Tenant's Ultimate Commercial Lease Checklist

Appendix A Analysis Checklist

The following is a basic, but not exhaustive, checklist of issues to keep in mind when reviewing commercial office leases from both a business and a legal prospective. This checklist can serve as a starting point to assist in the review and analysis of these complex documents. Throughout this book, these issues are discussed in more detail.

Parties:

€ Is the lease correctly dated for reference purposes?

€ Are the parties adequately described with full legal names, correct states of incorporation and principle business addresses?

€ Is the Landlord or owner sufficiently solvent to satisfy his contractual obligations?

Premises:

€ Are the premises fully and adequately described, including suite number, street address, municipality and state?

€ Is the square footage of the premises specifically stated?

€ Is the square footage measured by rentable square feet or usable square feet, and are you satisfied with the method of determining rentable square footage? Verify square footage figure provided by the Landlord.

€ Is rent based on usable or rentable square footage?

€ If the premises cannot be measured because the building is still under construction, what provisions are made for adequately measuring the space at a later date?

Term:

€ Is the term specified by the number of years plus commencement and termination dates?

€ If the commencement date is not specific, are you satisfied with the notice and method of determining commencement date?

€ If the commencement date is tied to Tenant's occupancy, are you satisfied with the amount of time given for Tenant to do its construction?

€ If the commencement date is triggered by some event, such as substantial completion, is that term adequately defined?

€ Is a provisions made for postponing the commencement date if possession is delayed through no fault of Tenant? If so, what remedies does Tenant have: rent abatement, monetary damages; cancellation, reimbursement of pre-paid monies or all or some of the remedies?

€ Are the commencement and termination dates extended due to delayed possession?

€ What is the termination date?

€ Does Landlord have the right to terminate early without cause?

€ Does Tenant have the right to terminate early by payment of a fee?

Rent and Additional Rent:

€ Is the base rent specifically stated?

€ Is rent stated in monthly, annual and per square foot basis and, if so, are these different amounts consistent?

€ Is rent pro rated for the first and last months if occupancy is less than a full month?

€ Is there a reasonable grace period and adequate notice before a penalty is charged for late rent?

€ Are the penalties for late rent reasonable?

€ Are there duplicate penalties for late rent, such as late fee and interest charge? If so, you should eliminate one and/or reduce these amounts.

€ Does the lease provide for some form of free rent: such as allowances for Tenant's improvements; rent discounts; postponement; cash payment or any or all of the above?

€ Does the rent clause permit offsetting or deducting monies from the base rent?

€ What provisions, if any, does the lease make for periodically increasing the base rent either through operating expenses or by a Consumer Price Index?

€ Is there more than one method for increasing base rent in the lease?

€ Do the increases start: immediately; on the first date of the calendar year following each commencement date; on the first anniversary commencement date or some point in the lease term?

€ Is there a maximum cap on these increases?

€ Does the Tenant pay a pro rata share of the increase in the operating expenses over a base figure or a pro rata share of expenses for the operating year? If so, is Tenant's proportionate share defined?

€ Is there a provision in the lease limiting the sum of all the Tenants proportionate shares to no more than 100% of the total rentable square feet of the building?

€ Is the base a calendar year or an expense stop?

€ If the base is a calendar year, is the base specified?

€ What is the prior year's operating expenses?

€ Are base year expenses based on current occupancy or are they properly adjusted until the building is fully occupied and fully assessed for tax purposes?

€ If the lease has an expense stop, was that stop computed by actual dollar cost of a particular year or based upon an estimate of operating expenses?

€ If the expense stop is an estimate, how was the estimate made and is it reasonable?

€ What is Tenant's responsibility with respect common area maintenance and other building operating expenses?

€ Is there a cap?

€ Can the amount be increased yearly or otherwise?

€ Are the operating expenses specified limited to those expenses that are reasonably and directly related to the building's operation?

€ Are the following expenses for: (1) capital improvements and repairs made to the land or building; (2) painting or redecorating or other work which Landlord performs for other tenants in the building; (3) repairs and other work caused by insurable casualty; construction defects or defective equipment in the building; (4) leasing commissions and advertising expenses; (5) general accounting and legal expenses; (6) interest or amortization payments on mortgages liening the building or ground leases; (7) rents paid by Landlord for ground leases; (8) costs for items that should be capitalized, unless these capital costs reduce operating expenses and are amortized over a reasonable length of the capital item in accordance with the generally accepted accounting principles (GAAP) and the yearly amortization does not exceed the actual cost reduction for the relevant year; (9) taxes on the Landlord's business (such as income, excess profits, franchise, capital stock, estate, inheritance); (10) greater than 5% increase in management fees or employees salaries or benefits of both; (11) payments (such as salaries or fees) to Landlord's executive personnel; (12) any costs, fines and like due to Landlord's violation of any governmental authority; (13) license, permit or inspection fees imposed on Landlord or tax on rent or rents received by Landlord from the building or assessments against the building for municipal improvement or otherwise?

€ Is the Landlord obligated to keep the books and records in accordance with general accepted accounting principles (GAAP) and present the Tenant with a copy of the annual expenses certified by a Certified Public Accountant?

€ Does Tenant have the right to audit Landlord's books and records?

€ Does the lease provide a dispute mechanism over increased operating expenses and, if so, does the lease allow Tenant to withhold payments until Tenant has an opportunity to review Landlord's books?

€ How are real estate taxes and other impositions handled?

€ Does Tenant pay a portion of the real estate taxes? How is that portion determined?

€ What increases over base year are allowed?

€ Is the Tenant required to pay increased taxes that may occur upon the sale of the building?

€ Does the lease provide that Tenant shall have a right to contest the validity of the tax or assessment in the event of a bona fide dispute over the increase of taxes due to a reassessment? Is Landlord required to cooperate with Tenant in contesting the taxes?

€ Are increases in additional rent pro rated for the first and last years of the term if occupancy in less than a full year?

€ Does Tenant receive a credit if the operating expenses are reduced or if the paid estimated monthly amounts exceed the actual incurred expenses?

€ Is there a CPI clause, and, if so, is the CPI index defined?

€ Is an alternative index selected in case the original index is no longer published?

€ What are the base and comparative periods? Is an example provided of how the index will operate?

€ Is it possible to obtain an increase of the lesser of either the CPI or some capped amount?

€ Is the base period fixed in order to avoid a compounding effect when the rent is adjusted?

Security Deposit:

€ Does the lease omit the requirement for security deposit?

€ If a security deposit is required, is it kept in a separate interest bearing account apart from the Landlord's other monies?

€ If the lease provided for security deposit, can Tenant use that deposit for the last month's rent?

€ Does the lease provide for an acceptable and timely procedure for the return of Tenant's security deposit? Is there interest on the security deposit?

Guaranty:

€ Is a personal guarantee required?

€ If a guarantee is required, when does it terminate?

Use:

€ What uses of the premises are permitted?

€ Can the Tenant use the premises for any lawful purpose?

€ If not, do the restrictions on use limit the type of business the Tenant will conduct at the premises?

€ Does the lease specifically allow Tenant to operate a business for the particular Tenant's use and any other use and uses that may be undertaken by other firms or companies having the same use as the Tenant?

€ Is the permitted use clause broad enough for possible changes in the business?

€ Is the permitted use clause broad enough for potential assignments or subleases?

€ Can the use clause be drafted to include "any lawful purposes"?

€ Can uses be changed (with Landlord's consent, reasonable or not)?

Services and Utilities:

€ Which party provides and pays for: heating, ventilating and air conditioning (HVAC); electricity; water, janitorial; snow removal; plumbing?

€ Are utilities provided directly or individually metered?

€ What method is used to compute payment?

€ If Landlord pays the services during the normal business hours, does this satisfy Tenant's expected hours of operations? Are there any holidays excluded on which the New York Stock Exchange will be opened?

€ Are there provisions made for weekend and holiday services? What are the charges?

€ What standard governs Landlord's provision of services: e.g., the standard for first class office buildings in the area, Landlord's sole discretion or in reasonable amounts and the temperatures required for Tenant's comfortable use and occupancy?

€ Are janitorial and cleaning services specified and/or excluded such as limited washing of windows?

€ Are there any special provisions addressing or exceptions to the Tenant's obligation to pay for services and/or utilities?

€ When is payment due?

€ What remedies does Tenant have as services are interrupted? Can these remedies include monetary damages, rent abatement, and/or lease cancellation?

€ If Tenant is given an remedies for service interruption, is there a reasonable threshold, such as three days, before these remedies can be affected?

€ If the Landlord is given a grace period before Tenant can effect these remedies, do the notice and time provisions reasonably protect the Tenant?

Work Allowances and Concessions:

€ Are the work or construction allowance spelled out in detail?

€ What approvals will be necessary?

€ Is the Tenant given sufficient time to submit plans and specifications to Landlord for its approval?

€ Is the Landlord required to approve or reject Tenant's plans and specifications within a certain reasonable time period?

€ Is the Tenant given a choice of taking the Landlord's materials or a cash allowance if it doesn't want Landlord's materials?

€ Is Tenant prohibited from using any contractors or subcontractors on the project?

€ Is the Landlord looking for a supervision fee or any sort, even if it doesn't perform any construction services?

€ Is Tenant required to use any of Landlord's contractors - including general, electrical or mechanical - on the project?

€ Does Landlord provide reasonable access to the premises - including freight elevators and lobby entrance - for Tenant's construction?

€ What permits will be needed?

€ Is Landlord required to obtain all necessary permits and building Certificates of Occupancy so Tenant can build out its space?

€ Does Landlord guarantee sufficient harmony between Tenant's contractors and other contractors working in the building?

€ Is Landlord obligated to prepare any preliminary plans and specifications for Tenant's work in the premises?

€ Is Landlord required to submit drawings and plans showing where Tenant can hook-up to building systems?

€ Does the work letter have any provisions immediately vesting Landlord with title to any improvements constructed by Tenant?

Repairs, Maintenance and Restorations:

€ What responsibility does Tenant have for repairs or replacements? Does Landlord have an obligation to repair damages to the building and/or premises?

€ What responsibility does Landlord have for repairs or replacements? Is the Tenant's liability for repair or maintenance greater than merely keeping the premises in good order and condition?

€ If Tenant's obligation is greater than that stated in the previous question, does the Tenant's obligation include responsibility for structural portions of the building, such as roof, exterior walls and systems even if the Tenant doesn't have access to them?

€ Has the Landlord assigned all warranties - such as the roofing warranty - to Tenant and is that assignment legally effective?

€ In returning the premises to the Landlord at the end of the lease term, is Tenant's obligation any greater than getting it back in the same condition as received at commencement, excepting ordinary wear and tear and damage by the elements, fire and other unavoidable casualty and alternations previously approved by Landlord?

Alternations:

€ Can the alterations be made without Landlord's consent of, if Landlord's consent is required, is it only for alterations over a certain amount?

€ In addition to alterations, does the provision also cover changes, improvements, additions, installations and decorations?

€ Does Landlord retain possession of the alterations until the end of the lease term?

€ At the lease termination, is Tenant required to remove any alterations and repair damages? If so, is Landlord required to give such notice at the time Tenant submits plans and specifications?

€ Does Tenant have the right to remove trade fixtures and alterations owned and paid for by Tenant or any improvements made at the commencement of the lease and paid for by Landlord and Tenant?

Compliance with Law:

€ If Tenant must comply with various laws, does Landlord warrant and guarantee that the premises are in compliance with these laws on the commencement date or on the date the Tenant takes possession?

€ Is Tenant's obligation limited to the various laws which pertain to a specific manner in which Tenant will use the premises?

€ Is Tenant obligated to make structural repairs?

€ Is there a dollar limit on Tenant's obligation?

€ Is there a contractual obligation for Landlord to comply with all laws and regulations applicable to its control of the building and the premises?

Insurance:

€ Does the lease require Tenant to have insurance?

€ What insurance is Tenant required to maintain?

€ Does the lease require Landlord to maintain insurance in the amounts sufficient enough to satisfy any obligation under the contract and adequate enough that Landlord is not a selfinsured?

€ What insurance is Landlord required to maintain?

€ Does Tenant's insurance coverage meet the minimums required by the lease?

€ Is Tenant obligated to give Landlord a copy of its insurance policy or will a certificate of insurance suffice?

€ If Landlord is added as an additional insured, is Landlord's interest under the insurance policy specifically limited to Landlord's interest under the lease?

€ Is Landlord required to carry rent value insurance?

€ Is Tenant required to maintain boiler or plate glass insurance and waiver of subrogation?

Subrogation:

€ Does the lease provide for a mutual waiver of subrogation?

€ Does Landlord's insurance policy permit such waiver?

€ Is there a provision that in the event that the parties are unable to obtain such waiver, each shall notify the other and that in the absence of such notice, each party will be deemed to have obtained such waiver of subrogation?

Indemnify and Hold Harmless Provisions:

€ Must Tenant indemnify and hold Landlord harmless from any claims arising out of Tenant's occupancy of the premises?

€ Is Tenant responsible for any and all claims or only for those claims arising from its intentional or negligent acts or omission?

€ Does Tenant waive any rights for subsequential, consequential, special and indirect damages?

€ Does Landlord indemnify Tenant to the same Tenant is obligated to indemnify Landlord?

€ Does Tenant indemnify Landlord for any third-party actions? If so, are there exceptions for Landlord's contributory negligence or willful acts?

€ Are exceptions carved in the indemnification and hold harmless provisions for any reasonable deductible that Tenant might have under its insurance policy? (first party claim)

€ Does the lease require that Tenant must give notice to Landlord before bringing a claim against Landlord of any damages caused by Landlord's negligence or willful acts?

€ Is Tenant's rights to bring claims against the Landlord solely to the extent of Landlord's equity in the property? If so, does the lease provide that landlord furnish Tenant with certified records of the extent of Landlord's equity and also require Landlord to maintain adequate insurance to satisfy any potential claim?

Casualty and Condemnation:

€ If the premises were destroyed by casualty, is Landlord obligated to repair and restore them as soon as possible?

€ Does Tenant's rent obligation abate from the date that the premises or access to the premises are damaged or repaired for the remainder of the period until the damages are repaired?

€ Is the rent abatement in proportion to the amount of unusable square feet?

€ Does Tenant have the right to cancel the lease if Landlord fails to repair within a reasonable amount of time, say 90 - 120 days or if vital operations in the premises, such as cashier, computer or trading areas are destroyed?

€ Does the lease provide for a rent abatement from the date of a condemnation action or taking?

€ Does Tenant have a right to terminate the lease if the taking is more than a specific amount or if the condemnation action materially impairs Tenant's use of the premises?

€ If the lease is terminated, is Tenant limited to obtaining a condemnation award for its trade fixtures, property, moving expenses, business relocation costs and unamortized costs of leasehold improvements?

€ If the lease is terminated, is Tenant reimbursed for pre-paid rent or pre-paid expenses?

€ Does the lease provide that the Landlord will relocate the Tenant in the event of a casualty or condemnation until Tenant's permanent space is finished?

€ Does the lease hold Tenant responsible for Landlord's damages in the event a fire or other casualty is caused by Tenant's negligence?

€ Does Landlord have the right to cancel the lease or a right of first refusal if notified of a proposed assignment of sublease?

€ Who keeps the excess, or how is the profit shared, if the assignment or sublet is at a higher price than the base rent?

€ Can Tenant assign the lease to its affiliates without landlord approval?

€ Can Landlord terminate the lease if the stock ownership of Tenant changes?

Assignment and Sublease:

€ Does the lease in any way prohibit assignments and/or subleases?

€ If Tenant is restricted in assigning or subleasing, does the contract allow the Tenant to assign or sublease with Landlord's consent?

€ If Landlord's prior consent is required, is Landlord required to be reasonable and timely in giving its consent?

€ Does the lease prohibit assigning or subletting without prohibiting the other? If so, Tenant is allowed to engage in the activity that is not prohibited without the Landlord's consent.

€ Does the lease allow Tenant to freely assign the contract to an affiliated parent or successor corporation without the Landlord's consent?

€ Does the Tenant share in any proceeds from insurance?

Rules and Regulations:

€ What, if any, specific rules and regulations in existence?

€ Is Landlord required to give Tenant notice for when adding or changing the rules and regulations?

€ Is Landlord specifically required to enforce the rules and regulations against other tenants who interfere with Tenant's use and enjoyment of the premises.

€ Are there any rules that unreasonably interfere with Tenant's interest: e.g., operations; security (requiring Tenant to surrender keys to secured areas); restricting cooking and vending machines on the premises for employee use; Tenant's access to the premises and use of elevators for construction; advertising; exculpating Landlord from liability for lax or negligent security?

€ Does the Tenant share in any proceeds from insurance?

Default:

€ Is the Tenant in default for vacating the space even if it continues paying rent and keeps the premises in good condition?

€ Is Tenant given a reasonable grace period (5-10 days) and notice before being held in default for monetary obligations?

€ Is Tenant in default if it corrects a non-monetary breach within 30 days of its receipt of written notice or if it begins to correct the problem within that time if the problem can't be cured within a 30 day period?

€ Are the following events - bankruptcy, receivership, seizure of assets, assignment for the benefit of creditors automatic defaults?

€ Does the lease provide for any instances, such as Landlord's failure to make repairs, deliver the premises, or otherwise fulfill its contractual obligations of the lease that constitute a Landlord's default? If so, are the time periods allowed the Landlord to correct these defaults reasonable and in line with the curing periods given to Tenant?

€ What remedies are available for breach?

Remedies:

€ Before exercising any of its remedies, must Landlord give Tenant notice or make a demand for correction?

€ Is Landlord entitled to unreasonable remedies, such as a "confession of judgment," "acceleration of rent" or "accumulation of damages" that exceeds the total rent payable absent a default?

€ If rents are accelerated under a remedies provisions, are such accelerated rents discounted at a reasonable amount?

€ Must Landlord mitigate damages and make reasonable efforts to relet?

Bankruptcy:

€ Does the lease address continued occupancy after the debtor files for bankruptcy?

€ Does the lease differentiate rights and courses of conduct in the event of a Chapter 7 or Chapter 11 filing?

€ Does the lease address what happens if the Landlord files bankruptcy?

Brokers' Fees:

€ Has Tenant dealt with any broker other than the broker specifically mentioned in the lease? Does the lease provide that Landlord will pay all commissions?

€ Is Tenant required to indemnify Landlord from claims by other brokers?

€ Does Landlord warrant that it has dealt with no other broker than that specified in the contract?

Estoppel Certificates:

€ Is an estoppel certificate required?

€ Does Tenant have sufficient time to respond to an estoppel certificate request, e.g., 20 days?

€ Does the lease permit Landlord to sign the estoppel certificate or act as Tenant's attorney in fact?

€ Is Tenant authorized to change the estoppel certificate?

Subordination and Nondisturbance:

€ Does the lease provide that the lease will be subordinate to any future ground leases or mortgages? If so, does the lease identify these superior liens?

€ Is the Tenant given adequate nondisturbance protection? That is, does the lease state that in the event of a foreclosure, Tenant's possessory right will not be disturbed and that it will not be named as a party-defendant in any action?

€ Are superior lien holders required to execute a nondisturbance agreement recognizing Tenant's possessory rights?

Quiet Enjoyment:

€ Does Landlord warrant Tenant's quiet possession and Landlord's authority to execute the lease?

€ Are Tenant's rights to quiet possession conditioned upon its paying rent and other obligations?

Renewals and Options:

€ Is the lease automatically renewed unless either party gives notice of termination? If so, is Landlord required to give notice of such automatic renewal before it becomes effective?

€ Does Tenant have one or more options to extend the lease term for five or more years on the same terms and conditions?

€ If there is a renewal provision, is the rent specifically designated for the renewal period? Is it tied to some maximum amount based on existing or fair market rent?

€ Does the renewal provision provide that the bases for CPI and/or additional rent be updated?

€ If the lease provides for a formula for a rent, such as fair market value, is the formula discounted to a percentage of such fair market value?

€ Is there a dispute mechanism, such as arbitration, provided in this clause in the event that the parties cannot agree on a rate?

€ Is the notice period for renewing the lease reasonable, e.g., 30-60 days before the end of the term?

€ Does the renewal provision exclude any rights that the Tenant has elsewhere in the lease or does it incorporate all the terms and conditions except for those modified in the renewal provision?

€ If Tenant holds over, is the rent during this period reasonable to compensate Landlord (e.g., 100-150% last month's rent) or is it excessive?

€ In the holdover provision, is Tenant regarded as a Tenant at Will (month-to-month) or as Tenant at Sufferance (trespasser)?

€ Is Tenant given a right of first refusal on adjacent space?

€ If so, are the conditions for Tenant's exercising the rights, such as written notice, reasonable with respect to the offer?

€ Are the rent and work allowance for the option space reasonable in light of the allowances that the Tenant has received for the original premises?

€ Does the expiration date for the option space coincide with Tenant's lease for the original premises? Is such option space incorporated into the premises for renewal and other purposes?

€ Does the option space meet Tenant's reasonable expansion needs?

€ Does Tenant have any cancellation rights?

€ Is Tenant entitled to reimbursement of part of any cancellation penalty if Landlord rents the premises within a fixed period of time?

€ Is the cancellation charge fair?

€ Does the cancellation end all of Tenant's responsibilities under the lease?

€ Does the Tenant have a right of first offer or first refusal for additional space? If so, what is the scope of any such right?

€ How is rent determined?

€ How long does Tenant have to decide whether or not to exercise such rights?

Representations and Warranties:

€ Does each party warrant that it has the authority to enter into the lease and that the signatories are authorized individuals?

€ Does the Tenant represent that it has sufficient financial capacity to meet its financial obligations under the lease?

€ Does the Landlord warrant the "safe occupancy" of the premises and building and that it is in compliance with all applicable laws?

Surrender of Premises:

€ Does the lease clearly define the condition in which the premises are to be "yielded up" at the end of the term?

€ Has the lease specified which items must be removed, which must stay, which may be removed, or which are permitted to be left on the premises?

€ Are exceptions made to the "same condition" requirement for "wear and tear," "casualties" and "force majeure?"

€ Does the lease require any notice for removal of alterations and improvements?

Attorney's Fees:

€ Is the Tenant required to waive any trial rights?

€ Is each party entitled to have its attorney's fees paid by the other if it prevails in any legal action necessary to enforce the lease?

€ Is the winner of a net judgment entitled to reasonable expenses and court costs?

Force Majeure:

€ Are there any instances where Landlord's obligations are postponed or relieved due to events beyond its control (force majeure)?

€ If so, is Landlord still obligated to make a good faith effort to fulfill its obligations notwithstanding such force majeure?

Mechanics' Liens:

€ Does Tenant have a reasonable time to eliminate nay mechanics' liens before Landlord is able to declare Tenant in default?

Right of Entry:

€ Exclusive of emergencies, must Landlord give Tenant reasonable advance notice of its entry into the premises?

€ Are time periods placed on Landlord's right to show the premises or advertise it "for rent"?

€ Is Tenant entitled to damages or rent abatement for any injured or damages caused by Landlord's negligence or unreasonable interference with the conduct of the Tenant's business due to Landlord's entry or work in the premises?

Miscellaneous:

€ Does the lease provide the state under whose laws the contract will be interpreted and where all lawsuits will be brought?

€ Is everything that Tenant bargained for - such as free rent concessions - referred to in the lease?

€ Is the Tenant limited to any period, e.g., one year, for bringing lawsuits against the Landlord?

€ Does the lease provide that the contract will binding on each parties successors, assigns and heirs?

€ Does the lease state that Landlord will be liable for the negligence of its officers, employees and agents?

€ Is there a provision that the document encompasses all prior agreements between the parties and that it can be modified or amended only by written agreement?

€ Does the lease provide that wherever Landlord's consent or approval is required that such approval or consent will not be unreasonably withheld or delayed?

€ Does the lease allow Tenant to do Landlord's repairs and deduct the costs of these repairs against future rent?

€ Are the parties required to give notices by registered or certified mail, return receipt requested to addresses stated in the lease?

€ Is Tenant required to provide additional guarantee or surety for the lease?

€ Are the individuals signing the lease on the Tenant's behalf signing only in their corporate and not personal capacity?

€ Is there space for the lease to be notarized if the lease is to be recorded later?

Exhibits:

€ Is there an adequate description of the building and the premises?

€ Have the Landlord's and the Tenant's initial construction obligations been clearly spelled out in an exhibit, with adequate specifications for HVAC, dry wall, flooring, electrical facilities, ceilings, doors, etc.?

€ Is there a Commencement Date letter?

€ Is there a Nondisturbance Agreement attached to the lease?

€ Are there cleaning specifications and are they specific with respect to the timing and detail of the work to be done?

€ If signage is going to be permitted or provided, is there an adequate description of the proposed sign, including its agreed upon design, specifications and elevation, and does it conform to all applicable codes?