28C.03 The Landlord's Checklist LANDLORD'S CHECKLIST OF SILENT LEASE ISSUES
TABLE OF CONTENTS
1 Alterations
2 Assignment and Subletting: Consent Requirements
3 Assignment and Subletting: Implementation
4 Bankruptcy
5 Bills and Notices
6 Compliance with Laws
7 Consents 8 Default
9 Destruction, Fire and Other Casualty
10 Development-Related Issues
11 Electricity
12 End of Term
13 Environmental
14 Escalations
15 Estoppel Certificates
16 Expansion/Renewal Options
17 Failure to Deliver Possession
18 Fees and Expenses
19 Future Documents and Deliveries
20 Guaranty
21 Inability to Perform
22 Insurance
23 Landlord's Access to the Premises
24 Landlord's Liability
25 Landlord's Representations
26 Maintenance and Repairs
27 Occupancy
28 Percentage Rent and Radius Clause
29 Quiet Enjoyment
30 Real Estate Taxes
31 Remedies of the Landlord32 Rent
33 Rules and Regulations
34 Security
35 Services Provided by the Landlord
36 Subordination and the Landlord's Estate
37 Tenant's Equipment and Installations 38 Use
39 Vault Space
40 Miscellaneous
41 Due Diligence; Other Documents
42 Post-Closing; Monitoring
1. ALTERATIONS 1.1 Completion Bond. Before the tenant undertakes alterations estimated to
cost above $_____, require the tenant to deliver a bond or letter of credit in
an amount equal to __% of the estimated cost. If the landlord doesn't require
such a measure because of the tenant's great credit, consider rescinding that
concession if the tenant's credit changes or if the tenant assigns the lease.
1.2 Restoration. State that the landlord's consent to any alteration does
not waive the tenant's obligation to remove it and restore the premises at the
end of the term.
1.3 Artists' Rights. Prohibit the tenant from installing any artwork that
could give the artist a right under federal law to prevent the artwork from
being removed.
1.4 Third-Party Fees. Require the tenant to reimburse the landlord for its
architect's and other professional fees in reviewing plans and specifications.
1.5 Supervisory Fee. Provide that the landlord may charge a supervisory
fee for supervising the making of alterations and reviewing environmental
conditions. The landlord's wage schedule or standard rates in effect from time
to time should constitute prima facie evidence of reasonableness.
1.6 ADA. Require tenant's alterations to comply with The Americans with
Disabilities Act of 1990, 42 U.S.C. §§ 12101 et seq. (the "ADA").
1.7 Labor Harmony. The tenant's obligation to maintain labor harmony
should relate not merely to construction, but also to any other activities at
the property.
1.8 Exterior Hoist. If the tenant wants to use a hoist outside the
building, all lease provisions, rules and regulations that govern alterations
and activities within the premises should also apply to the hoist. Require the
tenant to remove the hoist by a certain date. Should the landlord have the right
to "free rides" on any such hoist? If other tenants complain about the hoist or
even try to claim rent offsets because of it, the tenant should indemnify the
Landlord. If the landlord has installed the hoist, provide for scheduling,
charges, and the right to remove it.
1.9 Tenant's Records. Consider requiring the tenant to maintain records of
the costs of its improvements for six years. This information may help in real
estate tax protest proceedings.
1.10 Warranties. Require the tenant to provide a warranty on completed
restoration work or at least an assignment of any warranty it receives from its
contractor. If the tenant surrenders space (either at the end of the term or
because the tenant reduces its occupancy), require the tenant to assign to the
landlord any warranties the tenant received for any improvements or equipment
surrendered.
1.11 Modifications to Plans and Specifications. If the tenant modifies its
plans and specifications after the landlord approves them, the alterations as
modified should still meet a certain level of quality, whether or not the
landlord can control changes.
1.12 Plans and Specifications. Require the tenant to deliver plans and
specifications (initial and as-built) in a specified (or more current) computer
aided design ("CAD") format using naming conventions and other criteria as the
landlord approves or requires.
1.13 Activities Outside Premises. If the lease lets the tenant perform any
alterations outside the premises (e.g., cable or riser installations, or changes
in elevator operation), then require the tenant to comply with all the same
requirements that would govern alterations within the premises.
2. ASSIGNMENT AND SUBLETTING: CONSENT REQUIREMENTS2.1 Change of Control. Treat a change of control of the tenant (unless a
public company) as an assignment. To monitor, require the tenant to: (a)
represent and warrant current ownership structure when the parties sign the
lease, to establish a baseline and define "change of control"; (b) deliver an
annual certificate from its accountant or attorney confirming the tenant's then-
current ownership structure; and (c) report any change of control. Do not refer
only to corporations, partnerships, and limited liability companies. The
restriction on transferring equity should apply even to future entity types not
yet known.
2.2 Continuing Status as Affiliate. If the lease allows "free transfers"
to the tenant's affiliates, require that the assignee or subtenant thereafter
remain an affiliate throughout the lease term. If affiliation ceases, the tenant
must notify the landlord (but the landlord should not assume the tenant will
remember to do so). At that point the transaction becomes a prohibited
transaction requiring the landlord's consent and may, if not cured, become an
event of default.
2.3 Restriction. Prohibit assignments/sublets to existing tenants in the
building or for less than fair market rent or the present rent. Prohibit the
tenant from subleasing to any entity (a) that occupies any other building the
landlord (or its affiliate?) owns within a specified area, or (b) with whom the
landlord is actively negotiating or has recently negotiated. Consider
prohibiting any assignment/sublet to (1) any party with whom the landlord (or
its affiliate) is in litigation (or its affiliate), or perhaps even any party
with whom other landlords have had significant litigation; (2) a controversial
entity such as a terrorist organization even if for a permitted use; or (3)
specified entities or their affiliates (such as a chain store or multi-site
restaurant operator that may have become notorious for its aggressive litigation
programs against landlords). On the other hand, the landlord may prefer not to
limit itself to any particular grounds for disapproval and rely instead on its
right to "reasonably" reject proposed transactions on grounds such as those
suggested in this paragraph. This approach has the disadvantage, though, of
creating an amorphous factual issue that may require litigation to resolve.
2.4 Future Sublease-Related Transactions. If the tenant sublets in
compliance with the lease, future transactions might arise from that subletting.
Therefore, require the tenant to obtain the landlord's approval for any future
modification or termination of a sublease, any recapture, or any assignment by
the subtenant.
2.5 Discretionary Consents. If the business agreement between the parties
does not require the landlord to be reasonable about assignment or subletting,
simply ban both-instead of requiring "consent in Landlord's sole discretion"-to
avoid possible claims of an implied obligation to be reasonable. Also try to
negate any implication that the landlord must at least consider whatever
proposal the tenant presents.
2.6 Prohibit Collateral Assignment of Lease. Any prohibition against
assignment and subletting should also prohibit any collateral assignment of the
lease (i.e., mortgaging, encumbering, or hypothecating the lease).
2.7 Assignment/Sublet of Other Tenants' Leases. Even if other tenants'
leases permit assignment or subletting, ask this tenant to agree not to accept
an assignment of any other tenant's lease or a subletting of any of its premises
in the building without the landlord's consent.2.8 Diplomatic Immunity. Even if the landlord has agreed to be reasonable
in granting its consent, prohibit assignment/subletting to any person entitled
to claim diplomatic immunity, or to any domestic or foreign governmental entity.
2.9 Fixture Financing. Prohibit the tenant from financing its fixtures, or
impose appropriate protective conditions upon any such financing arrangements.
3. ASSIGNMENT AND SUBLETTING: IMPLEMENTATION
3.1 Tenant's Profit. If the tenant must pay the landlord a share of the
consideration or other profit the tenant receives from a subletting or
assignment: (a) the landlord can audit the tenant's books and records, (b) any
tenant revenue attributable to rent concessions under the lease belongs entirely
to the landlord (a proposition that has a ring of fairness to it but may
reverberate with a dull thud); (c) if the tenant does not furnish the necessary
information for the landlord to calculate assignment/subletting profits, the
landlord may estimate and the tenant must pay the estimated amount until a
correct amount is established; (d) the landlord may condition the closing of any
assignment/subletting transaction on the tenant's acknowledging the amount of
the landlord's profit participation and making any payments due on closing that
transaction; (e) the landlord may collect profit payments from the assignee or
sublessee if the tenant fails to pay; and (f) for a sublease, amortize the
tenant's transaction costs over the term of the sublease rather than up front.
Consider requiring the tenant to pay the landlord's share of sublet profits in a
present valued lump sum at sublease execution.
3.2 Assignor Guaranty. As a condition to any assignment that the lease
allows, consider requiring any unreleased assignor-and any guarantor of the
lease-to deliver a guaranty with full suretyship waivers or at least an estoppel
certificate to confirm that the signer remains liable. In either case, state
that any future changes in the lease obligations do not exonerate the guarantor,
but the guarantor is not responsible for any incrementally greater obligations.
3.3 Subtenant Nondisturbance. If the landlord agrees to provide
nondisturbance or recognition rights to subtenants, require that the
"nondisturbed" (or "recognized") subleases satisfy clear and objective
standards. Before agreeing to nondisturb (or recognize) any actual or potential
sublease, the landlord must ask whether it is willing to be "stuck with" that
sublease and all its terms if the main lease terminates. The landlord may want
to require minimum rents, a certain form of sublease, arm's length negotiations,
a reasonable configuration (at least a full floor?), and other characteristics.
If the tenant occupies multiple floors, try to limit the nondisturbed space to
full floor(s) at the top or bottom of the tenant's stack. Subtenant
nondisturbance or recognition agreements can create issues similar to partial
release clauses in mortgages (concern about cherry picking and/or destruction of
expected value), and opportunities for fraud or abuse. Any landlord obligation
to deliver agreements to protect subtenants should be conditioned on the absence
of any default under the main lease. If the landlord does agree to enter into a
nondisturbance agreement with any subtenant, the landlord may want to hold the
subtenant's security deposit and may want the tenant to reimburse the landlord's
legal fees in reviewing the sublease and negotiating the nondisturbance
agreement.
3.4 Contiguous Subleased Floors. Consider requiring sublet floors to be
contiguous--ideally at the top or bottom of the tenant's stack. Perhaps require
that any subleasing maximize contiguity (in some defined way), to facilitate
future transactions and flexibility.
3.5 Recapture Right. If the tenant wants to sublease any space, give the
landlord a right to recapture that particular space. If the tenant wants to
sublease 50% or more of its space, also give the landlord a recapture right for
the entire leased space. If the landlord exercises any recapture right, consider
requiring the tenant to pay the landlord a brokerage commission equal to what
the tenant would have paid a third party to broker a comparable transaction. For
any partial recapture right, require the tenant to pay for any demising wall or
other space separation expenses that may arise. These could include code
compliance expenses to establish a legally separate occupancy.
3.6 Transactional Requirements. For any assignment/sublet, independent of
any consent requirements, the tenant must also satisfy certain conditions (e.g.,
permitted use, reputation and net worth of assignee/subtenant, no violation of
exclusives) and delivery of certain documents satisfactory to the landlord
(e.g., assignee/subtenant's certified financial statements, unconditional
assumption of the lease, reaffirmation of guaranties).
3.7 Prohibited Use. Even if the tenant has certain rights to assign or
sublet, the new occupant should expressly remain bound by the use clause in the
lease. Although that proposition may seem self-evident, courts may infer some
unintended flexibility on use if the parties negotiate a right to assign or sublet.
3.8 Rent Increase upon Assignment. If the tenant assigns, let the landlord
increase base rent to fair market rent. When assigning a lease with percentage
rent, consider resetting the base for the rent calculation-either to current
market rent or, in the case of retail space, the sum of existing base rent plus
the average percentage rent for some specific period before the assignment.
(Anemic percentage rent will, however, often correlate with a tenant request to
assign or sublet.)
3.9 Leasing Agent. Require the tenant to designate the landlord's managing
agent as leasing agent for any contemplated assignment or sublet.
3.10 Processing Fee. Charge a processing fee for any
assignment/subletting, payable when the tenant submits an application.
3.11 Advertisements. The landlord should have the right to pre-approve any
advertisements for assignment or subletting.
3.12 ADA. Prohibit any assignment or subletting that triggers incremental
ADA compliance requirements in the building or by the landlord in the premises.
3.13 Confidentiality. Require the tenant to keep confidential the terms of
any assignment or sublease, particularly if the tenant's pricing is below
current market value (or the landlord's conception of current market value) or
the landlord's asking price for direct space.
3.14 Partial Subleases. Wherever the lease refers to subletting, it should
refer to a subletting of "all or any part of" the premises, because a bare
reference to subletting may let the tenant argue that the provision relates to a
sublet of the entire premises only. This is yet another example of how a literal
and narrow reading (or the possibility of a literal and narrow reading) produces
ever-longer legal documents.3.15 Breach of Anti-Assignment Covenant. A breach of the covenant not to
assign the lease without the landlord's consent should create an automatic event
of default, not merely a generic default for which the tenant might have a cure period.
4. BANKRUPTCY
4.1 Multiple Leases. If the same tenant leases multiple locations, try to
structure the transaction as a single combined lease for all locations to
prevent the tenant from cherry picking in bankruptcy. If the landlord must use
multiple leases, try to provide cross-defaults and give all the leases the same date.
4.2 Shopping Center Premises. Bankruptcy Code § 365 (11 U.S.C. § 365)
gives a landlord greater rights upon a tenant's bankruptcy if the landlord's
building is a "shopping center." But the statute does not define "shopping
center." Within reason and the bounds of good taste, the landlord can perhaps
include favorable language in the lease to confirm that the building is a
"shopping center."
4.3 Characterize Tenant Improvement Contribution as Loan? To the extent
that the tenant's rent represents reimbursement to the landlord for tenant
improvements, consider restructuring such payments as payments on a loan,
independent of the lease, evidenced by a note. Require the tenant to pledge (at
least) its leasehold as security. This structure may give the landlord an
argument to avoid Bankruptcy Code limitations on the landlord's claim for
"rent," although the landlord would then face all the risks of being a secured
or unsecured creditor instead. The landlord's choice of poison will vary with
the circumstances, but the landlord and its counsel may want to consider the
issue in structuring the lease.
4.4 Letters of Credit. If the tenant delivers a letter of credit in place
of a security deposit for more than a year's rent, consider the effect of
Bankruptcy Code § 502(b)(6) (11 U.S.C. § 502(b)(6)). Check the drawdown
conditions of the letter of credit to confirm that the landlord has the right
(though not the obligation) to draw on the letter of credit if the tenant files
bankruptcy, even if the tenant is totally current in its rent obligations.
5. BILLS AND NOTICES
5.1 Who May Give Notices. State that the landlord's counsel or managing
agent (as engaged from time to time) may give notices for the landlord.
5.2 Tenant's Notices. Copies of notices from the tenant (or perhaps just
notices of alleged landlord defaults) should also go to the landlord's counsel.
5.3 Next Business Day Delivery. Define "overnight" delivery as "next
business day" delivery, to avoid occasional case(s) saying "overnight" doesn't
mean any particular number of nights (more bad cases producing ever-long
documents).
5.4 Routine Rent Bills. Avoid any suggestion that the landlord cannot send
routine rent bills by ordinary mail and only to the tenant (no copies to, e.g., counsel).
6. COMPLIANCE WITH LAWS6.1 Notice. Require the tenant to give prompt notice to the landlord of
any violation of any legal requirement that applies to the premises or the building.
6.2 Legally Required Improvements. Require the tenant to perform all
improvements to the premises required by law. If the tenant resists (which it
probably will, and should), consider limiting the tenant's obligation to future
enacted laws. (The tenant will probably still resist and the parties will
probably reach the usual negotiated outcome in any space lease. The landlord
will bear the risk of present and future laws that generally govern similar
buildings and generic occupancies like the tenant's. The tenant will be
responsible for legal requirements that arise from the tenant's nongeneric or
unusual use of the space.)
6.3 ADA. If the tenant uses the premises as "public accommodation" or for
any other use that triggers extra ADA requirements in the building, the tenant
should pay for the work necessary to bring the premises into compliance with
such legal requirements.
6.4 Definition. Define "Laws" broadly to include future enactments and
amendments, insurance regulations and requirements, utility company
requirements, administrative promulgations, and recorded declarations.
7. CONSENTS
7.1 Reasonableness. When the landlord agrees to be "reasonable," set
criteria for reasonableness. Any mortgagee's disapproval of a matter should
automatically constitute a "reasonable" basis for the landlord to withhold
consent. Without some criteria or clear flexibility for the landlord, the
interpretation of "reasonableness" can result in litigation that will often be
stacked in favor of the tenant.
7.2 Scope of Consent. Any consent applies only to the particular matter
under consideration.
7.3 Deemed Consent. If the landlord has agreed that failure to grant or
withhold consent within ___ days is deemed consent, try to: (a) have this
concept apply only in particular areas (e.g., consents to transfers), (b)
require a reminder notice before the deemed consent arises, and (c) require both
the original notice and the reminder notice to state conspicuously (in all
capital boldface letters) that the landlord must respond within that period and
what happens if the landlord does not.
7.4 Expenses. Require the tenant to pay any expenses the landlord incurs,
including legal costs, in connection with any consent.
7.5 Conditions to Consent. Even when the landlord has agreed to be
reasonable about a consent, build in conditions such as no pending default.
Require the tenant to deliver an estoppel certificate and copies of all relevant
documents. Set other requirements tailored to the particular consent at issue.
Remember that the landlord may forget to impose any such requirements as a
condition to the consent when issued.
7.6 No Representation. Make clear that the landlord's consent to anything
is not a representation or warranty that the matter consented to complies with
law or will meet the tenant's needs.
7.7 Survival of Conditions to Consent. Whenever the tenant must satisfy
certain conditions to obtain the landlord's consent (or to take any action
without the need for the landlord's consent), consider as a general proposition
whether the lease should require the tenant to cause those conditions to remain
satisfied even after the consent is granted or the action is taken.
7.8 Limitation of Remedies. The lease should say that the tenant's only
remedy is specific performance-not monetary damages-if the landlord wrongfully
withholds consent (for example, acts unreasonably after agreeing to act
reasonably). Backup position: require expedited arbitration, perhaps with the
potential arbitrator(s) designated in the lease.
8. DEFAULT
8.1 Guarantor's Net Worth. Provide that a decline in a guarantor's net
worth or the bankruptcy of a guarantor (either an express guarantor or an
unreleased assignor of the lease) is an event of default. This should be
perfectly enforceable against a tenant.
8.2 Cross Defaults. Provide for cross defaults as against other leases
with the landlord or its affiliates, or even against other obligations of the
tenant or its affiliates.
8.3 Default Notices. Provide that default notices need not specify cure
periods.
8.4 Impairment of Business. Define an event of default to include events
(beyond the usual insolvency list) that may indicate the tenant is preparing to
shut down. These might include the tenant's announcing that it will make
substantial distributions/dividends outside the ordinary course of business;
shutdown of other locations; suspension or termination of a substantial part of
the tenant's business; or layoffs.
8.5 No Right to Cure Event of Default. Once an event of default has
occurred, should the tenant have a wide-open cure right even after a cure period
has already lapsed? Whenever the landlord can exercise remedies "if an event of
default shall have occurred and be continuing," this language effectively gives
the tenant an open-ended right to cure the event of default. Does the landlord
really want that?
8.6 Discount for Timely Payment. Consider increasing "face rent" in the
lease by __%; provided however, that if the tenant pays by the ____ day of the
month, the tenant is entitled to a discount equal to the overstated portion of the rent.
8.7 All Rent Due at Signing. Consider requiring the tenant to pay all rent
for the term of the lease at signing, but state that the landlord agrees to
accept monthly installment payments only so long as no event of default exists.
9. DESTRUCTION, FIRE AND OTHER CASUALTY
9.1 Rent Abatement. Limit the tenant's rental abatement right to the
amount of rental income insurance proceeds the landlord receives under the
landlord's casualty insurance. (A landlord must, however, carefully coordinate
any such provision with the insurance program for the property, to prevent
surprises and problems.)9.2 Time to Restore. If the landlord has the right or obligation to
restore after casualty, measure any deadline from the landlord's receipt of
insurance proceeds--not from the date of casualty.
9.3 Termination Right; Limitation on Restoration. Provide no right (or a
limited right) for the tenant to cancel upon casualty. To the extent the lease
requires the landlord to restore, impose appropriate conditions, including
recovery of adequate insurance proceeds.
9.4 Tenant Waiver. Require the tenant to waive the provisions of New York
Real Property Law § 227 (which allows a tenant to terminate a lease in the event
of a casualty that renders the premises untenantable), and comparable provisions
in other states.
10. DEVELOPMENT-RELATED ISSUES
10.1 Air and Development Rights. If the project includes development
rights from other locations, should the landlord include them as part of in the
definition of the project? The answer may vary depending on state and municipal
law. Have the tenant waive any right to object to any merger or transfer of
development rights, and agree to sign any zoning lot merger if requested to do so.
10.2 Landmark District; Historic Designation. If the building is located
in a landmark district or similarly protected area and local law (e.g., New York
City law) requires it, include in the lease a notice of such landmark status.
The tenant should agree: (a) not to file for historic designation of the
premises, and (b) to oppose any such designation if the landlord so requests.
10.3 Relocation Right. Give the landlord the right to relocate the tenant
to comparable premises in the building or in some other specific building the
landlord or its affiliate owns.
10.4 Demolition. Allow the landlord to terminate the lease after
reasonable notice if the landlord intends to demolish the building. Set as low
as possible a standard for the landlord to satisfy. For example, avoid any
requirement that the landlord must be unalterably committed to demolition or
must have terminated other leases or obtained a demolition permit. Give the
tenant incentives to cooperate. Set up a process so the landlord will find out
quickly whether the tenant will try to fight the early termination of the lease.
For example, the lease can require the tenant, promptly after receiving a
termination notice, to deliver an estoppel certificate and an increased security
deposit. Pay the tenant a demolition fee only if the tenant vacates strictly on time.
10.5 Building Name and/or Address. Allow the landlord to change the name
or address of the building. Require the tenant to refer to the building only by
whatever name or address the landlord gives it.
10.6 Construction Restrictions. State that nothing in the lease limits by
implication the landlord's right to construct or alter any improvements anywhere
on the landlord's property. If the lease does contain any such restrictions,
state that they are limited to their express terms.
10.7 Building Standard Specifications. The landlord should reserve the
right to modify building standard specifications.
11. ELECTRICITY
11.1 Change of Provider. State that if the landlord changes the
electricity provider for the building, the tenant must use the new provider, to
the extent legally allowed, even if the tenant directly meters its own
consumption.
11.2 Delivery of Electrical Service. The tenant should comply with
electrical conservation measures and any limits on power grid availability.
11.3 Electrical Service. If the tenant's space is directly metered,
require the tenant to keep the landlord informed of the tenant's electrical
consumption, with copies of bills. This may facilitate the landlord's long-term
planning of electrical service for the building.
12. END OF TERM
12.1 Obligation to Restore. Require the tenant to restore the premises at
the end of the term. That obligation should survive expiration or sooner
termination of the lease. Provide that if the tenant does not complete
restoration or other end of term activities (e.g., remediation?) by the
expiration date, the tenant must pay holdover rent until completion.
12.2 Landlord's Property. At the landlord's option, the tenant should
leave behind any improvements, fixtures, or personal property that the landlord
paid for (including through a rent abatement).
12.3 Cables, Conduits. The landlord should retain ownership of all cables
and other wiring in the building. Require the tenant to remove cables, conduits,
wires, raised floors, and rooftop equipment at the end of the lease term either
in all cases or at the landlord's request. Require the tenant to indemnify the
landlord from all liability in connection with that removal.
12.4 Holdover. Consider providing that if the tenant fails to vacate the
premises at the end of the term, the tenant must pay the greater of (a) ___% of
final adjusted rent under the lease and (b) [150%] of fair market rent as a use
and occupancy charge. Calculate the charge on a monthly basis for an entire
month for every full (or partial) month the tenant holds over.
12.5 Tenant Waiver. Have the tenant waives the provisions of any civil
procedure rule that would allow a court to issue a stay in connection with any
holdover summary proceedings the landlord might institute. (In New York, refer
to New York Civil Practice Law and Rules § 2201.)
12.6 Abandoned Personalty. State that upon lease termination, any
personalty in the premises is deemed abandoned and the tenant must pay to remove
and store it.
12.7 Consequential Damages. If the tenant holds over, the tenant should
agree to pay all damages the landlord incurs, including consequential damages
such as the loss of the next prospective tenant.
12.8 Time of Essence. State that "time is of the essence" with respect to
the tenant's obligation to vacate the premises.
13. ENVIRONMENTAL
13.1 Reports; Inspections. The tenant should agree to deliver, or
reimburse the landlord's cost to obtain, updated environmental reports. State
that the landlord has the right to inspect the premises if the landlord
reasonably believes that a violation of environmental law exists, all at the
tenant's expense.
13.2 High Risk Uses. For a gas station or other high-risk use, consider:
(a) establishing an environmental baseline by undertaking a sampling plan before
occupancy (this will establish what problems, if any, already exist); (b)
requiring periodic monitoring, especially at locations where groundwater might
be readily affected, and along perimeter areas where migrating oil can be
detected; (c) obtaining an indemnification that is both very broad (all
environmental risks) and very specific (particular environmental issues arising
from the tenant's particular business); (d) requiring the tenant to post a bond
if the tenant cannot obtain environmental liability insurance; (e) if
underground tanks already exist, requiring the tenant to: (1) accept the tanks
"as-is," (2) comply with all applicable laws, including obtaining all permits
(as well as annual registration and recertification), (3) post all state-
required financial assurances, (4) maintain, repair and replace, if required,
all tanks, and (5) maintain all required records and inventory controls.
13.3 Required Tank Removal. The landlord might want the right to perform a
further environmental assessment at the end of the term, and require the tenant
to remove any tanks and perform any required remediation.
13.4 Landlord Indemnification. If the landlord agrees to indemnify the
tenant for past environmental problems, limit this indemnification to any
liability that exists under present law based on present violations. Exclude any
liability arising from future laws or amendments of existing laws.
13.5 Interior Air Quality. Disclaim any landlord liability for bad air or
"sick building syndrome." Also state that the landlord may prohibit smoking
anywhere in the building or at adjacent sites.
14. ESCALATIONS
14.1 Operating Costs.
(A) Reality Connection. When negotiating the operating cost
escalation clause, confirm that the clause, particularly as negotiated, matches
the landlord's actual practices in operating the building, so the landlord can
actually make the necessary calculations and adjustments.
(B) Off-Site Costs. Avoid limiting "operating costs" to those
incurred physically within the particular building. The landlord may incur off-
site operating costs, such as in a multi-use project (e.g., holiday decorations
in a central plaza) or for off-site equipment, installations, traffic
improvements, shuttle bus services, or the like to benefit the building.
(C) Use of Generally Accepted Accounting Principles ("GAAP"). In
defining operating "costs" (not "expenses," perhaps an accounting term of art),
try not to refer to GAAP. The term often arises in two places: (a) when defining
what the landlord can pass through to tenants; and (b) when excluding "capital"
items. Regarding (a), GAAP requires matching of revenue and expenses, perhaps
forcing the landlord to reduce costs by any related income received. Examples:
recovery of heating, ventilation, and air-conditioning ("HVAC") overtime costs
from tenants (not all of this is actually expended, such as amortization of an
energy management system); telecommunications (revenue from rooftop antennas);
and parking garage income. Regarding (b): (1) Positive for landlords-the
American Institute of Certified Public Accountants ("AICPA") is reviewing
disparity of practice as to capitalization and expense, and this may help
landlords pending issuance of a formal statement and (2) Negative for landlords-
GAAP may treat preventive maintenance as "capital." (D) CAM. Avoid the term "CAM" (common area maintenance) because
operating cost escalations cover far more than common area maintenance.
(E) Major Repairs. Do not necessarily limit multiyear amortization
of large repair costs to "capital" items. Particularly if leases limit
escalations or if the landlord is concerned about base years for new leases, the
landlord may want the ability to spread major noncapital repair costs over
multiple years.
(F) Broad Definition of Costs. Consider any special characteristics
of the property that may lead to landlord costs outside the escalation
definitions in the lease. For example, if a reciprocal easement agreement
imposes costs similar to real estate taxes or operating costs, expand the
appropriate definition to include them.
(G) Timing. Try not to agree to tight time limits (or, worse, a
"time is of the essence" provision) for the landlord's obligation to provide
operating statements. The landlord should, of course, try to be timely, based on
cases that have required such timeliness based in part on an inferred "fiduciary
duty" because the landlord controls the information.
(H) No Fiduciary Duty. Negate any fiduciary duty regarding operating
cost escalations and their administration.
(I) Reserve Charge. To avoid the common arguments about how to treat
"capital" items, consider establishing an annual per square foot capital reserve
charge. The landlord would not need to account for these funds and the lease
would define categories of "capital type" costs to which tenants need not
contribute. (If, however, this reserve charge stays constant from year to year,
including the base year, then the landlord will never be able to collect a penny
of escalations under the typical pass-through of only increases in operating
costs. Therefore, make it a separate additional charge.)
14.2 Audit Issues (Operating Costs). (A) Condition for Audit. Allow the tenant to audit operating costs
only if those costs increase more than a specified percentage over a specified
prior year or base year.
(B) Auditors. Prohibit contingent fee auditors. If the landlord
agrees to reimburse audit costs (such as if the tenant's audit reveals a certain
level of mistakes), then negate any reimbursement to contingent fee auditors.
Consider requiring a national CPA firm. Insist that such firm agree to notify
the landlord of any undercharges or errors in the tenant's favor that the audit
discloses.
(C) Costs of Audit. Ask the tenant to pay for the landlord's out-of-
pocket costs in connection with any audit of operating costs (e.g. photocopying,
staff time, document retrieval, accountants' time spent answering inquiries, etc.).
(D) Confidentiality. Require the tenant to sign a confidentiality
agreement satisfactory to the landlord for any audit and its results before
disclosing any records or information to the tenant or to a lease auditor. The
agreement should, among other things, prohibit the tenant and its advisors from
disclosing the existence of any audit or any of its results, particularly to
other tenants in the building. The tenant's breach of the confidentiality
agreement should constitute an incurable default under the lease.
(E) Limits. Limit timing, frequency, and duration of audits.
(F) Inspection Restrictions. Allow the tenant (or its
representative) to examine specified books and records only, and only for a
specified period, but prohibit copying. Require that any audit comply with the
landlord's reasonable requirements and instructions.
(G) Threshold for Payment. If overcharges (net of undercharges)
total 3% or less of total annual operating costs (a generally accepted
definition of "materiality"), then the tenant should not receive any adjustment
or reimbursement of its audit costs. Define carefully the factor to which the
lease applies the3% factor. Use as large a number as possible. For example,
refer to 3% of gross annual operating costs rather than 3% of the tenant's
escalation payment.
(H) Dispute Resolution. Provide a private and final mechanism (e.g.,
arbitration) to resolve disputed operating costs.
(I) Claims. Require specificity, completeness, and finality in any
tenant claim of discrepancy or error.
14.3 Other Escalations.(A) Porter's Wage. Include fringe benefits and all other labor
costs. The wage rate used should not reflect "new hire" or other transitional
wage rates.
(B) Consumer Price Index. Use the Consumer Price Index for all Urban
Areas ("CPI-U") index. Many believe that this index has historically increased
faster than the Consumer Price Index for Urban Wage Earners and Clerical Workers
("CPI-W") index.
14.4 Generally.
(A) No Decrease. Escalation formulas should never allow rent to go
down.
(B) Examples. For any complex or intricate escalation formula,
consider adding an example, but don't make the numbers dramatic.
(C) Liability for Refunds. The landlord's liability for any refund
of overpaid escalations should terminate after a specified number of years (and
automatically upon any sale of the building?), to prevent open-ended obligations
or issues upon a sale of the building.(D) Survival; Timing. Limit the time during which the tenant may
challenge any escalation. (Be careful, though. The tenant may try to make this
reciprocal for the landlord's billings.) All the tenant's obligations regarding
escalations should survive the expiration or sooner termination of the lease.
15. ESTOPPEL CERTIFICATES
15.1 Lender Requirements. In defining the scope of an estoppel
certificate, allow the landlord to require any additional information a lender
might request.
15.2 Ratify Guaranty. Allow the landlord to obtain a
confirmation/ratification of any guaranty, not merely an estoppel certificate
from the tenant.
15.3 Exhibit. Attach a form of estoppel certificate as a lease exhibit
(conform to typical lender requirements), but build in flexibility for future
lender requirements.
15.4 Estoppels. Require the tenant to agree to deliver future estoppel
certificates at any time on the landlord's request. Provide that such
certificates shall bind the tenant whether or not the landlord can demonstrate
detrimental reliance. (Is such a concept enforceable?)
15.5 Reliance. Allow reliance by prospective purchasers, mortgagees or any
participant in a future securitization, including rating agencies, servicers,
trustees, and certificate holders.
15.6 Failure to Respond. Establish specific meaningful remedies for
failure to sign an estoppel certificate within a short period. These might
include: deemed estoppel; a power of attorney to execute it for the tenant; or a
nuisance fee (e.g., $100 per day).
15.7 Attach Lease. Require the tenant (if asked) to attach a copy of the
lease and all amendments to any estoppel certificate.
15.8 Legal Fees. If the landlord agrees to give an estoppel, require the
tenant to pay the landlord's legal fees and expenses.
16. EXPANSION/RENEWAL OPTIONS
16.1 Timing. Make time of the essence for exercising any option or right
of first refusal. Say that timely notice constitutes an agreed and material
condition of exercise. Recognize that the courts sometimes validate late
exercise after the fact. Perhaps provide for a protective rent adjustment in
this case (e.g., to fair market if the lease would not otherwise require fair
market rent).
16.2 Multiple Bites at the Apple. If the landlord offers "first refusal"
space and the tenant does not take it (or if the tenant declines to exercise an
option), then for a specified number of months deem the tenant to have waived
any first refusal rights (and any options that would otherwise apply), at least
where they relate to comparable space, broadly defined.
16.3 Timing. Make the exercise deadline early enough to give the landlord
time to relet if the tenant does not exercise its option. Coordinate the timing
with other leases to facilitate assembling large blocks of space if the landlord
wants to do so. A landlord usually wants plenty of lead time and notice, but may
want to give the tenant as little lead time and notice as possible, to maximize
the landlord's flexibility in dealing with unexpected changes in occupancy.
16.4 Coordination of Options. Time the exercise and lapse dates for
options so that adjacent blocks of space may become available to the landlord at
the same time.
16.5 Update Due Diligence. Reconfirm the due diligence requirements (e.g.,
financial statements) for the tenant.
16.6 Option Subject. Make any expansion option subject to existing
exclusives and renewal clauses of other tenants. Avoid overlapping expansion
options. Limit the tenant's remedy if the landlord inadvertently allows
overlapping options.
16.7 Carveouts from Purchase Rights. If the tenant negotiates an option or
right of first refusal to purchase, exclude: (a) foreclosure or its equivalent;
(b) any subsequent conveyance; (c) transactions between the landlord and
affiliates or family members; (d) other permitted transactions, such as
transfers of passive interests or creation of preferred equity for mezzanine
lenders (and any exercise of remedies by the lender); and (e) if the tenant
"passes" on its preemptive right, then all subsequent transactions.
16.8 Conditions. Condition any option exercise on the tenant's: (a) not
being in default (and not potentially being in default) both on the exercise
date and on the effective date, and perhaps even for ____ years before the
exercise date; (b) not having assigned the lease; (c) retaining a certain
minimum occupancy; (d) actually operating in the space; and (e) satisfying a net
worth test (fixed dollars or rent multiple) for at least ____ years before
exercising the option.
16.9 Option Rent. Set a "floor" for option rent equal to the previous rent
under the lease.
16.10 Covenant to Notify. Require the tenant to notify the landlord if
the tenant needs more space, to give the landlord a chance to provide it in this
or some other building. (The landlord might, however, better achieve the same
result by saying nothing in the lease and just maintaining a good relationship
with the tenant.)
16.11 Option Maintenance Fee. Require the tenant to pay a nominal annual
fee to preserve future options. This gives the tenant an incentive to terminate
any option rights that it does not truly need.
16.12 Miscellaneous. State that the tenant may not separately assign any
option. The tenant's options should terminate if the tenant subleases more than
a certain percentage of the premises or assigns the lease, or if specified other
events occur.
17. FAILURE TO DELIVER POSSESSION
17.1 No Liability. The landlord should incur no liability for failing to
deliver possession on the commencement date for any reason, including holdover
or construction delays. The tenant's obligation to pay rent should commence on
possession. Perhaps extend the term by the duration of any landlord delay in
delivering the premises.17.2 Delivery Procedure. Try to tie the "Commencement Date" to an
objective event-preferably within the landlord's control-or a date, rather than
to any notice from the landlord. Notices are often not as easy to give (and give
quickly) as they would seem to attorneys drafting leases. Any delay in giving a
commencement date notice will mean lost revenue.
17.3 Condition of Premises. Substantial completion should suffice (e.g.,
temporary certificate of occupancy) for the landlord's delivery of the premises.
17.4 Termination Right. The landlord may want a termination right if the
landlord ultimately cannot deliver possession by a date certain.
17.5 Delivery Dispute. Provide for a short deadline for the tenant to
report any issue or problem about the premises or the landlord's work. Better,
state that taking of possession constitutes acceptance for all purposes.
17.6 Rent Abatement. To the extent the landlord agrees to give the tenant
a rent abatement for late delivery, limit the duration of the abatement (e.g.,
if the rent abatement exceeds a set number of days, thereafter the tenant's only
rights are to terminate or wait). Try to defer any such abatement (e.g., spread
it out in equal annual installments over the remaining term of the lease). This
will reduce immediate damage to the landlord's cash flow at a time when the
landlord may be under financial stress.
18. FEE AND EXPENSES
18.1 Fee and Expenses. The tenant should pay a fee (and expenses) for the
landlord's review of any plans, specifications, or request for consent/waiver.
Avoid a flat fee. Set the fee according to a formula based on the size of the
job or hours necessary, with a minimum floor.
18.2 Attorneys' Fees and Expenses. The tenant should reimburse the
landlord's attorneys' fees and expenses both broadly and with specificity (e.g.,
for actions and proceedings, including appeals, and in-house counsel fees and
expenses). The reimbursement obligation should cover attorneys' fees and
expenses incurred in connection with: (1) any litigation the tenant commences
against the landlord, unless the tenant obtains a final favorable judgment; (2)
negotiating a lender protection agreement for the tenant's asset-based lender;
(3) the landlord's (or its employee's) acting as a witness in any proceeding
involving the lease or the tenant; (4) reviewing anything that the tenant asks
the landlord to review or sign; and (5) bankruptcy proceedings.
18.3 Witnesses. The tenant should indemnify the landlord if the landlord
or its personnel are called as a witness in any proceeding related to the lease
or the tenant.
19. FUTURE DOCUMENTS AND DELIVERIES
19.1 Tenant's Financial Condition. Require the tenant to deliver annual
financial statements for itself and any guarantor. Negotiate the right to
require a security deposit, rent adjustment, or other consequences to protect
the landlord in case the financial condition of either deteriorates.
19.2 Reporting. Require the tenant to immediately report if the tenant or
any guarantor experiences: (1) any adverse change in financial position; or (2)
any litigation that could adversely affect the ability to perform.
19.3 Further Assurances. Require the tenant to enter into any amendments
that the landlord reasonably requests to correct errors or otherwise achieve the
intentions of the parties, subject to reasonable limitations.
19.4 Future Events. The parties should agree to memorialize any
commencement date, rent adjustment, or option exercise in a lease amendment.
19.5 Termination of Lease Memo. If the tenant obtains a memorandum of
lease, then: (a) the tenant should covenant to execute and deliver a termination
of memorandum of lease in recordable form if the lease terminates early; and (b)
consider requiring the tenant to sign such a termination at lease execution, to
go in escrow.
19.6 Governmental Benefits, Generally. Require the tenant to cooperate, as
necessary, to help the landlord qualify for any tax or governmental benefits
(e.g., tax abatements) that would otherwise be available.
19.7 Permitted Disclosure. If the landlord agrees to any confidentiality
restrictions, or if governing law automatically infers such restrictions, then
the landlord should ask for the right to disclose to actual or prospective
mortgagees or purchasers any information about the tenant or any guarantor.
20. GUARANTY
20.1 Social Security Number/Address. State the social security (or
driver's license) number and home address of any individual guarantor beneath
his/or her signature line. This underscores the fact that the guaranty is
intended to constitute a personal obligation of the guarantor and may facilitate
enforcement.
20.2 Guarantor Consents. Tailor the guarantor's consent/waiver boilerplate
to reflect circumstances of the lease, such as pre-consent to any future
assignment of lease, and any state-specific language necessary or helpful for a
guaranty (e.g., a reference to New York Civil Practice Law and Rules § 3213).
20.3 Lease Assignment. If the landlord sells the property, then the
guaranty should, by its terms, automatically travel to the purchaser, whether or
not the transfer documents say so.
20.4 Net Worth. Any net worth test or other financial covenant should
apply to both the tenant and the guarantor. Tailor the covenant as appropriate.
20.5 Estoppel Certificate. The guarantor should agree to issue estoppel
certificates upon request.
20.6 Springing Guaranty. Consider a springing guaranty if certain adverse
events occur (such as a reduction in the tenant's or a guarantor's net worth).
Remember: the guarantor must sign the guaranty when the tenant signs the lease.
20.7 Tenant Bankruptcy. The guarantor (and any unreleased assignor) should
acknowledge its liability is not limited as a result of any limitation of the
landlord's claim against the tenant for "rent" in bankruptcy (11 U.S.C. §
502(b)(6)).
20.8 "Good Guy" Guaranty. Consider a "good guy" guaranty (i.e., a guaranty
of rent and perhaps all other obligations under the lease, continuing only until
the tenant surrenders the premises vacant, in satisfactory physical condition,
and free of any occupancy rights).
20.9 Security. Consider securing a lease guaranty obligation with a letter
of credit or other security. By tying such a letter of credit to a guaranty
rather than to the lease, the landlord may reduce the likelihood-perhaps already
low-that the tenant's bankruptcy estate could "claw back" any letter of credit
proceeds that exceed the landlord's permitted claim for rent in the tenant's
bankruptcy.
21. INABILITY TO PERFORM
21.1 Triggering Event. If the tenant negotiates a force majeure clause,
require the tenant to notify the landlord promptly of any "force majeure" event.
The extension of time should continue only so long as such triggering event
actually causes the tenant delay.
21.2 Exception to Force Majeure. Force majeure should never apply to any
monetary obligation.
21.3 Governmental Consents. For the landlord, force majeure should include
a failure to obtain governmental consents or permits.
22. INSURANCE
22.1 Additional Insureds. Include the landlord and its managing agent and
mortgagee as "additional insureds," not "named insureds." The latter may owe premiums.
22.2 Changed Requirements. Conform the insurance requirements in the lease
to those in the landlord's mortgage (and any future changes in the mortgage).
Allow the landlord to change the requirements in the lease as needed to comply
with the landlord's and any mortgagee's future reasonable requirements.
22.3 Business Interruption Insurance. Any rental/business interruption
insurance should cover additional rent (e.g., escalations and tax pass throughs)
and percentage rent as well as base rent.
22.4 Evidence of Insurance. Require "evidence" of insurance (the "ACORD
27" form)1 or a copy of the tenant's insurance policy at lease signing, not a
"certificate" of insurance (the "ACORD 25" form), which is often regarded as
worthless unless modified. Try to get an "ACORD 27" from (or its equivalent) not
only for property insurance, for which it was designed, but also for liability
insurance.
22.5 Landlord Insures. Consider having the landlord insure the tenant's
improvements (with the tenant reimbursing the allocable premium either directly
as additional rent or as an operating expense), and having the landlord restore
(or give the landlord the right to require the tenant to restore) with any
insurance proceeds.
22.6 Plate Glass Insurance. Require any retail tenant to carry plate glass
insurance.
22.7 Insurance Broker. Allow the landlord (at its option) to deal directly
with the tenant's insurance broker to obtain any insurance documents the lease
requires. But the lease should state that doing so imposes no liability or
obligation on the landlord.
22.8 Approval Rights. Allow the landlord to approve the identity and
financial condition of the tenant's insurance carriers.
22.9 Waiver of Subrogation. Understand "waiver of subrogation." This is a
tricky topic, often wrongly handled. These clauses should be mutual, covering
all losses caused by any insured risk (even negligence of the landlord or the
tenant), provided the insurance carrier has consented to the waiver. Such
consents often appear in standard insurance policies, although this should be
confirmed.
22.10 Tenant's Rights to Proceeds. Make any right of the tenant to receive
insurance proceeds subject to the rights of the landlord's mortgagee.
22.11 Tenant Failure to Insure. If the tenant fails to insure and a fire
occurs, then make the tenant liable for the entire loss and not merely the
unpaid insurance premiums-even if the landlord knew about the failure to insure.
(Such a provision responds to cases that limit the tenant's liability to the
amount of the unpaid premiums.)
22.12 Insurance Advice. Work with the landlord's insurance
broker/consultant to check, update, and improve the insurance requirements of
the lease as appropriate. Take into account whatever changes in insurance
requirements and practices ultimately arise from the resolution of "terrorism
insurance" in the wake of September 11.
23. LANDLORD'S ACCESS TO PREMISES
23.1 Emergency Contact. Require the tenant to provide the name and
telephone number of an emergency contact.
23.2 Reconfiguration. Reserve for the landlord the right to reconfigure or
change the means of access to the premises.
23.3 Notice Requirements. The lease should state that the landlord may
enter without notice in an emergency. Even absent an emergency, oral notice to
someone on site should suffice. This is yet another example of an area where a
requirement for "written notice" may sound perfectly reasonable, but in the real
world such a requirement is completely impractical.
23.4 Keys. The tenant should deliver copies of all keys and access codes
to the landlord. The landlord should consider, though, whether it truly wants
whatever liability travels with the keys and access codes, especially if the
tenant has unusually valuable personal property. The landlord may want to be
selective about requiring keys and access codes.
23.5 No Eviction. Make clear in the lease that the landlord's entry on to
or inspection of the premises is not an actual or constructive eviction and does
not entitle the tenant to any rights or remedies, it or any claim, offset,
deduction, or abatement of rent.
23.6 Purpose of Access. The landlord should insist on the right to: (1)
show the premises to prospective purchasers, mortgagees or appraisers and post
"for sale" signs; and (2) during the last [12] months of the term, show the
premises to prospective tenants and post "for rent" signs.
24. LANDLORD'S LIABILITY 24.1 Exculpation. Limit the landlord's liability to its interest in the
property. Negate personal liability of the landlord or its partners, members,
managers, officers, directors, and the like. Recent cases have applied the
"implied covenant of good faith and fair dealing"-a tort theory of liability-to
sidestep exculpation clauses in leases. To avoid the possible effect of such
cases, state that the landlord's exculpation applies not only to claims under
the express terms of the lease, but also claims of any kind whatsoever arising
from the relationship between the parties or any rights and obligations they may
have relating to the property, the lease, or anything related to either.
24.2 Landlord Default. Give the landlord the same open-ended cure periods
for nonmonetary defaults that tenants typically obtain-the landlord should not
be deemed in default so long as the landlord has commenced and is diligently
prosecuting the cure of its default.
24.3 Liability. Liability of the landlord should cease if the landlord
transfers its interest in the premises.
24.4 Liability for Prior Owners' Acts. As a rather aggressive position,
say that after any conveyance of the property (even outside foreclosure), the
new owner is not liable for (and the tenant may not assert any credit, claim or
counterclaim because of) any claims the tenant might have had against the former
owner, such as for overcharges and refunds of escalations.
25. LANDLORD'S REPRESENTATIONS
25.1 Express Not Implied. State that the landlord makes no implied
covenants, representations or warranties. Limit the landlord's responsibilities
to those expressly set forth in the lease.
25.2 Merger. State that any agreements, written or otherwise, predating
the lease merge into the lease. Indicate that any statements or representations
on the landlord's Web site or in the landlord's advertising are not part of the lease.
25.3 Other Leases. State that the landlord makes no representations,
warranties or covenants regarding other tenants (past, present or future) or the
terms of their leases.
26. MAINTENANCE AND REPAIRS
26.1 No Overtime. The landlord has no obligation to do any work at
overtime or premium rates.
26.2 Tenant's Obligation. The tenant must maintain and repair parts of the
building-including storefronts and sidewalks-that exclusively serve the premises.
26.3 Right to Perform. If the tenant's acts or omissions cause damage to
another tenant's premises, the landlord can repair them at this tenant's expense.
26.4 Broad Repair Obligations. Where the tenant has broad repair
obligations, expressly include "ordinary or extraordinary, structural or
nonstructural, foreseen or unforeseen" repairs.
26.5 Specify Repair Obligations. Avoid distinguishing repairs as
"structural" (the landlord's responsibility) and "nonstructural" (the tenant's
responsibility). Draw these lines specifically and in detail. Otherwise, a court
may decide what the parties intended.
26.6 Periodic Upgrades. Beyond maintaining the premises "as is," the lease
could require the tenant to upgrade and renovate every ___ years, to keep the
premises exciting and new, particularly for retail space.
27. OCCUPANCY
27.1 "As Is" Condition. The tenant should represent and acknowledge that
it takes possession of the premises in its "as is, where is" condition as of the
commencement date.
27.2 No Obligation Except Specific Work. Confirm that the landlord has no
obligation to perform any work or make any installations to prepare for the
tenant's occupancy, except as the lease expressly states.
27.3 Tenant Covenants. The tenant should covenant to file its plans
install its fixtures, and open for business, in each case by a certain date. The
tenant should then agree to operate for at least a certain minimum period.
28. PERCENTAGE RENT AND RADIUS CLAUSE
28.1 Increases. Provide for an increase in percentage rent upon any change
of use or change of the tenant.
28.2 Inclusions/Exclusions. For percentage rent purposes, include any
catalog or Internet sales that the tenant makes through the store. Prohibit the
tenant from claiming any credit for goods that a customer bought through a
catalog or over the Internet (unless previously included in store sales).
Exclude sales to the tenant's employees only if the tenant makes those sales at
a discount.
28.3 Limit Any Percentage Rent Penalty Period. If the lease allows the
tenant to pay "percentage rent only" if any cotenancy or other problem arises,
restore the fixed rent after the landlord solves the problem, or limit the
percentage-rent-only period. After a certain time, allow the landlord to require
the tenant to either terminate or resume paying full fixed rent.
28.4 Effect of Casualty. The lease should provide that if the premises are
closed part of the year because of a casualty or condemnation, the "breakpoint"
for percentage rent will drop. (This assumes the lease expresses the
"breakpoint" as a fixed dollar amount, and not a formula referring to actual
fixed rent payable from time to time. The latter would be more common, so this
problem usually does not arise.)
28.5 Gross Sales. Define gross sales to include sales by subtenants and
concessionaires.
28.6 Fixed Rent Increases. Increase fixed minimum rent (and the percentage
rent breakpoint) periodically over time based on increasing gross sales.
28.7 Audit Right. Let the landlord audit the tenant's gross sales. If the
tenant underpaid percentage rent by more than 3%, the tenant should pay interest
and the costs of the audit.
28.8 Kick-Out Right. Give the landlord the right to terminate the lease if
percentage rent does not reach a certain level by a certain date.
28.9 Recordkeeping. Require the tenant to maintain records sufficient to
make any audit meaningful.
28.10 Radius Clause. Include a "radius clause" in any lease requiring
percentage rent, i.e., the tenant may not compete with itself within a
restricted area without the landlord's consent.
28.11 Violation. Consider requiring the tenant to include as "gross
sales" (for percentage rent purposes) the greater of (a) a specified percentage
of gross sales at the premises; or (b) the gross sales of the tenant's store in
the restricted area if it violates the radius clause.
29. QUIET ENJOYMENT
29.1 Conditions. New York law (and probably the law of other states)
implies a covenant of quiet enjoyment if the lease is silent. Consider providing
that quiet enjoyment is subject to the rights of mortgagees, ground lessors, and
all other terms of the lease. Condition the covenant of quiet enjoyment upon the
tenant's not being in default.
29.2 Limit Obligation to Provide Services. Expressly limit the landlord's
obligation to provide services and other obligations regarding the building to
bare occupancy and express obligations under the lease. Try to prevent the
courts from using the "covenant of quiet enjoyment" as the basis to infer
possible landlord obligations to provide services beyond those the lease
requires.
30. REAL ESTATE TAXES
30.1 Tax Contests. Prohibit the tenant from contesting taxes without the
landlord's consent. If the landlord does consent, the landlord may want the
right to require the tenant to post a bond or letter of credit in the amount of
any contested taxes (if the tenant did not need to pay the taxes as a condition
to the contest).
30.2 Business Improvement District ("BID") Charges and Special
Assessments. Include any "BID" charges and special assessments in the definition
of "Real Estate Taxes."
30.3 Base Year Real Estate Taxes. Define "Base Year Real Estate Taxes" as
"net of any special assessments" and "as finally determined."
30.4 Further Assurances. The tenant should agree to assist the landlord,
as reasonably necessary, to qualify for tax abatements and benefits (e.g.,
Industrial Commercial Incentive Program ["ICIP"] in New York City). If the
landlord obtains such benefits, the lease should indicate whether the landlord
or the tenant will ultimately gain the economic benefits of the program and how
those benefits interact with real estate tax escalations.
30.5 Estimated Tax Payments. Require the tenant to make monthly estimated
tax payments, especially when the landlord's mortgage requires tax escrow
payments.
30.6 Management Fee.
