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The Not-So-Standard Commercial Lease Anthony W. Fitzgerald Anthony W. Fitzgerald is a partner with Curtis, Mallet-Prevost, Colt & Mosle LLP, in New York, and is co-chairman of the firm’s Real Estate Department practice. A “standard” commercial lease usually favors the landlord, but with attention to its contents and negotiation of its terms, it can benefit the tenant. IT ALWAYS AMUSES ME when a client who is not in the real estate business calls and says that he or she will be sending me a “standard office lease.” The client usually says that it is not a matter of great urgency, but requests us to give the lease a quick scan. Nothing serious—just that the lease is on a take-it-or-leave-it basis, the broker has already worked out a term sheet, and the client didn’t engage me or any other attorney in the initial stages (searching for the premises or dealing with the real estate broker). Consequently, the client will have had very little, if any, voice in the numbers formulating the transaction. In such a situation, there isn’t much more left to negotiate than the base year upon which real estate tax escalation will be charged, the verification of the current amount of rent inclusion costs or electricity meter installation costs, and the accuracy of the tenant’s “share” of operational costs. Not exactly the heart of the deal. THE REALITY OF THE STANDARD LEASE • The casual “once over” for the standard form lease is also likely to be requested for something which is, in reality, a rather complicated document. It might be some version or adaptation of the “Standard Form of Lease” (including the usual rider), either issued by the New York Board of Title underwriters (used in many situations by smaller firms for small leases with a voluminous attached rider) or perhaps the form used by the Association of the Bar of the City of New York. There are likely to be 50 to 75 comments on it. If the proposed lease is of a sizeable proportion, there may be master computerized content of 30 to 100 or more pages. The object of this article, however, is not to criticize or unduly condemn any forms of lease or any landlord which issues its “standard” or pro forma lease for particular premises. The effort here is to address some of the issues that typically arise, and to provide guidance on them, so you can help out the client who needs a little more than just perfunctory “lawyer blessing” on a very important document. Assignment Or Subletting Most leases in large cities expressly prohibit assignment or subletting whether by operation of law, transfer of interests of the tenant or otherwise, in--cluding the disallowance permitting the premises or any part thereof to be occupied or used for desk space, mailing privileges or otherwise, unless expressly permitted by the landlord. Assignment: Entire Interest As is the case in New York, if the landlord ar-bitrarily withholds its consent to an assignment or subletting, and such a clause is allowed to remain in the lease, a tenant has no basis upon which to argue against the landlord’s decision. In New York, as opposed to several other states, the landlord may be arbitrary in withholding its consent to an assignment or subletting. An assignment in the lease by a tenant conveys the tenant’s entire interest or estate to the assignee of the lease. The assignee steps into the shoes of the assignor-tenant and assumes all the obligations under the lease in most instances. In that situation, the landlord/tenant relationship is created between the landlord and the assignee, although in most cases the original tenant-assignor remains liable to the landlord under the lease for all the leasehold obligations. Only in very few situations such as recapture by the landlord and a subsequent subletting would a tenant be successful in negotiating a release of its obligations under the lease. Sublease: All Or Less Than Entire Interest A sublease, on the other hand, is a further leasing by a tenant to a subtenant of all or part of the premises which has been demised to the tenant under the lease. A sublease runs for a term which is less than the remaining term of the lease. Should the premises be demised by a sublease for the entire remaining term of the lease it will be deemed an assignment. Most subleases, therefore, have a term which ends at least one day before the expiration date of the main lease. Landlord’s Consent In considering a consent to subletting or an as-signment, landlords generally restrict such rights in order to accomplish certain objectives. These can include: • Retaining control of the building and the demised premises; • Taking advantage of upswings in the market place; and • Controlling the use of unused space which may affect other tenants in the building. If the landlord agrees to not unreasonably withhold its consent to an assignment of a lease or a subletting, then the landlord cannot withhold consent on eco-no-mic grounds, and in New York the landlord is restricted to certain objective criteria (some of which, however, remain questionable, such as the right to decline an assignment or subletting if in the landlord’s sole judgment it would change the character of the building). Typical Criteria For Consent Most landlords spell out such criteria in several pages of the lease. Among such criteria would be: • • • • • The creditworthiness of the subtenant; The character of the subtenant’s business; The subtenant’s proposed use of the demised premises; and The nature of the subtenant’s occupancy. Landlords also restrict tenants against subleasing or assigning to more than a certain number of occupants per floor to prevent overcrowding. Restrictions also reach any party with whom or with which the landlord is actually dealing, or current occupants of the building. Most landlords treat the transfer of a controlling interest of a tenant as an assignment which requires its consent and limits a subletting to the same or similar use as that occupied by the tenant. Recapture Rights Landlords are in some cases including recapture rights in the event of a subletting or an assignment. In such cases, landlords require a lead notice period when the tenant intends to sublease or assign, along with a detailed description of the transaction. When the landlord insists on a right of first offer, the provision in the lease requires a description of the transaction, including the details relating to the proposed assignee or subtenant. When the Landlord has the right of first refusal, the landlord requires a delivery of the assignment or sublease to the landlord to trigger its consent or recapture rights. Landlords may impose different recapture rights such as: • Termination of the lease with respect to the portion of the space affected; • Taking an assignment of the lease; and • Preserving the right to sublet the space proposed to be subleased. Recapture of a portion of the space raises all sorts of interesting questions: • Who will be responsible for construction costs with respect to a partial recapture? • How will the rent and additional rent be adjusted? • What responsibilities will the landlord, subtenant or assignee have with respect to returning the recaptured space and in what condition? • Who pays brokerage costs?