• September 13, 2020

Key Terms: Negotiating Security Deposits & Good Guy Guarantees in a Commercial Lease

Key Terms: Negotiating Security Deposits & Good Guy Guarantees in a Commercial Lease

Additional Rent: 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.

Amortization | Amortization Schedule: Amortization is 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. Amortization can also be described as a reduction of a debt by regularly scheduled payments of interest and principal over a designated period of time. An amortization table or schedule illustrates such payments (or deductions) and the remaining balance due after each payment is made.

Broom Clean: 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).

Build-Out: Improvements made to the interior of the leased premises according to a tenant or landlord’s building specifications.

Burndown of Security Deposit or Letter of Credit: A provision in a lease permitting the amount of the required security deposit to decrease over time subject to specified benchmarks and conditions (e.g., “provided that this Lease is in full force and effect and Tenant shall not be in monetary or material nonmonetary default of this Lease (beyond the expiration of any applicable notice and cure period), then Tenant may provide to Owner (and Owner shall promptly thereafter execute and deliver to Tenant, if necessary) such instruments and authorizations as may be reasonably required by the issuer of the Letter of Credit to reduce the face amount thereof by $250,000.00 to $500,000.00 as of the first (1st) day subsequent to the fifth anniversary of the Rent Commencement Date”). It is also known as a “Security Deposit Reduction.”

Cash Security Deposit: At its simplest level, it is cash security 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. If the tenant is in default (beyond the expiration of any applicable notice and cure period described in the lease), generally stated, the landlord can “draw” on the security deposit in order to “cure the default.”

Concessions | Tenant Concessions: 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.

Default: 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.

 

Due Diligence: 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.

Exit Strategy: 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. For example, subject to conditions contained in the lease, the release of a guarantor from a guaranty upon assignment of the lease which has been guaranteed, provided that a replacement guaranty is executed by a principal of the assignee.

Financial Statements and Records: 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).

Free Rent Concession(s): A rent abatement given by the landlord to the tenant, generally at the commencement of a lease term. Such free rent concessions are often dependent on a number of factors including the length of the lease term, the amount of security deposit put down by the tenant, the current market conditions, the other concessions the landlord is granting the tenant, and whether the lease is for office, retail, or industrial use.

Good Guy Guaranty (“GGG”) | Guarantee: 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. In a basic GGG, at such time as the space is given to the landlord broom clean and vacant with all rent paid through the date of surrender, an event that the principals unilaterally control – the aforementioned guarantee will no longer be in full force and effect.

Examples of “legal and business steroids” landlords to add to a basic GGG can include: (1) guarantee of non-monetary lease covenants, (2) construction completion and a lien free guarantee, (3) space returned in condition required under the lease, (4) full amount of security deposit remaining intact at time of surrender, (5) 90 to 180 days’ advance written notice of surrender date, (6) reimbursement of landlord’s unamortized costs, such as brokerage commissions, free rent concessions, tenant improvement allowances and landlord’s work and (7) the GGG remaining in effect in the event of an assignment.

Guarantor: A person or entity that agrees to be responsible for another’s debt or performance under an agreement (such as a lease).

Letter of Credit (“LOC”): The requirement of a tenant, in lieu of making a cash security deposit, to maintain in effect at all times during the lease term (as well as any renewals or extensions thereof and for a period of up to ninety (90) days thereafter), an irrevocable, self-renewing letter of credit. The letter of credit shall: (i) be clean, unconditional and non-negotiable, except by the landlord; (ii) be for an initial term of not less than one (1) year; (iii) provide that the landlord shall be entitled to draw upon the letter of credit upon presentation of a sight draft stating that an uncured event of default has occurred under the Lease; and (iv) provide that the letter of credit shall be deemed automatically renewed, without amendment, for consecutive periods of one (1) year, each year during the term of this Lease, and for a ninety (90) day period thereafter (as well as any renewals or extensions thereof) unless the bank shall notify landlord on not less than thirty (30) days preceding the then expiration date of the letter of credit, that the bank elects not to renew such letter of credit, in which event the owner shall have the right, by sight draft presented to the bank, to receive the monies represented by the then existing letter of credit and to hold and apply such proceeds in accordance with the provisions of this lease. In the event that the landlord uses, applies or retains any portion of the proceeds of the letter of credit, the tenant shall be required to restore the amount so applied or retained.

Personal Guarantee | Personal Guaranty | Straight Personal Guarantee | Straight Personal Guaranty: An agreement in which an individual agrees to be personally liable for the obligations of a party (i.e., the tenant) to a lease.

Rent Concession(s) | Rental Relief | Rent Reduction | Rental Concession | Rent Abatement: A reduction in the amount of rent (e.g. full rent, half rent, etc.) that tenant owes to landlord for a defined period of time. The period often commences at the beginning of the term, but sometimes is spread out over the course of the lease term or towards the end of lease term.

Security Deposit Reduction: A provision in a lease permitting the amount of the required security deposit to decrease over time subject to specified benchmarks and conditions (e.g., “provided that this Lease is in full force and effect and Tenant shall not be in monetary or material nonmonetary default of this Lease (beyond the expiration of any applicable notice and cure period), then Tenant may provide to Owner, and Owner shall promptly thereafter execute and deliver to Tenant, if necessary, such instruments and authorizations as may be reasonably required by the issuer of the Letter of Credit to reduce the face amount thereof by $250,000.00 to $500,000.00 as of the first (1st) day subsequent to the fifth anniversary of the Rent Commencement Date”). This is also known as a “Burndown of Security Deposit or Burndown of Letter of Credit.”

Sunrise Provision: A provision of a lease which only becomes effective after a specified period of time or as of a certain date. 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.

When negotiating, agreeing to a “sunrise provision” is often used as a middle ground compromise between a landlord and a tenant when the landlord is requiring that a particular provision be included within a lease when a tenant wants that clause deleted from the lease.

Sunset Provision: A provision of a lease which, after a specified period of time or as of a certain date, is no longer considered in full force and effect. An example of a provision considered to be a “sunset provision” is when a tenant has to pay back the unamortized portion of any free rent and/or brokerage commissions only if the tenant is in default of the lease during the first three (3) to five (5) years of the lease term.

When negotiating, agreeing to a “sunset provision” is often used as a middle ground compromise between a landlord and a tenant when the landlord is requiring that a certain provision be included within a lease when a tenant wants that clause deleted from the lease.

Unamortized Cost: The actual cost of an asset or concession less the depreciation or amortization of such item, generally on a straight line basis (e.g., landlord’s work and/or a brokerage commission, free rent concession, tenant improvement allowance or professional fees incurred in connection with a lease).   

Unamortized Cost Reimbursement: In the context of a commercial lease, 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).

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