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AIA contracts are documents that govern labor and union issues.
Air rights are unused development rights for real property; often referred to as the empty space above a piece of real property.
Annual percentage rate (APR) is the yearly cost of credit, including the interest and fees, expressed as an interest rate.
Assessment in real estate is the setting of a value on property, usually for the purpose of calculating real property taxes.
Air rights are those rights granted to a tenant and landlord in a lease to object to and/or review calculations provided by the other party.
Any structure or part of a structure that is below the surface of the ground that surrounds it is known as above grade.
As described on the NYC.GOV website, a business improvement district (“BID”) is a “public/private partnership in which property and business owners elect to make a collective contribution to the maintenance, development, and promotion of their commercial district. BIDs have helped revitalize neighborhoods and catalyze economic development throughout New York City. BIDs deliver supplemental services such as sanitation and maintenance, public safety and hospitality, marketing and promotions, capital improvements, beautification, district representation, and business development.”
Capitalization rate (also referred to as cap rate) is the rate of return on a real estate investment property based upon the income that the property is expected to produce.
Collateral assignment of lease is when the tenant assigns its lease back to the landlord.
A cooperative (also referred to as co-op) is a legal entity, usually a corporation, which owns real estate, usually in the form of a residential building. Individuals who buy “into a co-op” are not actually purchasing real property. Instead, they are essentially becoming: (1) a shareholder in a corporation that owns real property, as evidence by shares of stock allocable to the unit purchased, and (2) a tenant of such corporation, as evidence by a proprietary lease for the unit purchased.
A deed in lieu of foreclosure is a deed by which a borrower voluntarily gives title to real property to the bank (i.e. the mortgagee) in exchange for the borrower (i.e. mortgagor) being released of all obligations under the mortgage, generally in order to avoid foreclosure.
A deed of trust is a document by which real property is pledged to secure a loan and held by a trustee; used in certain states in place of a mortgage.
An easement is a non-possessory right to use and/or enter onto the real property of another. This may include the right to cross over to access another property or use the property for a particular purpose.
An easement is the cash remaining after the landlord pays all expenses for operating a particular property as well as costs for tenant work in order to prepare the property for occupancy.
An escrow agreement is an agreement in which one party to a transaction will place an asset in the care of a third party, often an attorney or banking institution, unless and until a particular event occurs or a condition is satisfied.
Escrow disbursements, in the context of a real estate transaction, are escrowed funds that may be released for the payment of expenses relating to a real estate transaction.
Exclusive right to purchase agreement is an agreement granting a party the exclusive right to purchase a particular property from the other party to the agreement.
Exclusive right to sell agreement is an agreement whereby an owner can only sell, but not lease, their property.
Façade is the exterior side of a building that is usually characterized as the front of the building.
Floor area ratio (“F.A.R.”), at its simplest level, is the ratio between the total amount of usable floor area that a particular building has (or is permitted to build upon), when compared to the total area of the lot which the building stands on.
A domestic entity is an entity formed in another state or foreign nation conducting business in another state or jurisdiction.
Franchise agreement is a contract in which an established entity (known as the franchisor) agrees to, among other things, permit another party (known as the franchisee) to utilize its brand while providing the requisite support for and to the franchisee so that the franchisee can operate the franchised business of the particular brand in exchange for a fee and share of income. The franchise agreement will specify the duties of each party as well as the compensation to be paid to each.
A franchisee is an individual or entity that purchases and operates a franchised business. The look, name, and products sold by the franchise are commonly under the control of the franchisee.
Franchisor is an entity that allows a franchisee to operate a location/franchise of their business. The franchisor is the party that owns the franchise company and its intellectual property but grants the franchisee the right to operate a franchise location.
Gross building area is the total area of a building with a finished interior, including but not limited to below grade living space as well as interior stairways, hallways, storage rooms and laundry rooms.
The Appraisal Institute defines highest and best use as follows: “The reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity. Alternatively, the probable use of land or improved property – specific with respect to the user and timing of the use – that is adequately supported and results in the highest present value.”
Industrial and Commercial Abatement Program (ICAP) is a New York City program that provides property tax abatements for up to 25 years for those building or conducting physical improvements, modernizations, or expansions on commercial buildings.
License agreement is an agreement where an owner of real property grants an individual or an entity the right to use real property for a specific purpose. Unlike a lease, a license does not transfer an interest in the real property for a pre-established period of time.
Listing agreement is a contract in which a real estate broker is hired to represent an owner of real estate in their efforts to sell or lease real estate or a particular space in a building.
Net absorption is the amount of tension between the broker and the tenant during the leasing process.
A power of attorney grants the attorney of the tenant the right to enter the premises being leased by the tenant at any time, without permission.
Recourse, at its most basic level, is the legal right to demand compensation for a breach of contract.
Sale-leaseback is a real estate sales transaction in which the owner of a property sells the property to a buyer, and after the closing of title to the property, the seller then leases back all or a portion of such property from the purchaser.
A stacking plan is a two dimensional representation of a building that details the space available on each floor of the building, all occupied space in a building and the lease expiration date for such spaces.
Vacancy rate is the percentage of vacant space in a building due to non-occupancy of an available, rentable unit or space.
FASB reporting changes that require commercial space leases to be considered capital leases for accounting purposes are effective (i) for public companies on December 15, 2018, and (ii) for private companies on December 15, 2019.
Until the FASB reporting changes for private companies become effective subsequent to December 15, 2019, commercial leases will continue to be reported as a balance sheet item.
FASB reporting changes will mandate a commercial lease to be recognized as both an asset and liability on a balance sheet, rather than being merely written off as an expense on a company’s profit and loss statement.
Once the FASB reporting changes become effective for public companies post December 15, 2018 and private companies post December 15, 2019, commercial space leases will be considered operating leases for accounting purposes.
Pre-FASB changes, financial statements were accurately portraying the health of a company’s true financial picture by not including commercial space leases on a company’s balance sheet.
As a consequence of the FASB reporting changes, which require commercial leases to be considered capital leases, once effective: (i) many companies will “front load expenses,” and (ii) leases of 12 months or less will not need to be reported on a company’s balance sheet (unless the tenant’s lease contains a renewal option and it is “reasonably certain” that it will exercise same beyond the initial 12 month period).
Given that the current FASB reporting changes for public companies require a commercial lease to be considered a capital lease (and effectively be treated as if it is both an asset and a liability), unlike an operating lease, tenants will be required to report the lease on their balance sheet.
For private companies, subsequent to December 15, 2019, notwithstanding that a tenant does not own the space it leases, nonetheless FASB reporting requirements will require a tenant’s commercial lease to be capital in nature.
Once FASB reporting changes are effective for both public and private companies, in addition to commercial leases then being considered capital in nature, a tenant’s obligation to pay rent over the remaining term of its commercial lease will not be considered a liability.
The following are potential impacts of the FASB lease reporting change, tenants may be incentivized to (a) purchase a building for their business operations, (b) enter into shorter term leases, or (c) in certain markets, push to have a purchase option included in their lease.
One potential consequence of the FASB lease reporting changes will be that, in some markets, triple net leases (“NNN”) will gain popularity, given that future payments for operating expenses, real estate taxes and insurance will not have to be reported as liabilities on a tenant’s balance sheet.
In order to verify the additional rent being charged by the landlord, it is in the tenant’s best interest to audit and verify the accuracy of a landlord’s books, records and/or authoritative documentation in support of the additional rent items charged by the landlord.
It is unnecessary for landlords to put limitations on a tenant’s ability to audit its books and records within a commercial lease.
In regards to a tenant’s audit rights, it is in the landlord’s interest to provide language that only allows tenant to perform an audit of landlord’s books and records during certain specified times of the day and/or the month (e.g., only during the hours of 10 AM to 4 PM on Monday through Friday on the 10th through the 25th day of the month and not during the period January 15th through April 15th).
Tenant advocates should negotiate for language in the lease stating that, in the event tenant fails to send landlord tenant’s audit notice within 30 days following tenant’s receipt of the end of year statement, such end of year statement shall be conclusive and binding upon tenant.
Tenant advocates should negotiate for language in the lease reflecting that a landlord’s failure to claim any payments of rents, percentage rents, or other rents (including rents with respect to operating expenses and taxes) or payables within two (2) years after the date any such rents were determinable shall constitute landlord’s waiver of such payment.
If a tenant’s audit alleges that an error was made by landlord in their calculation of additional rent, landlords should accept tenant’s findings without verifying tenant’s audit for accuracy.
A tenant advocate should push for language stating that if a significant discrepancy is found in the landlord’s books relating to an additional rent payment, the landlord should be required to pay for the tenant’s audit.
In the event a retail landlord is receiving a share of its tenant’s profits or gross revenue above a specific “breakpoint” in revenue as part of the additional rent to be paid to landlord, the landlord should secure the right to audit all of tenant’s books and records.
In a retail lease where the landlord is receiving a share of its tenant’s profits or gross revenue, the landlord should provide in the lease that if a landlord audit shows the tenant understated their gross sales for the previous audit period, tenant shall immediately pay to the landlord the additional percentage rental due for the period audited.
In a retail lease where the landlord is receiving a share of its tenant’s profits or gross revenue, the tenant should attempt to negotiate for language stating that if a tenant’s audit finds that tenant paid an excess of three percent (3%) or more of additional rent, landlord shall also pay tenant the reasonable cost of such audit and examination.
There is no situation in commercial leasing where a landlord should negotiate to have the right to audit tenant’s books and records.
In a retail lease where the landlord is receiving a share of its tenant’s profits or gross revenue and the landlord has the right to audit a tenant’s books and records, the landlord should also include language in the lease that the landlord will use “commercially reasonable” efforts to cause its agents and employees to hold such records in confidence.
If an audit shows that a retail tenant misreported and understated earnings, the landlord will want some recourse for the cost of the audit and in some leases, may even have the right to terminate the lease if the understatement is big enough.
Generally, the restructuring of a lease occurs as a result of the tenant reaching out to the landlord for reduced rent or other common concessions.
When asking its landlord for a short-term or long-term lifeline (e.g., a free rent concession), the tenant needs to be prepared to offer not only a convincing “tale of woe” and a sensible solution to get them through the challenging times, but also with clear and written authoritative documentation in support of their request to the landlord.
It is not important for a tenant to provide its landlord documents in support of its position when asking its landlord for potential rent relief.
Examples of documents that a landlord should review when considering granting a tenant rental relief includes: (i) tax returns for the past few years; (ii) financial statements; (iii) year to date and comparative profit and loss statements; and (iv) future projections of income and expenses.
Given the minimal upfront costs to a landlord when finding a tenant, landlords shouldn’t consider granting their current tenant any rental relief.
A tenant should inform its landlord of its past timely payments when approaching the landlord for rental relief to further enforce that this relief will be an anomaly and not a regularity.
When seeking rental relief from its landlord, a tenant should be unrealistic and exaggerate their financial woes to the landlord in order to ensure that they receive rent relief.
Tenants who feel they can no longer afford the large space they are currently leasing should consider asking for reduced space in place of rent relief.
Given that you have to give something to get something, a possible tenant tradeoff that a landlord might require in exchange for rental relief is for the tenant to provide a personal guaranty for the rent reduction if the tenant doesn’t live up to the terms of the restructuring agreement.
It is always better for the tenant to simply forward the tenant’s proposal for rent relief to the landlord without providing the landlord with any type of “heads up” about what is being sent over and requested.
Quite often, an anchor tenant will pay a lower rental rate per square foot than ancillary tenants that follow it in the lease up of a mall or shopping center.
An anchor tenant is generally perceived as a small tenant with minimal prestige, name and brand recognition. The hope is that an anchor tenant will attract customers to shop and attract other smaller tenants to lease space at a mall or shopping center.
The three most common forms of co-tenancy clauses are (i) opening date co-tenancy clauses; (ii) pre-occupancy co-tenancy clauses; and (iii) occupancy co-tenancy clauses.
As to shopping center or mall “centric” provisions, landlord advocates should include pro-landlord language in its lease that there shall be no change in the location, shape, and dimensions of the premises and that the visibility of tenant’s signs or storefront shall not be affected, without tenant’s prior written consent.
As to shopping center or mall “centric” provisions, a tenant advocate should include language in its lease stating that the landlord can place or maintain any kiosks, planters, trees, shrubs, stairs, elevators or other obstructions any place in front of the premises.
When it comes to agreeing to any pro-tenant representations and pro-tenant protections within shopping center or mall “centric” provisions, landlords should adapt the expression “less is more,” and allow the market and context of the deal to rule the day.
Most leases require a tenant to continuously operate its business while leasing its space, and in the event a tenant fails to adhere to any minimum hours of operation covenants contained in its lease, more often than not, the tenant will be subject to some type of monetary penalty as a consequence of doing so.
In the context of landlord imposed tenant operational requirements, a recapture clause allows the landlord to take back a tenant’s space, canceling all lease obligations in the event a tenant decides to “go dark” or ceases operating its business in accordance with the terms and conditions of the lease.
Unless the clause includes a landlord termination right, a well negotiated “go dark” clause to a retail tenant states that it may allow the tenant to essentially cease its business operations without being considered in default of its lease obligations, provided that the tenant continues to pay the rent due and owing under the lease.
A landlord should require in its lease that after the lease commencement date, tenant must continuously and uninterruptedly operate in the premises during tenant’s normal business hours (for the uses and in the manner permitted by the lease).
Given modern sound attenuation measures, landlords should not put language in the lease that limits the tenant’s right to play any live music, recorded music or other sounds played or broadcasted inside of the premises.
Most well drafted leases specify the manner in which the tenant must maintain its premises (including for retail leases, requiring the tenant to keep its store fully stocked and fully staffed by sales personnel).
In order to control the “image” of their property and the nature of the tenant mix at such property, it is imperative that landlords set standards within a tenant’s lease for the tenants to uphold.
Landlords prefer to have little control of the content of advertising or merchandise tenants use and sell within the premises.
Landlords should expressly state in the lease those uses which are prohibited in the premises (e.g., for the preparation, manufacture or mixing of anything that might emit any unreasonably objectionable odors or noises).
In a retail context, landlords attempt to control the manner of how a tenant must conduct its business within its space by including provisions within the lease which are pro-landlord in nature.
If applicable for a retail lease, it is in the landlord’s best interest to add the following language in the lease: “Tenant shall comply with all reasonable rules and regulations established by landlord with respect to delivery of merchandise to and from the premises and, to the extent within its control, the removal of wastes.”
It is in the tenant’s best interest to accept language within the lease which states that landlord makes no representation of any kind or nature as to tenant’s use and as such, tenant shall be responsible for any and all fines and penalties incurred (the payment of same being considered additional rent).
Landlord advocates should incorporate language within the lease expressing that, “In the event that any governmental authority shall declare by notice of violation or order that the premises are being used in violation of any law or regulation, tenant shall immediately discontinue such use, and failure to discontinue such use shall constitute a material default by tenant hereunder.”
To control the property’s image and tenant mix, landlord advocates should push for language within its lease reflecting that “Tenant covenants and agrees that (i) tenant’s use of the premises throughout the term will be consistent with the character and dignity of the building; (ii) the business conducted by tenant will be first-class quality; and (iii) sales employed by the tenant will be in conformity with the highest standards of practice in tenant’s industry.”
Landlord advocates should negotiate for language in the lease stating that all displays and exhibits placed or installed in or about premises, and any signs, lettering announcements or any other kinds of forms of inscriptions displayed in or about premises will be only such as meet with landlord’s approval.
Tenants should not be concerned that any consent language in the lease also has language that such consent is subject to a reasonableness standard.
Tenant advocates should attempt to incorporate the following language within the lease: “Notwithstanding anything to the contrary contained in the lease, landlord consents to (i) the use of video displays in the windows of tenant and (ii) tenant window signage and/or displays. Furthermore, landlord shall not unreasonably refuse to consent to any of tenant’s dignified signs, provided that they are in conformity with all relevant state and local codes.”
It is common in commercial leases that landlords require their tenants to maintain the property in a certain manner and not take certain actions without landlord’s prior approval.
Especially in retail leases, landlord advocates should include language that dictates how the tenant will maintain the area in front of its premises and dispose of its garbage, with language such as the following: “Tenant shall at all times keep the entire area in front of and alongside the Demised Premises clean and free of litter and rubbish. Tenant shall place any and all rubbish in areas designated by Landlord from time to time. Unless otherwise agreed to by Landlord in writing, Tenant further agrees that they shall make arrangements for daily pickups five (5) times weekly of rubbish, refuse and garbage. The Tenant also agrees that it will be responsible for the removal of ice and snow in front of the Demised Premises to one (1) foot in front of the sidewalk into the street. Furthermore, Tenant shall at all times keep the portions of the interior of the Demised Premises visible from the outside neat, tidy and orderly.”
Tenant advocates should push for language in the lease that tenant shall promptly comply with any reasonable request from landlord for a change in a particular method of operation if other tenants in the building complain about such method of operation.
Landlord advocates should require that the installation of any blinds or other window coverings, signs or banners in a tenant’s space shall be subject to landlord’s written approval.
Generally, tenant advocates should propose the following language: “Subject to all applicable laws, rules and regulations of any governmental or quasi-governmental entity, it shall be tenant’s responsibility to install the signage for the demised premises. Such installation shall be done at tenant’s sole cost and expense. The sign by tenant must be approved by landlord and the contractor selected by tenant to install the sign must be approved by landlord, at landlord’s sole discretion.”
The following are tenant uses a landlord will commonly exclude in its lease: (i) to conduct or permit any fire, auction, going-out-of-business or bankruptcy sale; (ii) to engage in unethical or disreputable method of business operations; (iii) to sell or display for sale or display any pornographic or obscene material; and (iv) an unemployment, counseling or other similar social services office.
Generally speaking, landlords are not concerned with the nature of the tenant mix in its mall or shopping center, and therefore will lease space to businesses with the same or similar use (e.g., multiple sporting goods stores within the same mall or shopping center).
The following expenses are normally considered part of the definition of operating expenses in a commercial lease: ownership, management, maintenance and operating costs; insurance premiums and deductibles; wages, salaries and benefits of building personnel; management fees; service contracts; supplies and equipment; repairs and maintenance; decorating; security; snow and ice removal; and utilities for the common areas.
The manner in which operating expenses are defined in a lease will go a long way in determining just how much of a “profit center” the operating expense clause can be to a landlord.
Given that the operating expense clause can often operate as a “profit center” for a landlord, tenants need to be aware of the many holes and landmines contained within them. At worst, any item of a capital nature should only be included based upon the remaining term of the lease to the useful life of the capital expenditure itself based on Generally Accepted Accounting Principles (GAAP), and not on a useful life “as [reasonably] determined by landlord in its sole discretion.”
A tenant advocate should aim to keep the definition of operating expenses within the lease as broad as possible.
In most circumstances, an operating expense definition includes a number of costs that are capital in nature and built-in profit components for the landlord.
In almost all situations, tenants should simply agree to the operating expense clause in the lease without attempting to negotiate the definition of operating expenses.
From a landlord’s perspective, a landlord’s operating expense definition within the lease should include as many items as possible.
To make a landlord’s operating expense provision appear impartial, landlords should list some exclusions to the definition of operating expenses in the initial lease draft.
In the letter of intent, tenants should include language reflecting that tenant reserves all rights to negotiate operating expense definitional exclusions during lease negotiations.
A tenant should always include an expansive list of operating expense exclusions in the letter of intent.
For those landlords willing to agree to the the following language, the cap should be applied to both controllable and uncontrollable costs: “Notwithstanding anything to the contrary contained in this lease, in no event shall tenant’s obligation to pay its pro rata share of operating expenses over the base year operating expenses increase by more than five percent (5%) over the tenant’s pro rata share of the increase for the prior calendar year.”
Tenants should make sure that there is no “double dipping” of any item deemed to be an operating expense that tenant is required to pay under any other section of the lease.
If a tenant is paying its share of operating expenses over a base year, tenants should add “gross up” language that provides that the base year operating expenses shall be determined as if the building is 95% occupied and landlord is supplying services to 95% of the rentable area of the building.
If the landlord gives the tenant the right to audit their books in relation to an operating expense escalation, it would be in the landlord’s interest to state that the “Tenant shall be required to (a) hire a national, regional or local CPA and (b) not use a firm which will charge tenant for its examination services on a contingency basis.”
If a tenant is paying its share of operating expenses over a base year, tenants should try and negotiate that in no event shall their initial payment occur prior to the twelve (12) month anniversary of the rent commencement date.
Most landlord advocates prefer an operating expense escalation as opposed to that of a CPI or straight predetermined percentage bump in rent because landlords use the operating expense escalation as a profit center by including as many expenses as possible in the definition of operating expenses.
If the landlord elects for a percentage rent increase over that of an operating expense escalation, it is in the tenant’s best interest to have the increase applied every five (5) years, as opposed to annually.
In the aggregate, it is less expensive for a tenant to have to pay a rent increase annually, rather than one applied every 2-5 years.
Tenants should agree to language within the lease that any capital expenditures or any cost that is capital in nature, including the costs of any capital improvements, alterations or replacements made to the building or the property, are the tenant’s responsibility.
Generally speaking, landlords are in the business of leasing out their space for profit and tenants are in the business of leasing out space from landlords to conduct their business operations in order to make profit.
From a tenant’s perspective, the useful life of any capital expenditure should be determined by the Generally Accepted Accounting Principles (“GAAP”) and not on a useful life “as [reasonably] determined by landlord in its sole discretion.”
In all instances, when a tenant is negotiating a myriad of pro-tenant carve-outs to a real estate tax escalation clause, tenants should propose as many carve-outs as possible to landlord.
A tenant’s proportionate share of real estate tax increases is often calculated based upon its space’s rentable square footage to that of the rentable square footage for the building it occupies.
Generally, it is in the landlord’s best interest to include within a real estate tax escalation provision the basis for the tenant’s square footage pro rata share calculation.
In jurisdictions where real estate taxes are calculated based upon the income generated by a building, landlords at a bare minimum should require 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.
Due to the fact that residential tenants in a mixed-use building generally do not pay for real estate taxes by way of a straight tax pass-through or escalation, it would not be uncommon for a landlord advocate to consider inflating the calculation by making the percentage higher for the commercial tenant than its pro-rata ratio.
Landlord advocates should attempt to pass any business improvement district (“BID”) or equivalent charges on to tenant based on their proportionate share of the same (as opposed to that of including such BID charges within the definition of real estate taxes).
Tenant advocates would prefer to have business improvement district (“BID”) charges as a straight pass-through expense, as opposed to having the expense included within the definition of real estate taxes.
In regards to real estate taxes, to protect against a developers’ tax abatement expiring prior to the time that a tenant’s lease will expire, tenant advocates should attempt to secure language that the base year tax be computed as if the building was fully assessed and no longer subject to any tax abatement.
Generally, it is in the landlord’s best interest at the LOI stage (as opposed to merely including such “reduction” language within the body of their original lease draft), to negotiate language that if in a subsequent year the base year tax is reduced as a result of a settlement or final determination of a legal proceeding with the tax authority, then the base taxes shall be retroactively (and for the future) adjusted to reflect the reduction.
During the LOI stage, it is in the landlord’s best interest to either remain silent on retroactive and future base tax year adjustments (leaving such “reduction” language to be included within the body of their original lease draft), or alternatively, to add “as finally determined” language immediately subsequent to whatever base tax year is agreed to in the LOI.
In situations where a tenant pays its pro-rata share of real estate taxes over a base year, the following is pro-landlord language that landlords should include in its initial lease draft: “In the event that, after an Owner’s Statement has been sent to Tenant, the assessed valuation which had been utilized in computing the Base Taxes is reduced (as a result of settlement, final determination of legal proceedings or otherwise) then, and in such event: (i) the Base Taxes shall be retroactively adjusted to reflect such reduction; and (ii) all retroactive tax payments resulting from such retroactive adjustment shall be due and payable when billed by Owner.”
Tenant advocates should include the following in the definition of real estate taxes: “With respect to any comparison tax year, all expenses, including reasonable legal fees, experts’ and other witnesses’ fees, incurred in contesting the validity or amount of any taxes or in obtaining a refund of taxes or in attempting to prevent an increase in the taxes, may be considered as part of the taxes for such tax year.”
Tenant advocates should permit landlord’s recovery of expenses in obtaining a refund of taxes or attempting to prevent an increase in taxes, only in the event landlord is successful in reducing taxes or preventing an increase in same.
In regards to real estate taxes, landlord advocates should attempt to negate tenant’s ability to bring tax certiorari proceedings or other proceedings contesting the amount or validity of any taxes.
In regards to real estate taxes, tenant advocates should push for language stating that the owner shall contest taxes for the building on an annual basis by tax certiorari or other proceedings.
As opposed to a landlord having the option at any time during the term of a tenant’s lease to make a decision on the payment method, it is preferable for a tenant to definitively know prior to lease execution whether it will be paying its tax escalation payments in a single lump sum, or alternatively, in monthly, quarterly or semiannual installments.
Generally, tenant advocates should negotiate express language within a lease that the following items will be excluded from the definition of real estate taxes: (i) any item included as a building operating expense; (ii) any assessments and/or development fees paid to a governmental or quasi-governmental body or agency in exchange for securing the right to make improvements or alterations to building; and (iii) penalties and/or interest resulting from landlord’s late real estate tax payments.
Tenant advocates should demand that if its landlord receives any rebate or refund of any real estate taxes, the landlord should credit an equitable amount to the tenant to the extent the tenant contributed to same.
Percentage rent provisions are commonly found in office leases and rarely appear in retail leases.
In the context of a retail lease where a landlord shares in the profits of a tenant, the breakpoint is that monetary threshold which, when the gross sales of a tenant’s business exceeds said amount, the landlord will share in the excess of the tenant’s gross sales over and above the pre-established breakpoint.
Generally stated, in the vast majority of retail leases nationally, seven percent (7%) is the percentage that a landlord will receive in the form of additional rent from a tenant for the tenant’s annual gross sales exceeding the breakpoint.
When negotiating a percentage rent provision, it is in the landlord’s best interest to keep the breakpoint amount as low as possible in the lease.
When negotiating a percentage rent provision, it is in the tenant’s best interest to keep the breakpoint amount as low as possible in the lease.
When advocating on behalf of tenants, in regards to percentage rent, the definition of gross sales under the lease should be closely looked at and heavily negotiated.
In regards to percentage rent within a commercial lease, a landlord computes the breakpoint by dividing the fixed rent by the percentage of profit the landlord will receive from the tenant’s gross sales.
A landlord for a retail space doesn’t need to examine a prospective tenant’s gross sales reports when performing their due diligence of the tenant.
A landlord should define “gross sales” narrowly in the percentage rent provision of the lease.
When negotiating a percentage rent provision within a retail lease, a landlord should include language reflecting that the tenant is obligated to continuously operate its business in the premises throughout the term of the lease.
When negotiating a percentage rent provision within a retail lease, landlords should make the definition of “gross sales” as broad as possible.
When negotiating percentage rent provisions within a retail lease, it is imperative that tenant advocates provide the landlord with a list of “gross sale exclusions” and implement as many carve-outs to the definition of “gross sales” as possible.
When negotiating a percentage rent provision, landlords prefer the breakpoint to increase by only 2% to 3% per annum. On the other hand, as a tenant, the preferred annual percentage increase is no less than 5% percent.
It is in the tenant’s best interest for the definition of “gross sales” in a percentage rent provision to include alterations, fitting, repairs, and delivery or shipping charges.
Examples of exclusions to the definition of “gross sales” in a percentage rent provision that a tenant should negotiate for include: alteration, gift wrapping and delivery charges; sales taxes if paid by a customer; interest, service or carrying charges for goods sold; and bulk sales and wholesale transfers of tenant’s goods and inventory.
The following is an operating expense exclusion that a tenant should include in its lease: “Costs, including permit, license and inspection costs, incurred with respect to the installation of tenant improvements made for new tenants in the building or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenants or other occupants of the building.”
The following is a reasonable item for a landlord to include in the operating expense definition within a lease that a tenant advocate should not attempt to negotiate out of the lease, “Rent for landlord’s on-site management or leasing office, or any other offices or spaces of landlord or any related entity.”
In regards to the operating expense definition, a tenant should agree to the inclusion of costs incurred by the landlord due to violations by the landlord of any governmental rule or code.
It is not in the landlord’s best interest to agree to an operating expense definition which includes any capital expenditures or any cost that is capital in nature, including costs of any capital improvements, alterations or replacements.
When negotiating the definition of operating expense, tenants should attempt to exclude late charges, interests, penalties and assessments on any charges payable by landlord which are included within operating costs.
Within an operating expense provision, it is customary for a tenant to pay for wages and benefits of any employee not attributable to the building, but under the supervision of the landlord.
Tenants advocates should consent, without hesitation, to the costs of any above electrical usage by any other tenants in the building to be included within the operating expense definition.
Tenants should negotiate that any cost of extra HVAC, janitorial or other extra work provided to the tenant in non-business hours to be excluded from the operating expense definition.
In most instances, the tenant has very little leverage in excluding advertising and promotional costs associated with the leasing of the building and the costs of signs in or on the property identifying the owners of the property or any tenant of building from the operating expense definition.
In regards to operating expenses, tenants should agree to pay organizational expenses associated with the creation and operation of the entity that constitutes the landlord.
When seeking an architect, it is often in the tenant’s best interest to create a request for proposal (“RFP”). Among other things, the RFP will detail the scope of the architect’s work required and outline the project’s administrative environment during the construction process.
When a tenant is searching for an architect in the preliminary stage of construction, a tenant’s request for proposal (“RFP”) constitutes a binding agreement upon consent by the architect (thereby, legally binding the architect to finish the job).
Without exception, all leases must contain language stating that any work that is to be performed in a tenant’s space must be subject to landlord’s consent.
There is no situation where a tenant should seek pre-approval of its construction plans by its landlord before lease execution because in all cases, lease execution is a condition precedent to the landlord’s approval.
Whether or not it is financially feasible, it is not in the tenant’s best interest to hire an architect to design construction plans for a space before lease execution.
A tenant should request pre-approval from its landlord for all decorative alterations, which do not impact the building’s system and are non-structural in nature.
If a tenant’s alteration is non-structural, a landlord will not require a tenant’s contractor to submit a certificate of insurance. A landlord will only demand a contractor’s certificate of insurance for structural alterations.
Landlord advocates should provide language in the lease that states that “Landlord’s approval of tenant’s work plans indicates that in the landlord’s judgment, all plans submitted by the tenant are in fact in accordance with applicable governmental or quasi-governmental laws, codes, rules and/or regulations.”
Tenants should request a cap on reimbursements to the landlord for its review of tenant’s construction documents.
If a landlord is providing the tenant a “landlord contribution” or “tenant improvement allowance” in order for the tenant to perform its work, there should be a specific time period – somewhere between six (6) to nine (9) months – that the tenant must use those monies or, otherwise, they will lose the right to reimbursement from the landlord for same. Conversely, if confronted with such a request by the landlord, tenants should try to insert language to the effect that if they don’t use the money within that time period, the landlord will credit back those monies to tenant as additional free rent under the lease.
As to specialty alterations, if you are a landlord, it would be beneficial to make it an express condition of the lease that any specialty alterations need to be removed by the tenant at lease expiration or earlier termination of the lease.
As the tenant, the landlord should make you aware of whether your improvements are specialty alterations or just simple alterations at the time they grant their consent to the actual plans, so that you will know in advance of performing the construction if the alteration will need to be removed by you at lease expiration or earlier termination of the lease.
Tenants should accept if the lease requires them to pay for damage caused by tenant’s removal of tenant’s trade fixtures, materials and equipment, including for wear and tear.
Generally, the tenant has the power to remove the labor employed by the landlord in the building if the labor employed by tenant to perform work is incompatible with landlord’s labor at the building.
The tenant must be aware of whether or not the building is a union or non-union building because the union labor at the building will have the power to remove the tenant from their space.
The cost of performing work with union workers adds a fairly significant amount to the cost of a tenant’s build-out.
If you are a tenant and the landlord is also going to be performing work to the space, having the right of early access is essential. Tenants should negotiate language to the effect that, somewhere between ten (10) and twenty (20) business days prior to landlord’s substantial completion of its work, tenant shall have the right to access the premises early for the purpose of installing its telecom and data wiring contemporaneously with the landlords installation of any of its own work.
As a landlord, it is imperative to include language in the lease that any and all work by the tenant must comply with any reasonable work schedule and rules and regulations proposed by you.
In the event of a sizable build-out of a space by a tenant, it would not be unreasonable for a landlord to ask the tenant to provide financial proof of their ability to complete the construction.
In the event of a sizable build-out by tenant, it is common practice for a landlord to have legal access to the tenant’s bank account to ensure that the construction is completed.
Landlord advocates should consider instructing tenants to maintain segregated bank accounts for sizable build-outs and earmark their funds for that particular purpose.
A performance bond taken out by the tenant is given to the landlord so that the landlord can raise debt to ensure that the contractor will be paid.
A performance bond is often required of a tenant to ensure that the work commenced will, in fact, be completed.
A tenant would prefer the amount of insurance required of its contractor by the landlord to be closer to $1 million, as opposed to $3 million.
Landlords typically bond, discharge or pay off liens placed against the premises as a result of tenant’s work.
Landlords should require that in connection with any tenant work that be performed at a cost in excess of $25,000 to $50,000, that copies of any and all financial records of work for that project are given to building ownership.
A DCP-36 document is a statement by the landlord ensuring that the premises leased to a tenant is asbestos free.
If a tenant’s build-out requires demolition work to be done, then the tenant should request an ACP-5 and add language that the ACP-5 must state that there is no asbestos-containing material within the premises.
Tenants should secure a representation that on the lease commencement date that any floors, ceiling, insulation, fireproofing and columns do not contain asbestos or any other hazardous material. Taking it a step further, tenants should request that if any asbestos containing material (“ACM”) is discovered in the performance of tenant’s work (the removal of which is required by law), then the landlord must be obligated to remove or reimburse tenant for its removal.
Tenants should request free freight elevator time during the performance of its work to prepare the premises (in addition to requesting additional free freight elevator time during tenant’s initial move in to the premises).
Tenants need to be aware that if the electrical work that needs to be performed will impact a major component of the building, such as the need to have additional electrical capacity brought to a tenant’s space, simply put, it will be the landlord’s choice of contractor and not tenant’s contractor performing that work.
During lease negotiations, tenants should try to get pre-approval of its contractor(s) from the landlord.
A landlord, in order to exert their control over the work being performed in its building, will sometimes have a list of pre-approved contractors for major trades (thereby controlling what work will be performed and by whom in their building).
From a landlord’s perspective, language should be included in the lease that states that landlord, at its sole cost and expense, will perform all maintenance of the air conditioning HVAC system, including but not limited to, all repairs and replacements thereto.
Tenants should readily agree to language in the lease that any violation of the tenant work restrictions by tenant would give landlord the right to injunctive relief and/or the right to terminate the lease.
In a pro-tenant lease provision regarding a tenant improvement allowance, the tenant would perform all of its work and either pay the construction costs out of its own pocket as work is completed and thereafter get reimbursed by the landlord, or receive the entire allowance at the conclusion of the project.
From a landlord’s perspective, most if not all of the tenant improvement allowance should be spent on hard costs such as costs directly related to construction (including labor, materials, equipment, etc.).
With regards to a tenant improvement allowance and determining how much of the allowance the tenant can put towards soft vs. hard costs, computer data equipment and architectural costs would be considered to be “hard costs.”
With regards to a tenant improvement allowance and determining how much of the allowance the tenant can put towards soft vs. hard costs, construction “hard costs” include labor, materials and space fit-out costs.
A tenant improvement disbursement request states that the tenant has the ability to withdraw from the agreement upon request and vacate the premises.
A tenant improvement disbursement request is a request by the tenant for disbursement from the tenant improvement allowance and generally includes, among other things, (i) a statement that the amount requested in disbursement does not exceed the actual tenant improvement allowance amount, and (ii) that all copies of contracts, work, purchase and change orders associated with the disbursement are attached to the request.
It is common for a tenant to ask the landlord’s principals to be personally responsible for the repayment of any financed additional tenant improvement allowance.
Among other responsibilities, an architect administers the construction process while simultaneously being somewhat of an asset to the tenant’s general contractor on the project.
An architect for a commercial project must also have residential real estate experience.
During the hiring process of an architect, tenants should interview multiple architects to see whether they share the same vision, creativity and competence. In addition, tenants have to gauge if they will be able to work with the architect on a personal level (and whether the price range of the architect is something that the tenant can afford).
It would not be unreasonable when interviewing an architect to ask what (i) projects they have worked on, (ii) the type of errors and omissions liability policy they have, and (iii) the fee and payment schedule.
At the bare minimum, any architectural contract tenant enters into must establish the financial parameters of the project and include the time parameters as they relate to the schematic design, design development, construction document preparation, assistance in the bidding process and contract administration.
The standard agreement form B101 or B141 drafted by the American Institute of Architects provides necessary protection for the client hiring the architect, but not for the architect.
From the perspective of the party hiring the architect, the architectural contract should contain termination provisions for “cause” and “without cause.”
If a tenant is hiring its architect to also help in the purchase of certain furniture, fabrics, materials and other items of that nature for the tenant’s space, it is imperative that you request that any and all discounts that the architect is entitled to be passed along to you.
The AIA document doesn’t properly express that the contractor must comply with all applicable provisions of federal, state and local laws in the performance of its obligations under the contract.
Generally, there is nothing wrong if the contractor asks you as a tenant or landlord for a deposit for the work to be performed in your space. Somewhere in the arena of 10% to 20% of the overall construction price is a reasonable number.
Lien waivers that are given for progress payments are commonly called partial lien waivers. A partial lien waiver should include language that the contractor or subcontractor acknowledges and represents that to date, they have received payments totaling whatever dollar amount you as the landlord or tenant have given them for labor, equipment and materials through that particular date.
Retainage is the portion of each progress payment that the landlord or tenant holds back from each progress payment to the contractor. The general but steadfast rule is the amount that must be held back is 10%. However, many savvy contractors will request that the 10% retainage be reduced to 5% at such time as the project is roughly 50% to 60% complete.
Language needs to be inserted within the construction contract that in order to take the job from being substantially completed to fully completed (and as such in order for the contractor to receive the final payment due under the contract and all of the held back retainage), the definition of full completion should include delivery to landlord or tenant of such items as (i) the final certificate of payment, (ii) all lien waivers from both the contractors and subcontractors, (iii) a certificate of occupancy for the space or a certificate of completion, (iv) close out binders, (v) operational and maintenance manuals, (vi) warranties required under the contract, and (vii), sign-offs from the landlord that the job has in fact been completed including all punch list items.
Leftover materials from a construction project are commonly referred to as “final stock.”
Examples of insurance policies that often need to be provided during the construction process will include commercial liability insurance, property damage coverage, independent contractor coverage, completed operations and contractual liability coverage along with workers compensation insurance and where applicable, automobile liability insurance.
From a landlord or tenant’s perspective, the construction contract should provide that the contractor can terminate the contract either for cause or without cause, and the landlord or tenant can only terminate the contract for cause.
Tenants should hire on their behalf and for their protection a construction manager or some other kind of landlord representative to deal directly with construction issues and the contractor during the construction project.
Landlords and tenants should consider negotiating that the agreed upon fee for construction is contingent on completion of their project by a certain date, and if not completed by such date, thereafter the fee shall be reduced by a specified amount per day.
Landlords and tenants should be aware that in order to secure penalty language for non-completion of the construction project by a certain date, a contractor may require language to be inserted in the construction contract which states that if they complete the project at a certain established date in advance prior to the estimated completion date specified in the contract, their fee increase by a similar amount for every day that they completed the project prior to the estimated completion date.
A construction contract should include a definition that “substantial completion” shall be deemed to occur when the improvements contracted for have been completed except for minor items and defects that can be completed or remedied by the contractor within a reasonable period of time thereafter not to exceed thirty (30) days.
If you are a tenant, you should know well in advance of negotiating a lease for a building whether or not the work needs to be performed by union workers, a combination of union and non-union workers or solely by non-union workers, if so desired.
When it comes to doors, the landlord and the tenant generally differ in perspective in the sense that most tenants prefer welded hollow metal door frames, whereas most landlords prefer to install solid wood doors with solid wood molding for the frame.
If the ceiling is going to be exposed (as opposed to a dropped ceiling), as a tenant, you want to make sure that the landlord will be patching and repairing and thereafter smoothing out the ceiling prior to its painting.
If the space does not have sprinklers and it’s required by law to have such, the tenant is always responsible for paying for all costs associated with the installation.
Tenants should negotiate for the right to install its telecommunications wiring, cabling and other conduit roughly 10 to 15 days prior to the substantial completion of the landlord’s work.
In order for a landlord to be able to have its architect prepare construction documents (such as architectural and electrical, mechanical, plumbing, structural and fire protection plans), landlords should establish a date certain as to when the tenant must (using the previously agreed schematic design or test fit plan as the basis for same) provide specific details and finishes as to exactly what work tenant wants performed by the landlord’s contractor to its space.
To protect against a tenant delay, the landlord should provide in the lease that any such delay which causes landlord to not substantially complete the premises in a timely fashion shall require that the lease commencement date be accelerated by one day for each day of such tenant delay.
The tenant should request language that if the premises are not substantially completed by the landlord by a date certain, then in such event tenant shall be entitled to an additional day of free rent for each and every day that the premises are not completed beyond that outside date.
In many construction projects, it is common that at some point between the commencement of the work and the ultimate completion of that work, a change order is requested by a tenant for a myriad of factors. Reasons for change orders can include, but not be limited to, conditions discovered in the field during construction that a landlord or tenant has to deviate from the original construction plan, or it can simply be a case of the tenant changing its mind and deciding it now wants a piece of work to be performed to the space that it otherwise did not contemplate at the time it approved of the construction documents.
If a change order or extra work is requested of landlord over and above that which the landlord has agreed to provide to the tenant, the additional cost associated with either of the foregoing items will be subject to both overhead and profit components for the landlord.
Landlords should insert language stating that the tenant will promptly, and in no event later than five (5) business days after the date on which tenant receives landlord’s substantial completion notice, inspect the premises to see if the space is substantially completed.
Once the premises are accepted by tenant as being substantially completed, the tenant along with landlord should execute what is commonly referred to as either a certificate of acceptance or memorandum confirming term, wherein the tenant acknowledges and accepts among other things, that the premises have in fact been substantially completed.
The assignment and subletting clause is one of the most important clauses to draft, review and negotiate in a commercial lease, primarily because of a (i) landlord’s desire to control everything and anything related to its building, including but not limited to its tenant mix and the strength of its tenant base to maximize profits and (ii) tenant’s desire to have as much business and financial flexibility through the term of the lease.
Tenant advocates need to carefully review the assignment and subletting clause within the lease and be aware that at best, most well-crafted assignment and subletting clauses will frame the landlord as somewhat of a democratic dictator, wherein the landlord essentially has the power and complete control over how, if, and when an assignment or sublease will be effectuated and, if one occurs, the terms under which the landlord will benefit as a consequence thereof.
From a landlord’s perspective, a well-crafted subletting and assignment clause may include the landlord’s right to increase fixed rent upon an assignment of the lease.
A tenant should seek carve-outs from (or delete wherever possible a) landlord’s recapture and leaseback rights in a subletting and assignment clause.
A landlord should not be concerned about the rights and obligations of a subtenant contained in a sublease, including making sure that the sublease is subordinate to the terms and conditions contained in the lease between the landlord and the tenant.
An assignment and subletting clause drafted by the landlord should include, among many things, what a landlord may condition its consent on, what a landlord’s rights are with respect to an assignment, and who pays the cost for the landlord’s review of the request to assign or sublet.
In the assignment and subletting clause, tenants and landlords should address tenant’s recapture and leaseback rights.
In a well-drafted subletting and assignment clause, the landlord should include language (and the tenant thereafter negotiate) as to the sharing of profits and key money.
Landlords should attempt to condition a tenant’s right to assign its lease or sublet all (or a portion) of its space, on landlord’s prior written consent.
When negotiating the right to assign its lease or sublet all (or a portion) of its space, the tenant should attempt to include a time limit as to when landlord’s consent must be given.
Landlords should readily agree to a tenant’s request to have “deemed consent” language where if the landlord does not respond to tenant’s written subletting or assignment request within ten (10) to fifteen (15) business days of its request, consent shall be deemed granted.
Wherever possible, a landlord should severely limit or delete language granting the tenant the right to sublet its space or assign its lease without landlord’s consent.
Landlords should require that a tenant’s written request to landlord for its consent to an assignment or sublet shall include the name of the proposed assignee or subtenants and their principals, and any other information as the tenant deems it wants to provide.
As “time kills deals,” although they might not be successful in doing so, tenants should attempt to negotiate that the required response time for the landlord’s consent to an assignment or sublet starts to run upon receipt of (i) the necessary financial information required of the subtenant or assignee, (ii) an executed term sheet or letter of intent signed by both parties and (iii) the proposed assignment form or sublease and not the executed version thereof.
A well-drafted assignment and subletting clause will often include language detailing what information a landlord will want from its tenant in the event they want to assign or sublet, such as the name(s) and current financial information of the proposed assignee or subtenant (and in many cases, those of their controlling principals).
A landlord would very likely want to recapture a tenant’s space when the market rent for the tenant’s space is significantly lower than the rent which the tenant is currently paying under the lease.
Typically, when a landlord recaptures the tenant’s space, from and after the effective date of termination of the lease, the tenant will no longer have any liability for the lease.
Generally, when a tenant sublets its space or assigns its lease, the tenant is no longer on the hook financially either primarily or secondarily for the lease.
The following language is pro-tenant language that a tenant advocate should negotiate for as early as the letter of intent stage: “In no event shall landlord have a recapture right for the space if the transfer of the lease is pursuant to a sale of a tenant’s business or assets, or to an entity that is related to or is acquiring the tenant by way of merger.”
It is especially important when representing retail tenants who have made significant financial expenditures on their space to either delete the recapture or leaseback provision or secure a carve-out that prevents landlord from exercising its recapture or leaseback rights in the event of a transfer of the lease pursuant to a sale of a tenants business or assets or to an entity that is related to or is merging with tenant.
An initial draft of a lease by a landlord should contain language stating that if a tenant is attempting to partially sublet its space, the landlord would have the right to recapture or leaseback either the entire space or the portion of the space tenant is attempting to sublet.
A tenant should readily accept a restriction which prevents them from subletting a partial space (as opposed to the entire leased premises).
A landlord should not be concerned with including a restriction that the tenant cannot advertise the subletting of their space below that of the rent provided for in the lease.
A landlord’s initial lease draft should contain language stating that the term of any sublease or any renewal or extension thereof shall not extend beyond a date one (1) day prior to the expiration or earlier termination of the term provided for under the lease itself.
A landlord’s initial lease draft should contain language specifically requiring landlord’s consent prior to a tenant subletting the premises or assigning its lease.
A landlord should not worry about its initial lease draft containing language which provides that the tenant is prohibited from negotiating an assignment or sublease with anyone the landlord has negotiated with, or shown space to, over the prior six (6) to nine (9) month period.
If there is language in the subletting and assignment clause that tenant can’t negotiate to assign its lease or sublet its space to any party who landlord has negotiated with or shown space to over the last six months or to any current occupants of the building, the tenant should include language indicating that the landlord must notify tenant within a specific amount of time from the tenant’s request (e.g., five (5) days), whether the potential subtenant or assignee has in fact been in contact with the landlord in the recent past or if in fact they otherwise occupy space in the building.
Landlords should include language in the lease that requires that tenant’s proposed assignee or subtenant be a person or entity which has a financial standing and character consistent with the standards of the landlord’s building.
A landlord should agree to a sublet or assignment without requesting the prospective subtenant’s or assignee’s financials, as it is the tenant’s task to assess the same.
Landlords should include language in their initial lease draft stating that any sublease agreement may provide that by its terms, the sublease may be further modified (including, without limitation, modification of the financial obligations, identity or character of the subtenant), without landlord’s consent.
If a landlord is going to consider consenting to a partial sublet of a tenant’s entire space where such space is going to be separately demised, the lease should provide that any portion of the premises proposed to be sublet shall not comprise less than twenty-five percent (25%) contiguous square feet of area and shall be of a shape or configuration such that both the area proposed to be sublet and the remainder of the premises shall, in landlord’s judgment, constitute commercially marketable space as separate rental units.
Tenants and their representatives should attempt to include a reasonable financial cap on its reimbursement to landlord for landlord’s outside counsel fees in reviewing the sublet/assignment request.
A tenant should never expect to receive any of the compensation paid by sublessee over and above the rent payable under the lease, as landlord is always entitled to any profits received on its property.
The landlord should include as broad language as possible when defining as many allowable deductions by tenant in determining a tenant’s profit from a sublease or assignment.
In regards to the sharing of profits from subletting or assigning with a landlord, a tenant should attempt to include attorney, broker, accountant, architect and engineering fees, along with any other concessions granted or work provided to the subtenant or assignee (such as free rent concessions, improvement allowances and any construction costs) as part of those deductions allowable when determining net profits to be shared.
In the event of an assignment, landlords should attempt to expand the definition of consideration paid to tenant that the landlord is entitled to share in to include “key money” for the sale of the lease, as well as sums paid for the sale, rental or use of tenant’s furniture, fixtures and equipment.
With regards to profit sharing in an assignment and subletting clause, generally, it is more important for an office tenant where the landlord provides a turnkey build-out than for a retail tenant where the landlord provides little or no contribution in the way of a tenant improvement or landlord’s work to secure language that (i) excludes tenant’s unamortized costs of its furniture, fixtures and equipment and improvements from the definition of consideration that landlord is entitled to share in, (ii) sets a cap on the amount of profit landlord is entitled to share in, and/or (iii) excludes any profit received from an assignment.
Use restrictions and a landlord’s right to recapture and/or leaseback are not among the items that landlords need to ask (and tenants need to secure carve-outs) for in the assignment and subletting clause of a lease.
In a well drafted assignment and subletting clause, the landlord should include use restrictions, specify a profit sharing arrangement, have a recapture or leaseback right, and wherever possible, dictate that landlord will be entitled to a rent increase of 5% to 10% on almost any assignment or sublet.
In the event that the landlord within the lease conditions a sublet or assignment on a rent increase of 10%, a tenant should (i) delete the provision, (ii) seek to reduce the potential rent increase by a lower amount (e.g., 5%), and/or (iii) make the provision non-applicable in the event of an assignment or sublet to a related entity or in respect to a bona fide sale or acquisition of a tenant’s assets or business.
Allowing a tenant to have a broadly defined use clause would not be beneficial for a landlord because of a landlord’s interest to have absolute control over their property, including the profits derived therefrom, and its tenant mix.
To have a use clause for a nail salon that merely states that “Tenant shall use the premises for a nail salon and no other purpose” is an example of a narrowly defined and pro-landlord provision.
Many landlords prefer to prohibit the subleasing of space or assigning of a lease to “a federal, state or local governmental division, department or agency, including, without limitation, court, social security offices, labor department office, drug enforcement agency, motor vehicle agency, postal service and military recruitment offices,” as these types of tenants, among other things, increase traffic in the building which consequently result in greater operating expenses of a building from both a maintenance and security standpoint.
A landlord should not only narrowly define the tenant’s permitted use of the space, but also include in its initial lease draft a myriad of prohibited uses and if possible, a list of any “exclusivity provisions” that the landlord has agreed to with other tenants.
Virtually all landlords are not concerned with having a prohibition of leases to unions or labor organizations.
Most well-drafted initial versions of a lease will include language stating in some manner that an assignment requiring landlord’s consent shall be deemed to include among other things: (i) any change in control of the entity; (ii) a withdrawal or change, whether voluntary, involuntary or by operation of law of any one or more of the partners, shareholders, members or other owners if such withdrawal represents fifty percent (50%) or more of the ownership interests of the partnership, corporation or limited liability company as then constituted, or the dissolution of the entity; and (iii) the sale of fifty percent (50%) or more of the value of the assets of tenant.
Tenants should want the right, without landlord’s consent, to assign or sublease to a related entity (i.e., a wholly-owned subsidiary of tenant or any corporation or entity which controls or is controlled by tenant or is under common control with tenant), regardless of the net worth of the related entity.
Tenants and their leasing professionals should strongly consider adding the following leasing carve-out to the definition of assignment that would require landlord’s consent: “The direct or indirect sale of a non-controlling interest in tenant, regardless of the percentage of ownership transferred.”
Landlords should attempt to include language in their initial lease draft that upon an assignment or sublet, tenant agrees that it (or its assignee) shall deposit with the landlord as additional security, up to three (3) additional months of security based upon the then monthly installment of fixed rent payable by tenant.
In the event of an assignment or sublease, a tenant should gladly accept landlord’s right in the lease to request three (3) months (or more) of security deposit to ensure landlord has funds available to cover any potential defaults under the lease.
Tenants should accept “waiver” language in the lease that provides that in no event shall tenant be entitled to make, nor shall tenant make any claim and waives any such claim, for monetary damages based upon any claim or assertion that the owner has unreasonably withheld or unreasonably delayed its consent or approval to a proposed assignment or subletting, with tenant’s sole remedy being an action for specific performance or injunction, even where landlord has acted in bad faith.
From a landlord’s perspective, once there is an assignment or sublet, the primary tenant should no longer be liable.
Landlords should include in the lease that upon an assignment of the lease, they have the right to collect rent directly from the assignee.
Generally, upon an assignment of a lease, the named tenant and any guarantor of the lease are released from any liability under the lease.
Tenants should attempt to negotiate a basic desk sharing and permitted occupants clause, which provides that the tenant shall have the right, without landlord’s consent, to license or sublease up to 1/3 of its space in the aggregate to another user or users.
Tenants and their leasing professionals should make sure that any rights of landlord as to recapture or profit sharing do not apply to any permitted occupant or desk sharing arrangement.
Although not necessarily common in retail leases, it would be in the best interest of a retail tenant to request a permitted occupant provision to (i) drive additional traffic to the space, (ii) make better use of the allotted space and (iii) help it effectively reduce its rent (given that the permitted occupant will be paying the tenant for its permitted occupancy).
The benefits of subleasing space for a potential subtenant include: (i) below market rents; (ii) pre-built office space without the necessity of large capital expenditures; and (iii) the potential inclusion of modern phone, furniture and modular work station systems, not to mention filing cabinets and chairs at little or no cost to the subtenant.
When subletting a space, a tenant generally remains primarily liable for its financial and non-financial liabilities to the landlord, despite the sublease.
Despite its lack of direct privity with the landlord, a subtenant need not be concerned about a failure of the sublandlord to perform its obligations under the lease.
Tenant advocates should include language in the assignment and subletting provision stating that “Landlord should not be allowed to unreasonably withhold, condition or delay its consent.”
In an assignment and subletting clause, many leases provide that the space can be advertised or subleased for an amount less than the lower of the rental called for in the lease or the then fair market value.
In addition to trying to secure a landlord non-disturbance and attornment agreement (“NDA”) during the sublet consent process, potential subtenants should negotiate with the sublandlord that they can provide the security deposit in the form of a letter of credit to protect themselves in the event the sublandlord defaults under the master lease and/or goes bankrupt.
It is assumed that all permitted subtenants (or assignees) are allowed to exercise the tenant’s renewal rights under the lease, even without language in the lease stating same.
In a market where current rents are high, but the rent under the lease provides for a significantly below market rent, landlords may strongly consider electing to recapture the premises in the event of a proposed transfer by tenant.
Tenants and potential subtenants should know that “time kills deals,” and unless negotiated otherwise before a tenant signs its lease, landlords generally have at least thirty (30) days, if not more, from the receipt of a completed sublease package to make a decision as to whether to consent to the sublease (or recapture the space).