, so that it is personal to that of the tenant only.
For a retail tenant, the existence of a renewal option does not make the value of its lease significantly stronger.
Tenants should negotiate for the right to exercise the renewal option by not only the named tenant, but also by any parent, affiliate, subsidiary or permitted assignee of the named tenant.
For a lease where the rent will be pre-established for the renewal term, tenants should attempt to have the landlord provide a tenant improvement allowance at lease renewal of roughly $5 to $15 PSF.
Ideally for tenants, the rent for the renewal term will be fixed and not based on fair market value (“FMV”).
As a landlord advocate, not only should you insist that the renewal term rental will be 100% of the fair market value (“FMV”), but you should also create a floor on the FMV by providing that the renewal rent shall be no lower than the net effective rent at lease expiration plus 3% to 5%.
For renewal rents based upon fair market value, tenant advocates should seek for (a) the renewal term rental amount to be 90%-95% of fair market value, and (b) the fair market value to be based upon all “relevant market factors.”
In many leases, in addition to a real estate tax escalation, among the more popular (or unpopular, depending on your perspective) rent escalation provisions are those which require the tenant to pay its proportionate share of operating expenses over a base year, and an agreed upon increase in fixed rent based upon a predetermined percentage increase.
Generally, most landlord advocates prefer a CPI or straight predetermined percentage bump in the rent as opposed to an operating expense escalation.
To the uninformed tenant (and a large portion of leasing professionals negotiating the clause), the language contained in an operating expense clause operates as a profit center for the landlord.
Decorating, snow and ice removal, and service contracts are generally not included in the operating expenses of a building.
Most operating expense definitions found within a commercial lease are extremely broad, and moreover, many include a number of costs considered to be capital in nature and contain built-in profit components.
Tenants are in the business of leasing out their space for profit, and conversely, landlords are in the business of leasing out space from a tenant to conduct their business operations in order to make profit off of such operations.
An example of how tenant advocates can lessen the way the operating expense clause can operate as a “profit-center” for the landlord is to make sure that any item of a capital nature included in operating expenses is based upon the remaining term of the lease to the useful life of the capital expenditure itself using Generally Accepted Accounting Principles (“GAAP”), and not on the useful life “as determined by landlord in its sole discretion.”
Landlord advocates should consider requiring its tenant to use a firm, which will charge the tenant for an audit of landlord’s operating statement on a contingency basis.
Tenants should attempt to negotiate that in no event shall the initial payment required by tenant relative to the operating base year occur prior to the twelve month anniversary of the rent commencement date.
Tenants who are paying their proportionate share of the increase in operating expenses over a base year don’t need to be concerned with the specific year the base operating year will be.
A strong argument can be made that when a tenant pays a percentage rent increase in addition to the fixed rent in lieu of an operating expense escalation, the landlord is actually “double dipping” and creating more profit for itself (given that the percentage rent increase is effectively applied against the landlord’s operating costs and profit margin).
Tenant advocates should insist that percentage rent increases be applied on an annual cumulative basis (instead of, for example, every 5 years).
Operating expenses never include costs attributable to wages, salaries and benefits of building personnel.
Operating expenses never include costs attributable to repairs and maintenance of the building.
Operating expenses never include costs attributable to ownership, management and repair and maintenance expenses.
Operating expenses do not include costs attributable to the wages, salaries and benefits of tenant’s employees.
Subject to certain exceptions, a tenant’s proportionate share of real estate taxes is typically based on the rentable square footage of the premises divided by the rentable square footage of the building.
In both the LOI and lease, it is in the interest of the landlord to include the basis for the proportionate share calculation.
In jurisdictions where real estate taxes are calculated off of the income generated by a building, landlords at a bare minimum should require their tenants to pay their proportionate share of real estate taxes based upon the approximate rent of such commercial tenant to that of the rent of all tenants in the building.
It is in the best interest of the tenant to have Business Improvement District (“BID”) charges as a straight pass through to the tenant, as opposed to included within the definition of real estate taxes and subject to an annual escalation.
Tenant advocates would prefer that the landlord only include expenses within the definition of real estate taxes that decrease the taxes or prevent or limit an increase to the taxes.
Tenants should attempt to secure language stating that the base year tax is to be computed as if the building was fully assessed and no longer subject to abatement.
Tenants should secure language that if the amount of taxes payable during the base year is reduced by final determination of legal proceedings, settlement or otherwise, the reduction shall be disregarded for the computation of tenant’s percentage of taxes payable under the lease.
A letter of credit security deposit creates significantly greater risk to a landlord than a cash security deposit.
It is always in the tenant’s best interest to put off the determination of the amount of the security deposit to the lease negotiation and have included in the letter of intent, “Subject to Landlord’s review of Tenant’s and its Principals Financial Statements and Returns.”
The following factors generally increase the amount of the security deposit: a shorter lease term, a tenant’s weak financial statements, and a large landlord concession (such as free rent and/or a tenant improvement allowance).
At its most basic level, a good guy guaranty is a document wherein a tenant’s principal or principals personally guarantee that the rent for the entire term of the lease will be paid, even if the tenant has surrendered the space and paid all rent through the date of surrender.
It would be advantageous for the landlord to have the guarantor guarantee the performance of non-monetary lease covenants such as repairs (in addition to the guarantee of payment).
With regards to the good guy guaranty, landlord advocates want the letter of intent to state, “Tenant’s principals will sign landlord’s standard good guy guaranty” and nothing more.
In a situation where the landlord is requiring a good guy guaranty (“GGG”), tenant advocates should try and secure language within the letter of intent akin to a “basic” GGG such as, “Tenant’s principal to guarantee the payment of Base Rent while the Tenant is in occupancy of the Premises. Tenant’s principal can unilaterally terminate the good guy guarantee by providing 30 days’ prior written notice to Landlord of its intention to surrender the premises, delivering the Premises broom clean and vacant to Landlord on the Surrender date, and lastly, paying all rent due and owing to Landlord through the surrender date on or prior to the date of surrender.”
Tenants should negotiate an “exit strategy” that would release the guarantor from a good guy guaranty upon assignment of the lease, if the assignee’s principals sign a replacement good guy guaranty.
“RSF” stands for reusable square footage.
Loss factors are greater for a space on divided, multi-tenant floors than full floor spaces, since there is more common area on a divided floor.
It would not be unreasonable for a tenant to request the right to verify the rentable square footage (RSF) of the premises by way of re-measurement prior to the lease commencement date.
Among an estoppel, tax abatement, assignment and subletting, and repair and maintenance provision, the most important clause to negotiate a tenant’s potential exit strategy from a lease would be the assignment and subletting provision.
The letter of intent is a binding document that plays an integral part in setting the playing field on which the lease will be prepared and negotiated.
The fact that a landlord has not been able to find a tenant to occupy a particular space for over one year will diminish a prospective tenant’s leverage in relation to that space.
In a letter of intent (“LOI”), a tenant should readily agree to a provision, which states, “Tenant agrees to the terms and conditions of landlord’s standard assignment and subletting clause.”
In the letter of intent (LOI), a tenant’s advocate should attempt to negotiate language stating, “Landlord shall have no profit sharing rights for transfers to a related entity of tenant, a permitted transferee, or for permitted occupants.”
In the letter of intent (LOI), a tenant’s advocate should attempt to negotiate language stating, “Tenant shall be allowed to sublet or license up to one-third (1/3) of its space for uses similar to that of tenants permitted use (a “permitted occupant” or “desk sharer”) without landlord’s consent or right of recapture and profit sharing.”
At a minimum, a tenant should negotiate that the landlord not unreasonably withhold, condition or delay its consent to tenant’s request for approval of an assignment of the lease or a sublet of all or a portion of the premises.
In the event that a tenant attempts to sublet its space or assign its lease, it is in the landlord’s interest to negotiate for the option to either terminate the lease by recapturing the tenant’s space, or leaseback all or portion of the tenant’s space.
If a tenant requests landlord’s consent to assign its lease and landlord has a right of recapture, a landlord will more often than not recapture a tenant’s premises where the market rent for the tenant’s space is far below the rent which the tenant is currently paying under the lease and a significant amount of lease term remains.
In response to a landlord’s ability to recapture or leaseback the premises in the event that a tenant attempts to sublet out its space or assign its lease, the tenant should negotiate that such landlord right shall not apply to transfers to a related entity of tenant, a permitted transferee, or for permitted occupants.
A tenant can generally limit the cost of its electric bill by (i) incurring the charge directly from the local utility (i.e., by “going direct’) or (ii) paying the landlord for electricity used as measured by a sub-meter installed for the premises at landlord’s actual cost without markup from the landlord.
A direct electric provision in a lease is generally less cost-efficient for a tenant than a sub-metered electric provision.
When paying a landlord for electricity on a rent-inclusion basis, tenants should request that electrical services through the electrical outlets in the premises be supplied 24/7/365.
If the amount of watts provided is stated within the lease, a tenant is not allowed to request additional electrical capacity.
For a refurbished space, a tenant should insist that all light bulbs be changed prior to the commencement date by the landlord at no cost to the tenant.
Tenants should request the right to have early access to the premises (i.e., 15 business days prior to the lease commencement date at no charge for the purpose of installing wiring, cabling and servers, and possibly workstations and furniture) as early as the first draft of a letter of intent.
A tenant’s right to early access to the premises can only be for taking measurements and preparing tenant’s construction plans.
Landlords prefer to limit a tenant’s rights during early access as much as possible (as they prefer, for example, to not allow the tenant to install or store their workstations during any early access period).
The majority of leases do not address the minimum temperature that must be maintained by the building owner in the winter and maximum temperature a space can be during the summer.
The American Society of Heating, Refrigerating and Air Conditioning Engineers (ASHRAE) seeks to advance technology to serve humanity and promote a sustainable world (in addition to having created the “ASHRAE Comfort Chart”).
Whenever possible, tenants should negotiate for its landlord to install a supplemental HVAC unit in the demised premises (e.g., in its IT server room).
Tenants should always agree to be responsible to repair and replace the major parts and components of the HVAC system.
A tenant’s advocate should push for language stating that the entire HVAC system is and shall at all times remain property of landlord, and at the expiration or sooner termination of the lease, tenant shall surrender to landlord the entire HVAC system in good working order and condition.
In a landlord’s ideal world, its landlord’s work LOI provision should merely state: “Tenant accepts the premises ‘as-is’.” By doing so, the inclusion of “as-is” language within its initial lease draft will generally (a) relieve the landlord of any liability as to the condition of the premises, and (b) allow the landlord to avoid providing the tenant with any representations or warranties as to the quality and condition of the then existing improvements within the space.
For tenants not willing to take its space “as-is,” assuming that the tenant will not be leasing a pre-built or turnkey space, after a tenant’s inspection of the space, it should assemble a “wish list” of those items the landlord must complete prior to the delivery of the space to the tenant.
Tenant needs to be as detailed as possible as to what specifications and finishes are considered “building standard” (such as a hollow wooden door instead of a solid wooden door), prior to agreeing to a landlord’s work letter.
In regards to a tenant improvement allowance (“TIA”), the tenant should include language stating that (a) at the tenant’s option, landlord shall make the payment to tenant as a reimbursement, or at tenant’s option, directly to tenant’s contractor; and (b) in the event tenant does not use all of the TIA, at its option, tenant may apply the balance as additional free rent.
Tenant advocates should provide language in the LOI requiring the tenant to reimburse the landlord for all of the landlord’s costs and expenses incurred in reviewing tenant’s plans and for additional costs that landlord may incur as a consequence of tenant changing its plans after landlord’s initial review.
Once a landlord approves tenant’s plans and contractors and tenant secures its building permits, the lease should contain an express requirement that the tenant (a) commence its work immediately, (b) proceed diligently in order to complete the work lien free within a reasonable period of time, and (c) must use “first class materials.”
Tenants should try to negotiate language allowing any and all initial improvements made to the space to remain (and not be required to be removed) at lease expiration, in tenant’s discretion.
If a landlord allows the tenant to leave all of tenant’s “ordinary” improvements in the space at lease expiration, it should also allow tenant to leave all “specialty alterations” at lease expiration.
For landlord advocates, it is imperative that the landlord retain control over the look, feel, and design of a tenant’s signage.
It is only important to the tenant to have the right to control the look, feel, and design over a tenant’s signage for retail space.
Once a tenant receives landlord’s consent, tenant’s signage does not have to be subject to and conditioned upon all applicable laws, codes, rules and regulations of any governmental or quasi-governmental entity.
The landlord’s process in reviewing a tenant’s proposed signage should not be explicit in the lease.
If possible, prior to lease execution, a tenant should prepare a design of their proposed signage to be pre-approved by their landlord and annexed to their lease.
For tenant advocates in office spaces, it is imperative to ask for hallway and/or door lobby signage in the LOI.
Landlord advocates should contain language in their leases that (i) the tenant’s signage will comply with all applicable regulations and ordinances of any department, municipal or other agency asserting jurisdiction, and (ii) the tenant will obtain all necessary licenses and permits.
Prudent landlords will ensure that tenant is obligated to comply with reasonable design, safety and construction considerations with regards to its signage installation.
Tenant advocates should negotiate that the landlord will be allowed to use any scaffolding to display signage of a nature not related to a tenant of the building.
A landlord should not be concerned as to whether or not the lease requires tenant to obtain the necessary licenses and permits required for any signage that tenant installs.
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 SDNA 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.
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.”
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).
Generally speaking, most leases provide that all fixtures, partitions and like installations installed in a tenant’s space by the tenant, or the landlord on behalf of the tenant, shall thereafter become the landlord’s property and remain on the premises after the tenant vacates, unless landlord notifies the tenant otherwise.
Many leases provide that the landlord may notify tenant that all fixtures, partitions, and/or installations installed by tenant or by landlord on tenant’s behalf, must be removed by tenant at its sole expense prior to the lease expiration date.
In the event that the tenant does not comply with landlord’s notice to remove fixtures, installations, partitions and such that tenant is required to remove from the premises at lease expiration, the landlord will generally remove the items at landlord’s sole cost and expense.
Landlords generally do not require the tenant to remove specialty alterations at the end of a lease.
Tenant advocates should attempt to delete language in the lease, which states that the landlord may, in its sole discretion, require the tenant to remove any installation made by tenant or by landlord on tenant’s behalf at lease expiration.
The following language is pro-landlord and should not be agreed to by a tenant advocate in the lease: “In no event shall tenant be required to restore the premises to the condition prior to the construction of the leasehold improvements. Additionally, the tenant shall not be liable for minor damage to the carpet, ceiling, and walls of the building and/or premises caused by the tenant’s removal of any fixtures or materials it may be required or has elected to remove from the premises.”
Tenants usually don’t have the negotiating power, and therefore should not attempt, to eliminate language expressing the tenant’s liability for “reasonable wear, tear and casualty” in the removal of fixtures, materials and equipment in the space.
A tenant advocate should negotiate for language in the lease along the lines of: “Notwithstanding anything to the contrary contained in the lease, as to any alteration allowed to be made by the tenant, the tenant shall not be required to remove such alterations at or prior to the expiration of the term of the lease.”
When a tenant is at a stalemate with a landlord in relation to tenant’s restoration and removal obligations, a compromise that a tenant advocate can suggest is: “When tenant seeks landlord’s approval to perform an alteration to its space, it shall not be required to remove the alteration provided landlord does not request it to be removed when landlord grants its approval to the alteration being requested.”
A built-in vault, a sound room for recording, a raised floor, an internal staircase, a decorative floor with a tenant’s embossed logo, mirrored walls or ceilings, and internal staircases are common examples of items considered to be specialty alterations.
In most leases, a tenant’s wiring and cabling must be removed at lease expiration.
Due to the tenant’s responsibility to remove its wiring and cabling in most instances, upon installation, a tenant should tag the wiring and cables as belonging to them.
A tenant’s restoration and removal obligations are separate from many of its other obligations under the lease.
A landlord’s good guy guaranty should require that in order for the good guy guaranty to be terminated, the tenant and the guarantor must surrender the premises “broom clean and vacant.”
It is in the landlord’s best interest to provide the tenant with a broadly defined use clause.
Generally, landlords prefer to define the tenant’s use clause very narrowly in order to have control over its property, the profits derived therefrom, and its tenant mix.
A use clause has no impact on a tenant’s ability to assign or sublet its space.
For a tenant, a broad use clause enables the tenant to have greater flexibility when trying to assign or sublet its space.
A use clause which states “for any lawful retail dry or wet use,” is non-beneficial for the tenant.
Landlord advocates should include language into the lease along the lines of: “Tenant must agree that it and anyone holding through tenant shall not use, sublet or assign all or any portion of the premises to any subtenant or assignee who will use the premises or a portion thereof for certain designated uses nor for any other use which is substantially similar to certain designated uses” (with a list of the prohibited designated uses included in the lease).
In determining a tenant’s use, the landlord should not consider the exclusivity provisions that it agreed to with other tenants in the building.
The following usage restrictions are examples commonly found within commercial leases: (i) no federal, state or local governmental division or agency which generates heavy public traffic; (ii) no union or labor organizations; and (iii) no chemical or pharmaceutical company.
When evaluating whether to permit a certain type of use, landlords won’t ordinarily consider whether the use will increase operating expenses of the building or add to traffic in the lobby of the building.
Common remedies for landlords if their tenant breaches the exclusive use provision in the lease are the right to restrain the same by injunctive relief and/or terminate the lease.
In a commercial lease, security deposits and good guy guarantees are used by landlords to manage short-term and long-term financial risks.
As a tenant, you never have less leverage in the transaction than when negotiating the letter of intent (“LOI”).
As a landlord, you should keep your letters of intent as narrow as possible to get your tenant into the negotiation stage of the lease.
A tenant’s attorney or broker should include various exit strategies from the good guy guarantee within the letter of intent.
The longer the lease term, the greater the period for the landlord to be able to recoup its upfront costs.
The following factors will increase the amount of security deposit a landlord will require from the tenant: (i) the tenant being a shell corporation; (ii) the tenant putting little or no money into the space; and (iii) there being no guaranty.
Typically, the tenant performing all of the work to prepare the space will increase the amount of security deposit its landlord requests.
A healthy balance sheet and profit and loss statement of a prospective tenant will work to reduce the exorbitant amount of security deposit that a landlord might require.
Generally speaking, the greater the commissions, the greater the concessions, the greater the allowances given by the landlord, the shorter the term, and the worse the financials; the smaller the security deposit is going to be.
Landlords should try to base a tenant’s security deposit on the rent payable during the last year of the lease term.
A security deposit “burndown” is a provision wherein after a specific timeframe, if the tenant isn’t in default of the lease, the landlord will reduce the security deposit by refunding the money to the tenant or having it credited towards the rent.
The costs of securing the deposit and having money tied up are not factors a tenant needs to consider when negotiating the amount of security deposit with the landlord.
As a consequence of bankruptcy laws, it is beneficial for landlords to require tenants to have security deposits in the form of a letter of credit over cash.
A letter of credit is a contract between the bank and the landlord as to the funds of the tenant that have been segregated.
A letter of credit is considered part of a tenant’s estate in bankruptcy.
It is safer and more secure for a tenant to have its security deposit in the form of cash than a letter of credit.
Tenants should explore the annual administrative cost that a bank will charge you for having a letter of credit. Administrative costs generally range somewhere around 1.5% to 2% of the security deposit per year.
If you’re given the option as a tenant between a cash security deposit where the landlord is holding your money or a letter of credit where a bank is holding your money, the landlord holding the money is a safer, more secure option for the tenant than the bank.
Given the risk to a subtenant of losing its security deposit if the sublandlord defaults under the master lease and the subtenancy is terminated, subtenants should try and either (i) have the sublandlord’s attorney hold the security deposit in escrow, or (ii) have the security deposit in the form of a letter of credit.
From the perspective of a landlord that is small in nature and dealing with large upfront costs, even if the tenant is a bankruptcy risk, such landlords ordinarily prefer the cash security deposit for cash flow purposes.
When the principals of a tenant hesitate to give the landlord a basic good guy guarantee, it sends up a red flag often perceived as foreshadowing a breach of the most basic of covenants a tenant makes to a landlord; to pay rent.
When a tenant gives back its space early and the guarantor is released from the good guy guaranty, because the lease is still in effect, the tenant will lose its security deposit.
If a tenant gives back its space early (e.g., in year six (6) of a twelve (12) year lease), not only is the guarantor let off the hook of a good guy guarantee (“GGG”) (assuming the conditions in the GGG are met), but the tenant is let off the hook as well.
If a tenant gives back its space early and releases the guarantor from the good guy guarantee, the tenant’s lease is terminated as well.
If you are a tenant or guarantor thereof, you should attempt to have the good guy guarantee be a guarantee of monetary and non-monetary obligations.
It is very important for landlords to be mindful of the tenants’ obligation to give notice under the good guy guarantee as to when they’re vacating the space.
The lesser the amount of advance notice required of tenant to terminate its good guy guarantee, the better it is for the tenant/guarantor.
In addition to paying the rent through the date of surrender and delivering the space broom clean and vacant in order to terminate the good guy guarantee, tenant advocates need to be mindful that some good guy guarantees also require that the landlord must be reimbursed for its unamortized free rent concessions, tenant improvement allowances, brokerage commissions and its cost of landlord’s work.
As a condition to terminating the good guy guarantee (“GGG”), tenants and guarantors would prefer the GGG to require that the tenant give back the space “in the condition required under the lease” rather than “broom clean and vacant.”
If the good guy guarantee (“GGG”) requires the tenant to reimburse the landlord for its unamortized costs as a condition to terminate the GGG, a reasonable compromise the tenant can offer is to have the reimbursement of unamortized costs “sunset” (or go away) after the first 2-5 years of the lease term.
Given that almost all guarantees provide that the guarantor remains on the hook if the lease is assigned, it is very important for tenants and their guarantors to include provisions in the good guy guarantee that will allow for the release of the guarantor if a sale of the business or an assignment of the lease occurs, subject to having at least one or more of the principals of the assignee signing a good guy guarantee in similar form.
The assignment and subletting and good guy guarantee provisions go hand and hand, and if negotiated properly create a great deal of flexibility for a tenant.
A landlord should limit the definition of additional rent in a good guy guarantee to solely tenant’s payment of taxes, or if there is also an operating expense clause in the lease, to taxes and operating expenses.
It can be beneficial for a tenant to reinforce a landlord’s trust by committing to some of the terms in the good guy guarantee, because down the road, it can pay dividends for the tenant in the form of other items the landlord will agree to.
When representing a tenant with more than one principal signing the good guy guarantee (“GGG”), the tenant advocate should put into the GGG and the letter of intent that if one of those principals later withdraws from the corporate tenant, the obligations of the withdrawn member under the guaranty may be terminated unilaterally by that withdrawn party, provided that the remaining guarantors remain as guarantors.
Especially for a retail lease, tenants should expand the right to exercise a renewal option beyond only the named tenant, to any parent, affiliate, subsidiary, permitted assignee or subtenant of the named tenant.
Tenants should attempt to have the landlord provide a tenant improvement allowance at lease renewal of at least $5 to $15 PSF to allow the tenant to paint, carpet or otherwise improve its then “tired space.”
Many leases subtly, yet effectively, strip a tenant of its renewal rights if it has “ever been in default during the lease term.” To combat that impact, at a minimum, change the words “ever in default” to “then in default” and add the language “beyond the expiration of any applicable notice and cure period.”
Landlords prefer as much notice as possible (e.g., 9-12 months prior to lease expiration) for a tenant to exercise their renewal option. If the rent during the option period is tied into fair market value, given the time it takes to negotiate the renewal terms, the larger notice period can be beneficial for a tenant. However, if there is a pre-established rent for the option period, it’s preferred for the tenant to only have to exercise the renewal option 4 to 6 months prior to lease expiration.
Generally speaking, a common landlord fair market value (“FMV”) renewal option provision will state that the renewal rent will be the greater of (a) 95% of FMV; or (b) the base rent then in effect at lease expiration minus all tax, operating and other escalations.
If the rent during the renewal term is based on fair market value, a tenant needs to make sure that for the renewal term they keep the same tax and operating base year.
If the rent during the renewal term is based on fair market value (“FMV”), it is important for tenants to define exactly what FMV rent means within the lease.
When a tenant moves to another building, a landlord not only losses the revenue stream, but also incurs costs in finding a new tenant in the form of paying: (a) a full brokerage commission; (b) tenant improvement allowances, landlord demolition and space build-out costs; and (c) free rent concessions.
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.
Tenants should be aware of language within a lease wherein landlords shift the legal and financial burden of compliance with applicable laws pertaining to its space and its proportionate share of the buildings to tenants.
Tenants should readily agree to language in a lease that requires that tenant be in compliance with present law and future laws, regardless of whether or not tenant’s space was in fact legally compliant on the date possession of the space was delivered by the landlord.
A tenant should attempt to revise or eliminate language in its lease that states that tenant is “taking the space ‘as-is’, with no representations or work of any kind or nature required by landlord.”
Tenants should take an “it is what it is” mindset and accept language in its lease that the landlord will deliver the space and the building in non-compliance with applicable laws.
It is not important to a tenant for the landlord to represent and warrant that the premises is in compliance with all applicable laws upon delivery to the tenant.
Tenants should include language in the lease stating that “The tenant shall be under no obligation to remedy any current non-compliance of the premises as of the lease commencement date with applicable laws.”
Tenants should negotiate for language in the lease which states that, “Tenant must comply with any law or cure any illegal condition if the illegality or necessity to comply existed or arose before the tenant took possession of premises.”
Tenants should negotiate a carve-out in the compliance with laws provision of the lease, which expresses that any act or omission of landlord (or landlord’s employees, agents, contractors or representatives), which causes an illegal condition in the space, should be the tenant’s responsibility to cure.
From a landlord’s perspective, tenant’s should not be required to pay their proportionate share of any money spent by landlord for alterations or improvements to the building that are required to be made pursuant to law or regulation after the lease start date.
If a lease provides that tenant is required to pay its proportionate share of any money spent by landlord for alterations or improvements to the building that are required to be made pursuant to law or regulation after the lease start date, tenant advocates should at least make sure that the expense passed through to the tenant is spread over the asset’s useful life on a straight-line basis in accordance with GAAP (i.e., Generally Accepted Accounting Principles) and not upon a useful life determined in landlord’s sole (and maybe reasonable) discretion.
If a lease provides that tenant is required to pay its proportionate share of any money spent by landlord for alterations or improvements to the building that are required to be made pursuant to law or regulation after the lease start date, tenant advocates should make sure that the period of amortization for the improvement is spread over either the term of the lease or payable in a lump sum.
It is in the tenant’s best interest for the useful life of an improvement or alteration be determined in landlord’s sole discretion.
With regards to alterations or improvements to the building that are required to be made pursuant to law or regulation, IRS tax rules don’t allow a landlord to accelerate the period over which certain improvements are amortized.
As a tenant advocate, you should attempt to make sure that the lease contains language wherein the landlord represents that, to the best of its knowledge, the demised premises are in compliance with all applicable legal requirements, both as of the lease execution date and the lease commencement date.
It is uncommon to find language in a commercial lease along the lines of, “Failure to any extent to make available, or any slow-down, stoppage or interruption of, services resulting from owner’s compliance with any law or requirements now or hereafter established shall not render owner liable for damages or entitle a tenant for an abatement of rent.”
Tenants should attempt to secure language that provides that when confronted with a business interruption scenario, its rent will be abated if the interruption continues for greater than a three (3) to ten (10) business day period.
From a landlord’s perspective, landlords should make sure that the lease clearly states that the tenant is responsible for all hazardous materials introduced to the building and/or premises through tenant.
Tenant advocates should counter language that makes tenant responsible for hazardous materials at the premises or the building with language that tenant shall not be liable for any hazardous materials existing in the premises and/or the building (a) prior to the lease commencement date or (b) 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.
Whether negotiating a lease for a new location or a renewal of a tenant’s existing location, and regardless of whether the deal is for an office, retail or industrial location, granting (or receiving) free rent needs to be part of the equation.
Factors which don’t impact how much free rent a landlord may be willing to give a tenant include: current market conditions; whether the lease is for office, retail or industrial space; the other concessions a tenant is seeking from the landlord; the financial strength of the tenant; and the length of the lease term.
Given that in most instances for retail tenants, the tenant (and not the landlord) is performing all or the majority of the initial installations to ready the premises for tenant’s occupancy at their own expense, retail tenants have a weak argument that the tenant should receive a larger amount of free rent.
In regards to retail transactions, given that in most instances the tenant (and not the landlord) is performing all or the majority of the initial installations to ready the premises for tenant’s occupancy at their own expense, tenants have a strong argument that it should receive a large amount of free rent.
Depending on the market, it would be unreasonable for a tenant to request 2-5 months of free rent on a 5-year deal, and 4-9 months of free rent on a 10-year deal.
An existing tenant renewing their lease shouldn’t ask the landlord for any free rent concessions.
Generally speaking, a tenant is usually able to receive more free rent from its landlord on its renewal than what they received at lease commencement.
A tenant can make it more appealing for a landlord to be generous with offering free rent by agreeing to bifurcate the free rent by spreading it out over a period of months instead of asking for it all to be granted up-front.
Given the many costs to a landlord if an existing tenant relocates to a competitor’s building, landlords should consider granting some type of free rent to a tenant on a renewal, though at a fraction of what they might have initially given at lease commencement.
Given that granting a tenant improvement allowance requires a landlord to go into its own pocket, most landlords would generally prefer to grant a free rent concession to a tenant, as opposed to an improvement allowance.
Generally, most landlords prefer to give a tenant an improvement allowance as opposed to a free rent concession.
Tenants should accept however the landlord chooses to charge them for costs associated with alterations or improvements to the building that are required to be made pursuant to law or regulation after the lease start date.
A landlord advocate should have language in the lease stating that if there is an uncured default by tenant, the free rent granted at lease execution will need to be paid back to the landlord.
A landlord advocate should include language in the guaranty that provides that in order for the principals of a tenant to be personally relieved of their obligations under a “good guy” or straight guaranty, they will need to pay their landlord the unamortized free rent concessions at the early termination date of the lease.
Tenants should include language in the lease that in the event there is an uncured default by tenant, tenant is required to pay back to the landlord the free rent granted at lease execution.
Tenant’s should be aware that a landlord’s concession dollars are fungible, so the more the tenant receives in free rent, the less they will receive in other areas from the landlord.
If a tenant is unsuccessful in deleting the requirement to payback the landlord any free rent granted at lease execution if there is an uncured default by tenant, they should attempt to implement a “sunset” provision in the lease, eliminating landlord’s right to recoup the free rent funds after a specified period of time.
Abatement of rent is the addition of a portion of rent during the lease term.
Abatement recapture is a provision contained in a lease which conditions tenant’s receipt of free or abated rent, a tenant improvement allowance, any cash or other bonus, inducement or consideration for tenant’s entering into the lease upon tenant’s full and faithful performance of all of the terms, covenants and conditions of the lease.
Absorption is the amount of inventory of leasable space that became leased during a particular time period in a specific market, typically reported as the absorption rate.
Absorption rate is the rate at which available properties are leased in a particular market during a specified time period, usually expressed as a percentage of total square footage.
An accelerated rent provision is a lease clause requiring immediate payment of all sums due for the balance of the lease term subsequent to an uncured tenant default or early lease termination event.
An ACP-5 is a certificate indicating the presence (or lack thereof) of asbestos containing material in compliance with applicable law.
An ad valorem tax is a tax based upon the assessed value of real estate or personal property.
ADA compliant is a term describing a commercial property that complies with the Americans with Disabilities Act (“ADA”).
The add-on factor is all sums due to a landlord pursuant to a lease other than base or fixed rent, which may include, among a plethora of items, real estate taxes, common area expenses, operating cost escalations, sub-metered charges and attorneys’ fees payable to a landlord.
An alteration is work performed or to be performed to the outside of a building, generally considered to be structural work.
The Americans with Disabilities Act is a federal law prohibiting discrimination against individuals with disabilities in employment, transportation, public accommodation, communications, and governmental activities.
Amortization can be described as the process of spreading out the deduction – often on a straight line basis – of capital expenses, loans, free rent concessions or even tenant improvement allowances granted by a landlord to a tenant over a period of time.
Amperage is the term used by tenants to describe how they can maximize the use of its space.
An anchor tenant is a major or principal tenant serving as the primary draw to a shopping center or building.
Antenna rights are the rights of a tenant, at its sole cost and expense, to install, service, maintain, and replace during the term of its lease an antenna (often limited to 18 to 24 inches in diameter) for their use and not for use by any other party.
Architectural fees are the costs of the services of an architect to a landlord or tenant, usually expressed as either a percentage of the total contract amount or based on the square footage of the space.
The ASHRAE comfort chart is a standard often requested by tenants in a lease requiring that HVAC shall be provided to a tenant’s space at minimum specified standards to maintain year round comfort.
“As is” or “as-is condition” is the existing condition of the premises with all faults and defects and without repair by landlord.
Attornment is a provision in the lease detailing the rights of, and procedures for, allowing (or not allowing) a tenant to assign its lease (whereby tenant’s entire interest in the lease and the premises to which it relates is transferred to another party), or to sublet all or a portion of the premises to another party (whereby a tenant transfers less than its entire interest in the lease and the premises).
Assignment is a transfer by a tenant of its entire interest in the lease and the premises to another party.
Attorn or attornment is the agreement and acknowledgment to “become the tenant” of a new landlord for the building (e.g., in the case of the current landlord’s mortgage being foreclosed) or to the owner of the same property.
Base rent is the minimum or base amount of rent payment as set out in a lease and is often referred to as “fixed rent.”
A base year is the year used in a lease for comparison in the measure of a business activity (the “breakpoint” for percentage rent payable to a landlord in some retail leases) or economic index (the fiscal or calendar base year for operating cost or real estate tax escalations).
Licensed professionals who represent buyers, sellers, landlords, and tenants in arranging real estate transactions for a commission or fee are known as brokers.
A brokerage agreement is the agreement detailing the relationship between a landlord and a broker (or a tenant and broker) and the myriad of terms and conditions relating to if, when, how, by whom and at what rates a fee shall be paid to a brokerage company for the services conducted by it on a real estate transaction such as an executed lease or a closed sale of real property.
The fee paid to a brokerage company for the services conducted by it on a real estate transaction such as an executed lease or a closed sale of real property is known as the down payment.
Broom clean condition is the absolute minimal condition a space should either be delivered to a tenant at possession or returned to a landlord at lease termination, (e.g., all carpets and floors broom swept and/or vacuumed, and all personal property (which has not been included in the lease to remain in the premises), trash and other debris removed).
The working definition often used by many for defining builder’s risk insurance is coverage to protect an individual and/or entity’s insurable interest in fixtures, materials, and/or equipment used in the construction or renovation of a building or structure in the event those items sustain any loss or damage from a covered cause under the policy.
When it comes to building classifications, the highest-quality office spaces on the market are considered Class A. Generally speaking, these spaces are newly constructed (or recently retrofitted) and have been outfitted with top-of-the-line fixtures, amenities and systems. Class B properties are considered “average” as far as office spaces go.
A building code is a set of rules and regulations provided by the landlord that all tenants in the landlord’s building must abide by.
Building standard is a particular style and level of quality (and quantity in certain instances) of building materials, finishes, and accessories (e.g., paint, carpet, fixtures, lighting, flooring, doors, etc.) used by a landlord in a specific commercial building.
Improvements made to the interior of the leased premises according to a tenant or landlord’s building specifications are known as built-ins.
A burndown (also referred to as a “reduction”) of a security deposit is a provision in a lease permitting the amount of the required security deposit to decrease over time subject to specified benchmarks and conditions.
Carrying charges are expenses incurred as a result of property ownership, including maintenance costs, real estate taxes, insurance and mortgage payments.
A cash security deposit is cash given at lease execution to a landlord from a tenant as “collateral” to ensure tenant’s performance of its monetary and non-monetary covenants under the lease.
Caveat emptor is Latin for “let the buyer beware.” In the context of real estate, it stands for the principle that the buyer (or tenant) bears the burden to inspect the property before purchasing (or leasing) it at his or her own risk.
A certificate of occupancy is a document issued by a local government agency or building department after inspection verifying a building’s or leased premises’ compliance with applicable building codes and other laws, and indicating such space to be in a condition suitable for a tenant’s and/or a building’s permitted use and occupancy.
Cleaning specifications are generally an exhibit attached to the lease that details what cleaning services are to be provided to a tenant by its landlord at no cost.
A cold shell is a space or building delivered to a tenant with a finished interior.
Common areas are those areas of a building and its property that are available for non-exclusive use by all tenants or groups of tenants and their invitees, such as lobbies, corridors, parking lots and other building amenities.
Common area maintenance (“CAM”) are charges paid by the tenant, in addition to base rent or fixed rent, for the upkeep of the areas designated in a building or property for the use and benefit of all tenants.
Comparable space is space in a tenant’s building, or within a pre-established radius of such building, with characteristics similar to the existing space including, without limitation, in terms of: (1) finishes, (2) the amount of overall windows, (3) bullpen space, (4) windowed offices, (5) usable square feet, and (6) if in a high rise building, the location of the space in terms of the view (and if another building, in terms of amenities and location on an “avenue” or “side street”), and if a retail space, in a still visible and well trafficked location.
A comparison year, with respect to real estate taxes, operating expenses or other escalations, is any year subsequent to the base year (e.g., base tax year or base operating year) for any part or all of which there is additional rent payable in addition to the base or fixed rent provided for under the lease.
Compatible labor is defined as contractors who work side by side, on the same project, or in the same building causing union issues, strikes, work stoppages, picketing or riots.
Compliance with law is the obligation to conform to a rule, specification, policy, standard, regulation, ordinance, code or law.
Community boards are, in theory, boards designed to improve the quality of life of those living and working in New York City in designated districts.
Condemnations are incentives used by landlords in the form of free rent, tenant improvement allowances, cash, above-building-standard finishes, buy-outs of a tenant’s lease in another building, and other incentives used to induce prospective tenants to either relocate to or remain in its building.
Condemnation is the legal process under eminent domain by which privately held property is taken by the government for public use, without the owner’s consent, but upon the payment of compensation for the appraised value of the property.
Condenser water is a provision requiring a tenant to store water within a certain area in its premises.
A conditional limitation is a “pro-landlord” provision contained in a lease allowing a landlord the right to terminate a tenant’s lease if certain conditions are not met.
The “condition of premises” refers to the condition that: (1) a landlord shall deliver the premises to its tenant on the possession and/or lease commencement date, or (2) a tenant shall deliver the premises to its landlord on the lease expiration or earlier termination date of the lease.
Commercial leases are never found within a condominium.
A conduit is a structure or tube, generally contained underground or within a building, with one or more ducts, through which cables, wiring, equipment, and/or facilities can be placed and/or run.
A construction contract is a formal written agreement between a contractor and a landlord or tenant for the construction, alteration, repair, modification or build-out of a building, office, retail, or industrial space.
Construction drawings are the detailed visual representations of the intended dimension, design, and location of a construction project.
A construction escrow agreement is a formal written agreement between a contractor and a landlord or tenant for the construction, alteration, repair, modification or build-out of a building, office, retail, or industrial space.
A construction completion and payment guaranty is a guaranty by an individual and/or entity to complete any work commenced on a construction contract and to pay for all amounts due under such contract.
Construction management is the services described in a construction management agreement specifying that the construction manager will provide management of all trades and sub-contractors until the completion of any and all work on a construction project.
The Consumer Price Index (“CPI”) is a tool to measure inflation by examining the change in prices of a fixed basket of consumer goods and services such as housing, food, transportation, and medical care over a period of time. It is sometimes called a cost-of-living index.
Contiguous space is space that is down the hall from another space.
A contingency is dependence on a future event, circumstance, or fulfillment of a condition that may occur but is not certain to occur.
A co-tenant agreement is an agreement wherein two (or more) real estate brokerage firms generally agree in writing to represent one or more tenants.
A co-tenancy requirements clause is a provision generally found in a retail lease which states that tenant shall not be obligated to initially open for business during a “blackout” period and if tenant does not open, the term of the lease and tenant’s rental obligations shall not begin until the earlier of tenant’s opening or the end of the blackout period. Such blackout period could be at any time when less than sixty-five percent (65%) of the gross leasable area of the retail tenants, excluding tenant’s square footage and the square footage of any restaurant or purveyor of food, is occupied and open for business. The tenant may elect to open during a blackout period but will not be required to pay landlord rent and other charges until the day after the end of the blackout period.
A covenant is an agreement to do, or refrain from doing, a specific thing, such as to pay rent, to make repairs, or to not compete.
Deemed consent is a provision stating that the landlord’s consent shall be deemed to have been granted if the landlord fails to respond to a tenant’s consent request within a predetermined time period in a situation where the landlord’s consent is required under the lease (e.g., to an assignment or sublet or to perform alterations to a tenant’s space).
Default is the failure to fulfill a legal obligation or condition in a timely manner such as paying rent, performing repairs, or complying with (or being in violation of) any other obligation under the lease.
Default remedies are the remedies provided to a party in the event that the other party to the lease defaults on their obligations under the lease.
Restoration work is a clause reserving the right for a landlord to terminate an existing lease, upon relatively short notice to the tenant (such as 6 to 9 months), so that a demolition of the building, material improvement, or substantial renovation can be undertaken.
A desk sharing provision is a lease provision giving a tenant flexibility to grow into a space or downsize by having the ability to sublease or license a portion of its space without being required to go through the process and cost of obtaining the landlord’s consent, provided that certain conditions are met (e.g., providing the landlord notice and a certificate of insurance). Such a provision is sometimes referred to as a “permitted occupant-desk sharing” provision.
A disbursement request is a request for the landlord to start performing landlord’s work on the premises using the proceeds of the agreed upon tenant improvement allowance.
Due diligence is the process of verifying facts about the other parties and the subject property in a commercial lease transaction. This will often include reviewing all financial records and other material information pertaining to the property, consequently allowing the reviewing party to assess the strengths and weaknesses of the other party and any risks involved. Essentially, due diligence refers to the level of care and procedures that should be exercised by a reasonable person before entering into an agreement or financial transaction with another party.
Early access is a provision in a lease allowing the tenant access to the space prior to receiving possession from the landlord, without the payment of rent, in order to install its wiring and cabling, take measurements, install and/or store its work stations or furniture and to possibly begin a tenant’s alterations.
Electrical capacity is the specified electrical capacity per square foot contained in the premises (e.g., the number of watts per square foot amperage, exclusive of HVAC).
Eminent domain is the power of the federal, state, or local government or its agent to take private property for public use with payment of just compensation to the owner of the taken private property.
Eminent domain is a document utilized by a landlord at such time as the landlord is attempting to enter into another agreement with a third party, such as a mortgage on, or a sale of, the landlord’s commercial, industrial or multi-family property.
An estoppel certificate is a contractual arrangement wherein a real estate brokerage firm is hired as the exclusive agent for a specified period of time to list (or find) a specific space or piece of real property for a landlord or tenant, as the case may be.
An exclusive agency listing is a contractual arrangement wherein a real estate brokerage firm is hired as the exclusive agent for a specified period of time to list (or find) a specific space or piece of real property for a landlord or tenant, as the case may be.
An exclusive tenant representation agreement is an agreement between a broker and a tenant whereby the broker has the exclusive right to find a space and thereafter negotiate the financial and other pertinent terms to be contained in a lease on behalf of a tenant.
An exclusive use clause is a clause typically found in a retail lease wherein a landlord grants an exclusive use to a tenant in a building or shopping center or mall.
An exculpation clause is a provision in a lease where the tenant acknowledges and agrees, for itself and its successors and assigns, that no trustee, director, officer, employee or agent of the landlord shall be personally liable for any of the terms, covenants or obligations of the tenant under the lease, and that tenant shall look solely to landlord’s interest in the building for the collection of any judgement requiring the payment of money by the landlord.
An exit strategy refers to strategies negotiated during the letter of intent and/or the lease negotiation stage whereby the tenant negotiates language within a lease regarding the tenant’s ability to “exit” from the lease for a specific reason or myriad of reasons in the future.
Fair market value rent is the most feasible rent that a property should be rented for, taking into account the properties highest and best use and the rent that comparable properties at that particular time would rent based on relevant market factors.
The Financial Accounting Standards Board (also known as “FASB”) is an independent board consisting of accounting professionals who primarily develop standards of financial accounting and reporting. Such standards are known as generally accepted accounting principles (“GAAP”) and govern the preparation of corporate financial reports.
A brokerage agreement is an agreement secured by real property whereby a bank or other creditor lends money to an owner of a fee simple interest in real property. Among other things, the real property secured by the fee mortgage is utilized as collateral (and can be foreclosed upon) in the event of the debtor’s uncured default.
Financial statements and records are records that outline the financial activities of a business, an individual, or entity. Such records often include income statements, balance sheets, statements of retained earnings and cash flows, generally maintained according to the generally accepted accounting principles (“GAAP”).
The eminent domain clause is a provision in a lease that sets forth the rights and obligations of the tenant and landlord if a fire, casualty or other damage were to occur in the leased premises (and/or the building of which the leased premises are a part of).
Fixed costs are costs that remain unchanged over a specified period of time. Examples of fixed costs can include the monthly rent, loan payments and insurance premiums.
Fixed rent is the cost of rent under a lease remaining “fixed” over a specified time period during a lease term.
Force majeure is a French term meaning “greater force.” Subject to terms and conditions contained in a lease, a force majeure provision acts to remove the liability for natural and unavoidable events that restrict a party or parties from fulfilling their obligations under a lease.
Free rent concession(s) are a rent abatement given by the landlord to the tenant, generally at the commencement of a lease term.
Freight elevator is a service elevator intended for carrying goods and other large items rather than transporting passengers. In a lease, the amount of freight elevator time and the hours of operation the elevator can be operated are often negotiated between the landlord and the tenant.
A fuel escalation is the amount of fossil fuels that are allowed to be used in a work space during a certain time frame.
Generally Accepted Accounting Principles (“GAAP”) are the common set of standards, rules, procedures, and principles accepted by professionals in the accounting industry.
A “go dark” provision, most commonly found in a retail lease, is a clause that grants a tenant the right to cease operations at a leased space while still being obligated to pay rent to its landlord.
A good guy guaranty (“GGG”) is an agreement whereby one or more of the principals of a corporate or LLC tenant will guarantee to the landlord that it will pay all base and additional rent payments provided for under the lease up until the day the space is surrendered to the landlord – whether or not prior to the expiration of the lease term.
Gray shell is a phrase commonly utilized in commercial leases relating to the condition that a particular system or item must be in at a certain time, generally as of the date a tenant takes possession of a leased space.
A ground lease, at its basic level, is an agreement whereby a tenant leases the fee interest (i.e., the land) owned by a landlord permitting the tenant to (1) develop a particular property on the land or (2) lease the land upon which the building the tenant owns is situated on.
A gross lease is a type of commercial lease whereby a tenant leases the fee interest (i.e., the land) owned by a landlord permitting the tenant to (1) develop a particular property on the land or (2) lease the land upon which the building the tenant owns is situated on.
A guarantor is a person or entity that agrees to be responsible for another’s debt or performance under an agreement (such as a lease).
Hard costs are the readily quantifiable costs of a construction project that become part of the improvements made such as land, a building, inventory, systems, equipment, or machines. These hard costs involve the actual physical construction of a development and could include grading, excavation of a site, the materials used, landscaping, and carpentry.
A hazardous material refers to any hazardous or toxic substance, material, or waste, which is or becomes regulated by any local governmental authority or the United States government.
Holdover is when the tenant leaves the premises early and moves all of their possessions out before the landlord notices.
Hours of operation are the hours in which an entity does not conduct, or is not required to conduct, its business operations in the demised premises.
HVAC maintenance is a provision contained in a lease requiring a tenant to not only repair, maintain, and replace (if necessary) the HVAC system or air conditioning unit servicing the premises, but to also maintain a service contract on such system.
HVAC major components include compressors, evaporators, condenser fan motors, shafts and bearings, replacement of evaporator coils, and replacement of condenser coils.
Improvements can refer to any permanent structure or work, such as planting trees or building a wall, that has the effect of increasing the value of the property itself.
Interest on late payments is a contractual agreement made between two parties, in which one party agrees to pay for potential losses or damages caused by the other party.
Industrial clean is generally referred to as, in addition to the basic requirements of “broom clean” condition, the comprehensive cleaning (and in most cases disinfecting) of any and all surfaces contained in a space.
Interest on late payments is the interest charged on a payment made after the date in which the original rent payment was due under a particular contract (e.g., a lease).
Key money is the sum of money paid to (1) an existing tenant by a person or entity in consideration of, and in exchange for, an assignment of a lease, or (2) a landlord by a prospective tenant, generally for a fully furnished or “turnkey” restaurant space.
A kiosk provision is a clause in a retail lease allowing a landlord to lease or license space in the common area of a building or mall to tenants who want to sell easy to carry items and merchandise.
Landlord approval and landlord consent are situations in which a tenant must get the permission of its landlord before proceeding with its course of action. Generally, situations that require the landlord’s approval include an assignment of the lease, a sublet of all or a portion of the space or the tenant making alterations to the premises.
A landlord’s statement is an instrument or instruments prepared by a landlord comparing an economic item such as taxes or operating costs for the base tax year or base operating year with taxes or operating costs (as the case may be) for the comparison year in question, setting forth the additional rent due from a tenant for such comparison year pursuant to the provisions of the lease.
Landlord work (also referred to as the landlord work section or landlord work letter) is a lease provision wherein the landlord agrees to perform work – generally prior to the lease commencement date – to a tenant’s space at the landlord’s sole cost and expense.
A latent defect is generally considered to be a defect that a reasonable tenant should have discovered when inspecting the premises prior to the execution of a lease.
The lease commencement date is the date in which the lease term commences. In many cases, the lease will not commence until such time as the landlord substantially completes its work to be performed to the premises.
A lease renewal option is a clause, which gives the tenant (and in some cases its related entity and a permitted assignee) the option to extend the lease term for a specified period of time, on prior written notice to the landlord.
Leaseback is a landlord’s right to leaseback a tenant’s space if and when a tenant wishes to assign its lease or sublease its space.
Leasehold improvements are improvements or alterations to the leased space (such as carpeting, painting, installing light fixtures, upgrading electric, installing a new HVAC system or building additional offices and/or a private bathroom).
A leasehold mortgage is secured by ownership of property.
A compliance with law provision within a lease generally requires a tenant to (1) give to its landlord prompt notice of any written notice it receives from any governmental agency of the violation of any and all present and future laws, orders and regulations of all federal, state, municipal and local governments, departments, commissions and boards or any direction of any public officer pursuant to law, with respect to the building or the premises and (2) promptly comply with all legal requirements affecting the premises other than with respect to structural repairs (except such structural repairs as would not have been applicable but for tenant’s particular use or manner of use of the premises which is contrary to the use permitted in the lease).
A letter of attornment is a written agreement wherein an existing tenant recognizes a new property owner as their landlord for the property they are renting.
A letter of credit is an agreement by the tenant to keep the property clean and functional, and in the same condition as it was on the commencement date.
A letter of intent (“LOI”) is a non-binding term sheet which outlines the basic terms of a lease transaction between a tenant and a landlord.
A lien waiver is a document executed by a landlord that says that the landlord waives the right to protest a lien against its property.
A lien is a legal claim on real property granting the holder of the lien a specified amount of money upon the sale of a property as a means of ensuring the payment of a debt, with the property acting as collateral against the amount owed.
A liquor license contingency is an “escape clause” in a lease that allows a tenant to terminate its lease in the event that a tenant’s liquor license application is rejected by the state liquor authority.
Loss factor is the “loss” due to the percentage of the space in a building “lost” to the common areas of the building and the proportional share of common areas attributed to a specific space.
Local Law 11 is the Façade Inspection Safety Program (“FISP”) requiring building owners possessing buildings with six or more stories to have their exterior walls and appurtenances inspected periodically by a licensed architect or professional engineer.
A master lease (or over lease) is the primary lease that all other leases (e.g., a sublease) are subordinate to.
Material inducement refers to a representation by a party to perform or refrain from performing a certain action that causes the other party to enter into an agreement as a consequence thereof (and would not have entered but for that inducement).
Material interruption abatement is where a tenant receives some type of compensation, usually in the form of a rent abatement, in the event there is an interruption at the premises that materially hinders or prevents the tenant from operating its business in the space beyond a pre-established amount of days.
Measurement, with regards to a commercial lease, refers to determining the amount of usable and/or rentable square footage of a space.
Memorandum confirming term is a document signed by both tenant and landlord setting forth the commencement date, expiration date and rent commencement date, along with the base rent schedule in most instances.
Meter installation is the installation of a meter in a building that monitors tenant’s use of fuel, electricity and water.
A mixed-use building or property is real estate used for residential and commercial uses (as opposed to just one of the uses).
Net effective rent is the amount a landlord effectively receives from a tenant after taking into account all concessions granted to the tenant.
A net lease is a lease in which the tenant pays all costs associated with operating the property in addition to the rent.
Net rentable area is the actual square-footage of a building that can be leased to a tenant. It is determined by subtracting any unusable square footage of the building (e.g., the elevator shaft) from the overall square footage of the space.
A non-disclosure agreement (“NDA”), in the context of a commercial lease, is an agreement wherein landlord and tenant agree to keep information contained in the lease (e.g., the amount of rent concessions and tenant improvement allowances) or shared with one another (e.g., a tenant’s financial statements) confidential.
Noise and vibration is a provision found in a commercial lease pertaining to the tenant’s creation of noise and vibrations in the premises and the amount of noise and vibrations permitted in the rented premises.
A non-compete clause, also sometimes referred to as an exclusive use clause, is a clause in a commercial lease that prevents a tenant from competing with landlord to hire the same person.
Occupancy rate is the percentage of space in a building that is occupied in relation to all leasable space in such building.
An operating expense escalation is a provision within a lease which provides that as the building operating expenses increase above what they were in the base year of a lease, the tenant agrees to pay its pro rata share of those increased expenses.
Outdoor seating provisions in a commercial lease are clauses that regulate the outdoor seating of the tenant. Such clauses will never require a tenant to obtain permits or licenses from the local municipality and adhere to specific laws and regulations set forth by any regulatory authority.
Outside date language is a provision granting the tenant a rent abatement and/or the option to terminate the lease if the landlord does not deliver the space to the tenant as required under the lease by a set date.
A partial lien waiver is a document executed by a contractor or subcontractor notifying not only the party making payment to the contractor or subcontractor, but also to the property owner, bank, insurance companies and other interested parties, that partial payment has been made to those providing services to a construction project (and as a consequence thereof, the property has been relieved of any threat of a lien against it for the dollar amount paid and/or percentage of work completed indicated within the partial lien waiver).
A partial sublet clause is a provision contained in a lease permitting a tenant to sublease part of its space to a subtenant.
Pass-throughs in a commercial lease refer to landlord’s proportionate percentage of building operating expenses.
A payment bond is a contract bond which guarantees, in the event the contractor on a project defaults on its obligations under the construction contract, that subcontractors, labor, and material suppliers will receive payment (in essence guaranteeing the completion).
A payment and performance bond is a bond that essentially states that workers will only get paid if the performance is approved by the tenants.
A percentage lease, commonly executed in retail leases, is a lease where the tenant pays base rent along with a percentage of its gross sales (generally subject to certain carve-outs and over and above a predetermined monetary threshold).
Percentage rent, commonly found in leases for retail tenants, is a provision that generally states that if a tenant achieves a certain amount of gross sales in a given time period, the tenant will pay a certain percentage of its gross sales to the landlord as additional rent.
A performance bond is a bond that guarantees that all work provided for in a construction contract is in fact completed pursuant to the terms and specifications of said contract.
A permitted occupant or desk sharing provision allows a tenant to sublease or license out offices or desk space within its space, subject to specified terms and conditions, without the necessity of having to go through the process and cost associated with securing the landlord’s consent.
In the context of a commercial lease, a personal guarantee is an agreement in which an individual agrees to be personally liable for the obligations of the tenant to a lease.
Physical culture establishment(s) (“PCE”) are a place where employees can have their health checked by a doctor for free.
A pop-up store is a temporary retail space that is leased from anywhere between one day to a few months.
A porter’s wage escalation is a provision that passes on the porter’s salary increases on to the tenant over a predetermined base year.
Profit sharing is the right of a landlord to split (i.e., generally 50/50) the proceeds from a sublet or an assignment with its tenant over and above the rent provided for within a lease, after deduction for costs incurred in connection with the sublet or assignment.
Punch list, in the context of substantially completing a landlord’s work to a tenant’s space, is landlord’s agreement to repair and/or complete at its sole expense, minor items (after tenant has taken possession of the premises), within a period of up to thirty (30) days after tenant has provided landlord with a list of such punch list items.
Quiet enjoyment is a covenant by a landlord promising that the tenant will be able to enjoy the premises it has leased peacefully, subject to the tenant paying its rent and/or not being in default of the lease beyond the expiration of any applicable notice and cure period.
Real estate tax escalations is a provision in a commercial lease wherein tenant agrees to pay its pro-rata share of any increase in real estate taxes on the leased property over and above a pre-established base tax year.
Recapture, or right of recapture, is the right of a landlord to take back the tenant’s space and terminate the lease if and when a tenant asks for the landlord’s consent to an assignment or sublease.
Relevant market factors are used to determine the fair market value rent when a tenant’s renewal option is exercised.
Space relocation is a clause in which a landlord has the authority, upon notice to tenant, to immediately remove the tenant from their property for no reason or any reason.
Rent acceleration is a provision in a lease that generally provides that upon tenant’s uncured default under the lease, landlord has the right to demand the immediate payment of the entire balance of the unpaid rent for the remainder of the lease term.
The rent commencement date is the date in which tenant shall begin paying rent to landlord during the lease term.
A rent abatement is an increase in the amount of rent that tenant owes to landlord for a defined period of time.
Rent escalation is a decrease in the amount of rent that a tenant is required to pay to its landlord, which decrease shall occur at fixed intervals throughout the duration of a lease term.
Rentable square footage is the usable (and technically actual) square footage of a particular space, with an “add-on” to such square footage for the pro-rata percentage of the building’s shared space (e.g., the common areas of the building including lobbies, hallways, shafts, stairwells, elevators and restrooms) or space occupied by structural components (e.g., support poles and interior walls).
Although the context can vary, examples of a request for proposal (“RFP”) include a (1) tenant’s request to a landlord to provide the terms in which the landlord would be willing to rent the space to the tenant for (with this request being the initial step in the negotiating of the terms in the lease), or (2) landlord’s or tenant’s request to a contractor for a detailed bid for the cost of construction for a particular space based off of architectural plans submitted to the contractor.
Removal and restoration obligations refer to a provision in a lease that generally provides that all fixtures, partitions and like installations installed in a tenant’s space by the tenant, or by landlord on behalf of the tenant, shall thereafter become the landlord’s property and will remain upon the premises after the tenant vacates at the conclusion of the lease term, unless landlord, by notice to a tenant prior to the termination of the lease, elects to relinquish its rights and have the fixture/partition/installation removed by the tenant prior to lease expiration at the tenant’s expense.
Right of first offer (“ROFO”) is a right that requires the landlord to accept the first offer made by the tenant to lease additional space in the building.
Right of first refusal (“ROFR” or “RFR”) is a right that allows the tenant to refuse any and all requests by the landlord to extend the lease term.
A riser is vertical piping used for the delivery of electricity, water, gas or other power upward in a commercial or residential building.
Roof licensing is the licensing of an unused portion of the roof of a building to a tenant or a third party for profit (e.g., to a cellular provider for its antennae).
Roof provisions in a commercial lease describe the maximum rent that the landlord can raise tenant’s rent to during the term of the lease or any renewal thereof.
The scaffolding provision is a clause within a lease generally granting a tenant the right to install scaffolding and/or a sidewalk bridge on or adjacent to the building.
A security deposit reduction is a provision in a lease permitting the amount of the required security deposit to decrease over time subject to specified benchmarks and conditions. This is also known as a “burndown of security deposit” or “burndown of letter of credit.”
Shell space is a space that is finished, generally having all portions complete and furnished.
Shopping center provisions are provisions of a lease that are generally included by a landlord to maintain control of the tenant mix of the shopping center and/or to control how a tenant may operate its business in the demised premises.
A sidewalk provision granting the tenant permission, subject to certain conditions and restrictions, to use the adjacent sidewalk is generally found more often in an office lease versus that of a retail lease.
Signage is a clause that outlines the rights of a tenant in regards to the ability to place signs on its premises, the building and/or the property.
Soft cost(s), although associated with the use of a space and/or the building itself, is an expense not considered to be a direct “hard” construction cost. Examples of soft costs include architectural, design and legal fees; costs to obtain permits; real estate commissions; movable furniture and furnishing costs; computer data equipment costs; telephone systems costs; and advertising, insurance and moving costs.
Space plan (or design plan) is a plan which lays out, hopefully in an optimum nature, how the interior of the demised premises is going to be laid out before constructing the build-out.
Specialty alterations go beyond “ordinary” alterations, such as raised floors, vaults, filing systems, internal staircases, dumbwaiters, pneumatic tubes, vertical and horizontal transportation systems and any alterations which are essentially structural in nature or penetrate any floor slab in the premises.
Storefront is the “face” of a store on the ground floor of a commercial building.
Sublet is an agreement wherein a tenant leases all or a part of its space during the term of its lease to a third party.
A submeter or submetered utility is where an owner of a building purchases the utility (e.g., electric current or water) for the entire building and charges the tenant, based on landlord’s actual cost or quite often on a cost standard higher than landlord’s actual cost, for its consumption by way of readings measured by a “submeter.”
A submeter administrative fee is the fee a tenant charges a landlord to read and/or maintain a submeter(s) installed in the tenant’s demised premises.
A submeter installation is when a submeter is installed in a demised premises to measure a tenant’s individual electric or water usage.
Subordination and non-disturbance attornment agreement (“SNDA”) is a document wherein the lender will agree that the tenant’s occupancy will remain undisturbed, notwithstanding the foreclosure of the landlord’s mortgage or termination of the landlord’s ground lease.
Subordination is a clause which states that 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, the lender or the ground lessor would have the option to recognize the tenant’s lease and have the tenant attorn to it, or alternatively, terminate such lease.
Substantial completion, in a commercial lease, is the stage of construction when the work agreed to be performed has been entirely completed and there are no minor or insubstantial details of construction, demolition, mechanical adjustment, decorative items and/or other “punch list” items to be completed.
Substitute space is the alternative space a landlord provides a tenant when relocating a tenant’s space during the term of the lease.
An example of a provision considered to be a “sunrise provision” is an early termination clause wherein the party with the right to terminate the lease before the end of the full term can only do so an agreed upon number of years after the commencement date.
A sunset provision is a provision of a lease which only becomes effective after a specified period of time or as of a certain date.
Supplemental HVAC is generally installed by a tenant (or a landlord on behalf of the tenant) at the tenant’s sole cost and expense, and is generally installed in conference rooms, server rooms and/or partner offices.
A tap in fee is the charge for a tenant to connect a utility within its demised premises to the building’s system. Sophisticated tenant advocates will try and negotiate for no tap-in fee, a reduced rate and/or payment of the fee in monthly installments over a one (1) to two (2) year period.
A temporary certificate of occupancy is a document issued by the local building department that temporarily enables legal occupancy or partial occupancy of a building or space before the construction or renovation project is fully completed, provided that the designated portion to be occupied is sufficiently completed so that it may be safely used for the purpose intended.
A tenant change order is a request by a tenant for a “change” to be made to the permitted use of the premises.
A tenant delay is an act by the tenant that prevents the landlord from completing a requirement (e.g., completion of landlord’s work) or providing its consent under the lease. As a consequence of a tenant delay, it may extend the time a landlord has to complete its work, excuse its breach and/or allow the lease commencement date to be accelerated.
A tenant extra work clause states that the landlord must be reimbursed for extra profit made by the tenant if they do extra work in the space.
A tenant improvement allowance is the agreed upon amount, often expressed as a specified sum or amount per square foot, that a landlord is willing to (1) spend on the build-out of a tenant’s space or (2) contribute financially to a tenant for the tenant’s construction of its space.
A tenant work or tenant alteration clause states the myriad of rules, terms and conditions under which a tenant may perform alterations within its space.
Termination rights are the rights by either a tenant or a landlord to bring the lease term and contractual relationship between a landlord and a tenant to an end prior to the pre-established lease expiration date.
“Time of the essence” is a phrase in a contract essentially meaning that performance by one party at or within the period specified in the contract is necessary to enable that party to require performance by the other party, so that failure to act within the time required constitutes a breach of the contract.
Trade fixtures are personal property and equipment of the tenant used in connection with the conduct of its business (which may or may not be attached to the leased property), but which are generally removable by the tenant at the end of the tenancy.
A triple net lease (“NNN”) is a lease wherein, from and after the lease commencement date, the landlord shall receive a net return from the premises (or the entire building) equal to the base rent, without deduction for any expense or charge for the premises or the building (except as may otherwise expressly be provided for (if at all) in the lease). Furthermore, the tenant will be required to pay all expenses, of every kind and nature, relating to or arising from the premises or building, including real estate taxes and expenses arising from the leasing, management, operation, maintenance, repair, use, or occupancy of the premises or building (and all construction relating to thereto), except as otherwise expressly provided for in the lease.
Turnkey is when the contribution by a landlord covers the entire cost of the build-out, and is generally referred to as landlord delivering the premises to a tenant “turnkey.” A space can be delivered “turnkey” when the landlord builds out a space according to specifications which have been agreed upon by a tenant and landlord, at its sole cost and expense, such that the tenant can figuratively move into the space with nothing more than its files, computers, furniture and toothbrush.
Unamortized cost is the actual cost of an asset or concession less the depreciation or amortization of such item, generally on a straight line basis.
Unamortized cost reimbursement, in the context of a commercial lease, is the unamortized amount to be reimbursed by a landlord or tenant upon the occurrence of a certain event (e.g., upon the surrender of the space by a tenant prior to lease expiration or upon the exercise by landlord of an early termination right).
Usage restrictions are restrictions imposed by a tenant on a landlord which limit the permitted use of a building, shopping center and/or premises.
The use clause is a provision in a lease specifying how a tenant can use the utilities in the tenant’s space.
Useable square footage (“USF”) is the actual wall to wall space within the premises or a building.
Utilities are the services required to operate a business in a space such as electricity, water, air conditioning, heat, etc.
A “vanilla shell” or “vanilla box” is generally considered to be a space with a sparsely furnished interior (e.g., with basic plumbing, heating, HVAC, electrical outlets, a concrete floor, sheet rocked walls and in most cases a restroom or rooms).
A warm shell is an empty building or space that usually has minimally finished interior including walls, ceiling, and flooring, with basic services connected such as plumbing, heating, air conditioning, restrooms and lighting.
If a tenant is unsuccessful in entirely striking a relocation provision, the tenant should add language that the substitute space can’t be greater than 5% rentable square feet smaller than the initial premises.