Landlord's Checklist Of Silent Lease Issues
By S.H. Spencer Compton
Senior Vice President and Special Counsel
First American Title Insurance Company of New York
Latham & Watkins
In commercial leasing, a “standard form” just isn’t enough. A supplemental checklist can ease the revision and modification of the standard form.
WHEN A LANDLORD AND A TENANT AGREE on the business terms of a substantial commercial lease, the landlord will ask you, as its counsel, to prepare the first draft of the lease. You will probably will start that job using some combination of the following (collectively, the “Standard Form”):
- A standard form of lease, possibly recent but more likely not;
- A form of lease used in another recent transaction; or
- A similar lease negotiated between the same parties or their affiliates.
Whatever Standard Form landlord’s counsel uses, it will probably cover most traditional leasing issues reasonably well. The Standard Form will not necessarily deal with recent developments in leasing law, recent reported cases, unreported litigation and disputes, newly discovered gaps and glitches in standard forms generally, or issues arising from changes in technology, the marketplace, and the world. To the extent that participants in other transactions have developed better ways to handle particular landlord-tenant issues or identified new issues or concerns that typical commercial leases have not covered, those improvements may not have found their way into the Standard Form.
Even if you recognize that the Standard Form is somewhat out of date or needs work, you probably will not have the time during any particular transaction to revisit the Standard Form and improve it. If you want to give the Standard Form a tune-up, or even a complete overhaul, you may find the task daunting, and incompatible with the timing and budget of any particular transaction. To accomplish it, you might first need to assemble a half dozen other lease forms that seem particularly well done, thorough, and up to date. Then you will need to read each and compare it against the Standard Form, updating and improving the Standard Form as appropriate.
This is a task that almost no particular transaction will ever support. It will probably never rise to the top of the “to do” list at any other time either. It is just too large and amorphous. But consider doing it periodically anyway.
To simplify any such task, and to create a guide and starting point for any landlord’s counsel who wants to rethink and perhaps update a Standard Form, the New York State Bar Association Commercial Leasing Committee recently appointed a subcommittee to prepare a “Landlord’s Checklist of Silent Lease Issues.”
The subcommittee tried to identify and collect leasing issues that a typical Standard Form might be likely to omit, or not adequately cover. These issues–the “landlord’s silent issues”–might arise from any of the causes or trends described above. And many of them also reflect the reality that judges hesitate to infer obligations or prohibitions in leases or contracts, particularly in New York, and particularly for the benefit of a landlord. Courts often take the position that if landlord wanted to impose any particular obligation or prohibition on tenant, landlord had the opportunity to do so in the lease. If landlord did not exercise that opportunity, then courts often refuse to give landlord a second chance. Landlords need to say everything the first time around.
The “Landlord’s Checklist of Silent Lease Issues” complements an earlier “Tenant’s Checklist of Silent Lease Issues,” prepared by much the same subcommittee and published in the New York State Bar Association’s 27 New York Real Property Law Journal (Fall 1999), and modified and republished in 16 The Practical Real Estate Lawyer 33 (May 2000). The “Tenant’s Checklist” was intended to help tenants’ attorneys identify and raise possible issues in lease negotiations, emphasizing issues that were typically not addressed at all in landlords’ lease documents. At the time of writing, the Tenant’s Checklist is being updated for republication in response to comments and suggestions received. Both the landlord’s and the tenant’s checklists will appear in the Commercial Real Estate Leasing Manual to be published by the New York State Bar Association [in ____ 2002].
WHAT THE CHECKLIST IS AND DOES
The “Landlord’s Checklist” focuses on commercial leasing issues that a landlord’s Standard Form probably does not, but possibly should, cover. As a rule of thumb, the Landlord’s Checklist identifies pro-landlord changes in a Standard Form that will be relevant in at least 15 percent of commercial leasing transactions, but are less than 50 percent likely to appear in a typical Standard Form that was intended to cover transactions of the type for which the issue is relevant; and has not recently been updated.
The Landlord’s Checklist ignores any provision that the subcommittee thinks is 50 percent or more likely to appear in a typical Standard Form.
The subcommittee applied both the “15 percent test” and the “50 percent test” arbitrarily, capriciously, subjectively, and with no evidence, data, or other empirical information, validation, confirmation, or corroboration of any kind whatsoever. This test, and numerous exceptions to it, was also applied inconsistently and unpredictably.
When the co-chairs of the Silent Lease Issues Subcommittee first proposed creating a Landlord’s Checklist of Silent Lease Issues, one of the more active members of the Commercial Leasing Committee (a former co-chair of the Committee) expressed concern that a list of landlord issues would be amorphous and potentially unending. Shouldn’t such a list ultimately include everything that any good lease should include? And if it does, what value does the list add? A landlord should simply start with a good Standard Form, our Committee member argued, then modify it to reflect the business deal and any particular concerns the transaction might create.
All this may be true. But the subcommittee co-chairs believe that
- A “good” Standard Form is not so easy to identify; and
- Even with a “good” Standard Form, you may benefit from having available in one place a somewhat condensed summary of the latest issues that the author of a “state of the art” Standard Form might wish to cover.
The subcommittee believes that this Landlord’s Checklist achieves that goal in a reasonably (and perhaps even surprisingly) succinct and contained manner, and will be useful to commercial leasing practitioners.
Does the Checklist Give Landlords an Unfair Advantage?
As another objection to this checklist, some might argue that Standard Forms are already landlord-oriented enough. No one benefits by piling on even more landlord protections and tenant burdens (also known as “gotcha” clauses in some cases). The landlord may counter that argument by stating that once tenant has possession, tenant has all the leverage (and judicial sympathy), and landlord merely has the words of the lease to fall back upon.
If landlords were playing on a level playing field, then perhaps lease forms would not need to be landlord-oriented; they could be “balanced” and “fair.” The use of landlord-oriented Standard Leases (including “new and improved” landlord-oriented Standard Leases of the type this checklist suggests) merely represents some effort to restore balance to the landlord-tenant relationship. Tenant’s counsel would, of course, disagree.
Intended for Big Commercial Space Leases
This checklist is intended mainly for substantial commercial space leases, for both retail and office uses. Most issues here will apply to some leases but not others. Any reader should interpret every item in the checklist as if prefaced by the words: “if applicable, appropriate, desired, and possible under the circumstances, taking into account the size and nature of the transaction, the condition of the market, the landlord’s project, the tenant mix, the needs and negotiating positions of the parties, the timing, and all other circumstances.”
The checklist does not attempt to suggest which issues apply to which types of leases, or how a tenant might respond to most of these issues. Because of these limitations, this checklist is more suited for use by an experienced lease negotiator than by a novice. Even a novice, however, will find this checklist useful. It is recommended that users use this checklist prudently, and not stop thinking just because something appears on this checklist.
This checklist is not intended to apply to residential leasing transactions.
Not an Official Recommendation
This checklist does not represent a position statement or recommendation by The New York State Bar Association or its Real Property Law Section, Commercial Leasing Committee, any of its subcommittees, nor any member of any of them. The checklist does not establish a “minimum standard of practice” and is neither exhaustive nor complete. It is provided merely as a resource for leasing practitioners. It creates no legal duties or obligations. No representation or warranty is made regarding the enforceability, validity, or practical feasibility (or palatability to any tenant) of any provision suggested here. The checklist merely proposes issues that you may wish to consider adding to a Standard Form as appropriate under the circumstances.
Notes on Style
In the editing process, it was decided to express some of the landlord’s “silent lease issues” as affirmative recommendations, in the interest of a more direct and lively presentation. Thus, the checklist sometimes says a landlord “should” consider or even “should” incorporate certain provisions in its lease. Each such statement must be taken with a bushel of salt, because the subcommittee does not purport to establish or define “standard” requirements for what any lease “should” or “should not” say. Every lease is its own negotiation, depending largely on the parties and the business and marketplace contexts. The making of definitive one-size-fits-all recommendations would thus be inconsistent with reality. It does, however, simplify, streamline, and add life to the presentation.
This checklist mentions each issue only once, even if it might reasonably belong under more than one heading. No cross-references are provided in these cases. Any user of this checklist should read it from beginning to end.
Written from the Landlord’s Perspective
This checklist considers lease negotiations from a landlord’s perspective. It is a landlord’s checklist. The subcommittee members do not necessarily believe that tenants should accept (or at least accept without objection) a landlord’s position regarding any issue suggested in this checklist. To the contrary, members of the subcommittee (when representing a tenant) would consider many suggestions in this checklist to be quite egregious. Nevertheless, almost everything suggested here comes from landlords’ lease forms offered in actual transactions.
Though the authors of the checklist and the subcommittee members will be honored and pleased if anyone reads this checklist and mentions it in lease negotiations, this checklist does not estop any author or subcommittee member from taking any position in any lease negotiation.
The Silent Lease Issues Subcommittee is co-chaired by S.H. Spencer Compton and Joshua Stein, who were also the primary authors of this checklist. Both the landlord’s checklist and the tenant’s checklist were initiated and edited by Joshua Stein.
Members of the Landlord’s Silent Lease Issues subcommittee were Arthur Anderman, David Badain, Robert Bring, Philip Brody, Mordecai Bronstein, Louis Broudy, Steven Cohen, Kathleen Cook, Dorothy Ferguson, Glenn Frankel, Samuel Gilbert, Barry Goldberg, Gary Goodman, James Grossman, Andrew Herz, Austin Hoffman, Jonathon Hoffman, Gary Kahn, Benjamin Mahler, Alexander Phillips, Richard Pogostin, Robert Reichman, Karen Sherman, Barry Shimkin, and David Tell.
COMMENTS ARE WELCOME
Changes, additions, and other improvements to this checklist are welcome. They will be taken into account as appropriate when this checklist is updated and republished. If you have suggestions for the landlord’s checklist or would like to reprint it, or if you have suggestions for the previously published tenant’s checklist of silent lease issues (which will soon also be updated and republished), please send e-mail to firstname.lastname@example.org or shcompton@FirstAm.com.
Completion Bond. Before the tenant undertakes alterations estimated to cost above $_____, the tenant must deliver a bond or letter of credit in an amount equal to 1__ percent of the estimated cost. If the landlord doesn’t require such a measure because of the tenant’s great credit, consider requiring it if the tenant’s credit changes or the lease is assigned.
Restoration. The fact that the landlord consented to any alteration does not waive the tenant’s obligation to restore at the end of the term.
Artists’ Rights. The tenant should not install any artwork that would trigger the artist’s right to prevent removal under federal law.
Third-Party Fees. The tenant should reimburse the landlord for its architect’s and other professional fees in reviewing plans and specifications.
Supervisory Fee. 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 is prima facie evidence of reasonableness.
ADA. The tenant’s alterations must comply with The Americans with Disabilities Act of 1990, 42 U.S.C. §12101 et seq. (the “ADA”).
Labor Harmony. The tenant’s obligation to maintain labor harmony should relate not merely to construction but also any other activities at the property.
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 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. If the landlord has installed the hoist, provide for scheduling, charges, and the right to remove it.
Tenant’s Records. Consider requiring the tenant to maintain records of the costs of its improvements for six years. This information may be helpful in tax certiorari proceedings.
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, provide for assignment to the landlord of any warranties the tenant has relating to improvements or equipment surrendered.
Modifications to Plans and Specifications. If the tenant modifies its plans and specifications after the landlord’s approval, the alterations as modified should still meet a certain level of quality, whether or not the landlord has the right to approve changes.
Plans and Specifications. The tenant must deliver plans and specifications (initial and as-built) in a specified (or more current) computer-aided design-computer aided manufacturing (“CAD-CAM”) format using naming conventions and other criteria as the landlord approves or requires.
Activities Outside Premises. If the lease allows the tenant to perform any alterations outside the premises (e.g., cable or riser installations, changes in elevator operation), require the tenant to comply with all the same requirements that would apply to alterations within the premises.
2. Assignment and Subletting: Consent Requirements
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 at time of lease negotiations, 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.
Continuing Status as Affiliate. If the lease allows “free transfers” to the tenant’s affiliates, require the assignee or subtenant to 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.
Restriction. Prohibit assignments/sublets to existing tenants or for less than fair market rent or the present rent.
Prohibited Subtenants/Assignees. Prohibit the tenant from subleasing to any entity (i) that is a tenant in the building or any other building the landlord (or its affiliate?) owns within a specified area, or (ii) with whom the landlord has actively or recently negotiated. Also, consider prohibiting assignment/sublet to (x) any party with whom the landlord (or its affiliate) is in litigation (or with its affiliate), or perhaps even any party with whom other landlords have had significant litigation; (y) a controversial entity such as a terrorist organization even if it is for a permitted use; or (z) specified entities or their affiliates (e.g., a chain store or multi-site restaurant operator that may have become notorious for its litigation techniques 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 of creating an amorphous factual issue that may potentially require resolution by a judge.
Discretionary Consents. If as a business matter the landlord is not required 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.
Prohibit Collateral Assignment of Lease. Prohibition against assignment/subletting should also prohibit collateral assignment of lease (e.g., no mortgaging, encumbering or hypothecating the lease).
Assignment/Sublet of Other Tenants’ Leases. Even if other tenants’ leases are assignable or sublettable, the tenant will not 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 (under a sole and absolute discretion standard).
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.
Fixture Financing. Prohibit the tenant from financing its fixtures, or condition any such financing upon specific landlord protections.
Future Transactions. Even if the tenant assigns or sublets in compliance with the lease, any future modification or termination of that transaction, or any future subsubletting or recapture, or consent to a subtenant’s assignment, again requires the landlord’s approval.
3. Assignment and Subletting: Implementation
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; (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 upon the tenant’s acknowledging the amount of the landlord’s profit participation; (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. Consider requiring the tenant to pay the landlord’s share of sublet profits in a present valued lump sum at sublease execution.
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 signer is not released. In either case, state that if the lease obligations later change, the guarantor is not exonerated but also not responsible for any greater obligation.
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 needs to be willing to be "stuck with" that sublease and all its terms if the main lease terminates. The landlord may want to require minimum rents, certain form of sublease, arm’s length negotiations, configuration of space (at least a full floor?), and other characteristics. If 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 (cherry-picking and/or destruction of expected value), as well as opportunities for fraud or abuse. Any landlord obligation to deliver agreements to protect subtenants should be conditioned on absence of any default under the lease. If the landlord agrees to nondisturb a 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.
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, to facilitate future transactions and flexibility.
Recapture Right. Trigger recapture right for entire space if the tenant wants to sublease 50 percent or more. If the landlord exercises recapture rights, consider requiring the tenant to pay the landlord a brokerage commission equal to that which the tenant would have paid to a third party for brokering a similar transaction. For any partial recapture right, require the tenant to pay for any demising wall or other space separation expenses that may arise.
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).
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.
Rent Increase Upon Assignment. If the tenant assigns, allow the landlord to increase base rent to fair market. When assigning a lease with percentage rent, consider resetting the base rent–either to current market or, in the case of retail space, the sum of existing base rent plus 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.)
Leasing Agent. Require the tenant to designate the landlord’s managing agent as leasing agent for any contemplated assignment or sublet.
Processing Fee. Charge a processing fee for any assignment/subletting.
Advertisements. The landlord should have the right to pre-approve any advertisements for assignment or subletting.
ADA. Prohibit any assignment or sublet that triggers incremental ADA compliance requirements in the building or by the landlord in the premises.
Confidentiality. The tenant should be required to keep confidential the terms of any assignment or sublease, particularly if the tenant’s pricing is below current market (or the landlord’s conception of current market) or the landlord’s asking price.
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 allow the tenant to 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 of words (or the possibility of a literal and narrow reading of words) produces ever-longer legal documents.
Breach of Anti-Assignment Covenant. A breach of the covenant not to assign the lease without the landlord’s consent should be an automatic Event of Default, not merely a generic default for which the tenant might be entitled to a cure period.
Multiple Leases. If the same tenant leases multiple locations, try to structure as a single combined lease, so the tenant cannot cherry-pick in bankruptcy. If the landlord must use multiple leases, try to cross-default them and date them the same date.
Shopping Center Premises. Bankruptcy Code §365 gives a landlord greater rights in the event of a tenant’s bankruptcy if the premises are a “shopping center.” But the statute does not define “shopping center.” Within reason and the bounds of good taste, the landlord may be able to include favorable language in the lease to confirm that the building is a “shopping center.”
Characterize TI 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 secured (at least) by a pledge of the tenant’s leasehold. 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 monetary 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.
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 effect of Bankruptcy Code § 502(b)(6).
5. Bills and Notices
Who May Give Notices. Provide that the landlord’s counsel or managing agent (as selected from time to time) may give notices on behalf of the landlord.
Tenant’s Notices. Copies of notices by the tenant (or perhaps just notices of alleged landlord default) should also go to the landlord’s counsel.
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.
Routine Rent Bills. Allow routine rent bills to be sent by ordinary mail or by hand and only to the tenant (no copies to, e.g., counsel).
6. Compliance with Laws
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.
Improvements Required by Law. Require the tenant to perform all improvements to the premises required by law. If the tenant resists (as the tenant probably will), 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, whereby the landlord bears the risk of present and future laws that generally govern similar buildings and the tenant is responsible for legal requirements from the tenant’s specific or unusual use of the space.)
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 that work.
Definition. Define “Laws” broadly to include future enactments, insurance regulations and requirements, administrative promulgations, and recorded declarations.
Reasonableness. When the landlord agrees to be “reasonable,” establish criteria for reasonableness. Mortgagee’s disapproval of a matter should be a “reasonable” basis for the landlord to withhold consent. Absent criteria, the meaning of “reasonableness” is a litigation that is often stacked in favor of the tenant.
Scope of Consent. Any consent applies only to the particular matter under consideration.
Deemed Consent. If the landlord has agreed that failure to grant or withhold consent within ___ days is deemed consent, try to: (a) have this 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 (all caps boldface) that the landlord must respond within that period and the consequences of failure to do so.
Expenses. Provide that the tenant is to pay any expenses the landlord incurs (including legal), in connection with any consent.
Conditions to Consent. Even when the landlord has agreed to be reasonable about a consent, build in conditions such as no pending default; the tenant must deliver estoppel certificate and copies of all relevant documents; other requirements tailored to the particular consent at issue, etc., recognizing that the landlord may forget to impose such requirements as a condition to the consent when issued.
No Representation. The landlord’s consent to anything is not a representation or warranty that the matter consented to complies with law or will be appropriate for the tenant’s needs.
Survival of Conditions to Consent. Whenever certain conditions must be satisfied for the tenant to obtain the landlord’s consent (or to take any action without the need for the landlord’s consent), consider whether the lease should require the tenant to cause those conditions to remain satisfied even after the consent is granted.
Limitation of Remedies. If the landlord unreasonably withholds consent when the lease requires the landlord to be reasonable, the tenant’s only remedy is specific performance (not monetary damages). Backup position: provide for expedited arbitration.
Guarantor’s Net Worth. Provide that a decline in a guarantor’s net worth or the bankruptcy a guarantor (either an express guarantor or an unreleased assignor) is an event of default. This should be perfectly enforceable as long as the tenant is not itself in bankruptcy.
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.
Default Notices. Provide that default notices need not specify cure periods.
Impairment of Business. Define an event of default to include events (beyond the usual insolvency list) that may indicate the tenant is preparing to go out of business. These might include the tenant’s announcement 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 even layoffs.
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. Is that what the landlord wants?
Discount for Timely Payment. Consider increasing “face rent” in the lease by __ percent; 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.
All Rent Due at Signing. Consider requiring the tenant to pay all rent for the term of the lease at signing, but the landlord agrees to accept monthly installment payments only as long as no event of default exists.
9. Destruction, Fire, and Other Casualty
Rent Abatement. Limit the tenant’s rental abatement right to amount of rental income insurance proceeds the landlord receives under the landlord’s casualty insurance. (Any such provision must, however, be carefully coordinated with the landlord’s insurance program for the property, to prevent surprises and problems.)
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 rather than from the date of casualty.
Termination Right; Limitation on Restoration. No right (or limited right) for the tenant to cancel. The landlord should be obligated to restore only to the extent the landlord recovers insurance proceeds.
Tenant Waiver. Require the tenant to waive the provisions of New York Real Property Law §227 (which gives a tenant the right to terminate a lease in the event of a casualty that renders premises untenantable), and comparable provisions in other states.
10. Development-Related Issues
Air and Development Rights. Consider the effect of including air rights and development rights in the definition of the landlord’s property. The tenant should waive any right to object to any merger of air rights, and should agree to sign any zoning lot merger if asked.
Landmark District; Historic Designation. If the building is located in a landmark district or similarly protected area and local law (e.g., NYC law) requires it, include in the lease a notice of such landmark status. The tenant should covenant: (a) not to file for historic designation of the premises, and (b) to oppose any such designation of the premises.
Relocation Right. The landlord can relocate the tenant to comparable premises in the building or in some other specific building the landlord owns.
Demolition. The landlord can terminate the lease after reasonable notice if the landlord intends to demolish. 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. Set up a process so the landlord will find out quickly whether the tenant will try to fight the early termination of the lease. Give the tenant incentives to cooperate. 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 only if the tenant vacates strictly on time.
Building Name and/or Address. The landlord can change the name or address of the building. The tenant will not refer to it by any other name.
Building Standard Specifications. The landlord can modify building standard specifications.
Change of Provider. If the landlord changes the electricity provider for the building, even if the tenant is directly metered for its consumption, the tenant must use the new provider, to the extent permitted by law.
Delivery of Electrical Service. The tenant’s electrical usage is subject to conservation measures and power grid availability.
Resale. Prohibit the tenant from reselling electricity.
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
Obligation to Restore. Require the tenant to restore at the end of the term. That obligation should survive expiration or sooner termination of the lease. 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.
Alteration Consents. Tenants sometimes negotiate that they have no obligation to restore unless the landlord requires that restoration as a condition to the landlord’s approval of any particular alteration. In those cases, the landlord must remember to exercise its right to require restoration when appropriate.
Landlord’s Property. At the landlord’s option, the tenant must leave behind any improvements, fixtures, or personal property paid for by the landlord (including by rent abatement).
Cables, Conduits. The landlord retains ownership of all cables and other wiring in the building. The tenant should remove cables, conduits, wires, raised floors and rooftop equipment either in all cases or at the landlord’s request. The tenant should indemnify the landlord from all liability in connection with that removal.
Holdover. Consider providing that if the tenant fails to vacate the premises at end of the term, the tenant must pay the greater of (a) ___ percent of final adjusted rent under the lease and (b) [150 percent] of fair market rent as a use and occupancy charge. Calculate the charge on a monthly basis for every full (or partial) month the tenant holds over.
Tenant Waiver. 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 instituted by the landlord. (In New York, the statutory reference is New York Civil Practice Law and Rules 2201.)
Abandoned Personalty. Upon lease termination, any personalty in the premises is deemed abandoned and the tenant must pay cost of removal and storage.
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 any prospective tenant.
Time of Essence. “Time is of the essence” for the tenant’s obligation to vacate the premises.
Reports; Inspections. The tenant covenants to deliver updated environmental reports. The landlord has the right to inspect the premises upon reasonable belief that a violation of environmental law exists, all at the tenant’s expense.
High Risk Uses. For a gas station or other high-risk use whole building lease, 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 ground-water 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) if no environmental liability insurance is available, having the tenant post a bond; (e) if underground tanks already exist, having the tenant (i) accept the tanks “as-is,” (ii) comply with all applicable laws, including obtaining all permits (as well as annual registration and recertification), (iii) post all state-required financial assurances, (iv) maintain, repair and replace, if required, all tanks, and (v) maintain all required records and inventory controls.
Required Tank Removal. Consider whether the landlord should have the option to require tank removal, assessment, and clean-up at the end of the lease term.
Landlord Indemnification. If the landlord agrees to indemnify the tenant for past environmental problems, limit indemnification to liability existing under present law based on present violations. Exclude any liability arising from future laws or amendments of existing laws.
Interior Air Quality. The landlord has no liability for bad air or “sick building syndrome.” The landlord may prohibit smoking.
14.01.A Operating Costs
14.01.A1 Reality Connection.
When negotiating the operating cost escalation clause, confirm that the clause, even as negotiated, matches the landlord’s actual practices in operating the building, so the landlord is capable of making the required calculations.
Try not to agree to tight time limits (or, worse, a “time 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.
14.01.A3 No Fiduciary Duty.
Negate any fiduciary duty regarding operating cost escalation and its administration.
14.01.A4 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.
14.10.B Porter’s Wage
14.10.B1 Scope of Costs.
Include fringe benefits and all other labor costs.
14.10.B2. Wage Rate.
Wage rate should not reflect “new hire” or other transitional wage rates.
A. Consumer Price Index
1. Use the Consumer Price Index For All Urban Areas (“CPI-U”) index because, historically, it has increased faster than the Consumer Price Index for Urban Wage Earners and Clerical Workers (“CPI-W”) index.
B. Audit-Related Issues (Operating Costs)
1. Condition for Audit. The tenant may audit operating costs only if they increase more than __ percent over prior year or base year.
2. 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.
3. 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.).
4. Look-Back Period. Maximum look-back period for issuing revised statements (but be careful; the tenant may try to make it reciprocal).
5. Limits. Limit timing, frequency, and duration of audits. Establish short deadline for the tenant to request an audit.
6. Claims. Require specificity, completeness, and finality in any tenant claim of discrepancy or error.
1. No Decrease. Escalation formulas should never allow rent to go down.
2. Examples. For any complex or intricate escalation formula, consider adding an example, but don’t make the numbers dramatic.
3. Confidentiality. Require the tenant to sign a confidentiality agreement satisfactory to the landlord regarding audit and its results before disclosing any records or information to the tenant or to a lease auditor (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.) Breach is an incurable default under the lease.
4. Scope of Review. List the documents the tenant is entitled to review in an audit. This limits the tenant’s right to see other documents and restricts the tenant’s review of property operations more generally.
5. Inspection Rules. Provide that the tenant (or its representative) may examine the landlord’s books and records for a specified period, but is not entitled to copies. Moreover, any lease audit must comply with the landlord’s reasonable requirements, such as preventing the lease auditor from observing the landlord’s general operations.
6. Threshold for Payment. If overcharges (net of undercharges) total three percent or less of total annual operating costs/common area maintenance fee (“CAM”) (a generally accepted definition of “materiality”), the tenant should not be entitled to any correction or any reimbursement of its audit costs. Define carefully the factor to which the three percent is applied. Use as large a number as possible. For example, refer to three percent of gross annual operating costs rather than three percent of the tenant’s escalation payment.
7. Dispute Resolution. Provide a private and final mechanism (e.g., arbitration) to resolve disputed operating costs/CAM.
8. 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) defining what the landlord can pass through to tenants; and
(b) excluding “capital” items.
Regarding (a), GAAP requires matching of revenue and expenses, forcing the landlord to reduce costs by any related income received. Examples:
(i) Recovery of HVAC overtime costs from tenants (all of this is not expended, such as amortization of Energy Management System);
(ii) Telecommunications (revenue from rooftop antenna); and
(iii) Parking garage income.
(i) Positive for landlords -- the American Institute of Certified Public Accountants is reviewing disparity of practice as to capitalization and expense, and this may help landlords pending issuance of a formal statement.
(ii) Negative for landlords – GAAP may treat preventive maintenance as “capital.”
(iii) Consider establishing an annual per square foot capital reserve charge. Landlord would not be required to account for these funds and the lease would define categories of “capital”-type costs to which tenants need not contribute.
9. “CAM.” Avoid the term “CAM,” because escalations cover far more than common area maintenance.
10. 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.
11. 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.
12. Liability for Refunds. The landlord’s liability for any refund of overpaid escalations should terminate after ___ years, so as to prevent open-ended obligations or issues upon a sale of the building.
15. Estoppel Certificates
Administrative Fee. Daily administrative fee for late delivery.
Lender Requirements. Require any additional information a lender might request.
Ratify Guaranty. Confirmation/ratification of any guaranty.
Exhibit. Attach form of certificate as lease exhibit (conform to typical lender requirements), with flexibility for future lender demands.
Right to Future Estoppels. The tenant will 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?)
When to Request. Request an estoppel certificate (or include equivalent language in the documentation) for any amendment, consent, waiver, favor, or other concession of any kind. Include “reliance” language to support enforceability.
Reliance. Allow reliance by prospective purchasers, mortgagees or any participant in a future securitization, including rating agencies, servicers, trustees, and certificate holders.
Failure to Respond. Establish specific meaningful remedies for failure to sign estoppel within short period, such as deemed estoppel, power of attorney to execute, or a nuisance fee (e.g., $100 per day).
Legal Fees. If the landlord agrees to give an estoppel, require the tenant to pay the landlord’s legal fees and expenses.
Attach Lease. Require the tenant (if asked) to attach a copy of the lease and all amendments to any estoppel certificate.
16. Expansion/Renewal Options
Timing. Time of the essence. Also, provide that timely notice is 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).
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 period of ____ months the tenant’s first refusal rights (and any options that would otherwise apply) should be waived, at least where they relate to comparable space, broadly defined.
Time to Relet. Exercise deadline must be early enough to give the landlord time to relet.
Update Due Diligence. Reconfirm due diligence requirements regarding the tenant.
Option Subject. Make expansion option subject to existing exclusives and renewal clauses of other tenants. Avoid overlapping expansion options.
Carveouts from Purchase Rights. If the tenant negotiates an option or right of first refusal to purchase, it should exclude: (a) foreclosure or its equivalent; (b) any subsequent conveyance; (c) transactions between the landlord and affiliates or family members; (d) other permitted transactions; and (e) if the tenant “passes” on its pre-emptive right, then all subsequent transactions.
Conditions. Condition option exercise upon the tenant’s (i) not being in default (and no potential default) both on the exercise date and on the effective date, (ii) not having assigned the lease, (iii) retaining a certain minimum occupancy, and (iv) actually operating in the space. Also, consider requiring the tenant to satisfy an objective net worth test (either a specific dollar amount or a multiple of the annual rent during the extension period) for at least the three years immediately preceding the option exercise date. Consider permitting a sound tenant whose net worth does not satisfy such a test to post additional security (presumably in the form of a letter of credit) to make up for the net worth shortfall.
Option Rent. Set a “floor” for option rent equal to the previous rent under the lease.
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.)
Termination of Option Rights. Options may not be separately assigned. They terminate if the tenant subleases more than __ percent of the premises or assigns the lease.
Option Maintenance Fee. Require the tenant to pay a nominal annual fee to preserve future options, to give the tenant an incentive to terminate any option rights it does not truly need.
17. Failure to Give Possession
No Liability. No landlord liability for not delivering possession on commencement date for any reason, including holdover or construction delays. The tenant’s obligation to pay rent commences on possession. Perhaps extend term by the duration of any landlord delay in delivering the premises.
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 may sound to attorneys drafting leases. Delay in giving a commencement date notice will mean lost revenue.
Condition of Premises. For delivery of the premises, substantial completion is sufficient (e.g., temporary certificate of occupancy).
Termination Right. The landlord may want a termination right if the landlord ultimately cannot deliver possession by a date certain.
Delivery Dispute. Provide for a short deadline for the tenant to report any issue or problem about the premises or the landlord’s work. Or state that taking of possession constitutes acceptance for all purposes.
Rent Abatement. To the extent the landlord agrees to give the tenant a rent abatement for late delivery, limit duration of abatement (e.g., if the rent abatement exceeds __ 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), to reduce immediate damage to the landlord’s cash flow at a time when the landlord may be under financial stress.
18. Fees and Expenses
Fee and Expenses. Collect a fee (and expenses) to review any plans, specifications, or request for consent/waiver. Avoid a flat fee. Express as a formula based on size of job, with a floor.
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). Reimbursement right should include attorneys’ fees and expenses incurred in connection with (i) any litigation the tenant commences against the landlord, unless the tenant obtains a final judgment, (ii) negotiating a lender protection agreement for the tenant’s asset based lender, (iii) the landlord or an employee acting as a witness in any proceeding involving the lease or the tenant, (iv) reviewing anything that the tenant asks the landlord to review or sign; and (v) bankruptcy proceedings.
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
Tenant’s Financial Condition. The tenant must provide annual financial statements for itself and any guarantor. If the financial condition of either deteriorates, negotiate the right for a security deposit, rent adjustment, or other consequences.
Reporting. The tenant must immediately report, for the tenant and any guarantor: (i) any adverse change in financial position, and (ii) any litigation that could adversely affect ability to perform.
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.
Future Events. The parties should agree to memorialize any commencement date, rent adjustment, or option exercise in a lease amendment.
Termination of Lease Memo. If the tenant obtains a memorandum of lease, then: (a) the tenant covenants 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 be held in escrow.
Governmental Benefits, Generally. The tenant must cooperate as necessary to allow the landlord to qualify for any tax or governmental benefits (tax abatements, etc., including ICIP in NYC) that would otherwise be available.
Permitted Disclosure. The landlord can disclose to mortgagees or prospective purchasers any information about the tenant or any guarantor.
Social Security Number/Address. State the social security (or driver’s license) number and home address of any individual guarantor beneath his/her signature line. This underscores the fact that it is intended to constitute a personal obligation of the guarantor and may help enforcement.
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.
Lease Assignment. If the landlord sells the property, the guaranty should by its terms automatically travel to the purchaser, whether or not the transfer documents say so.
Net Worth. Any net worth test or other financial covenant should apply to both the tenant and the guarantor. Tailor as appropriate.
Estoppel Certificate. The guarantor should agree to issue estoppel certificate upon request.
Springing Guaranty. Consider a springing guaranty as a consequence of certain adverse events (e.g. reduction in the tenant’s net worth). Remember: the guarantor must sign at the time of the lease execution.
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)).
“Good Guy” Guaranty. Consider a “good guy” guaranty (e.g., 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).
Security. Consider securing the guaranty obligation with a letter of credit or other security. By tying the letter of credit to the guaranty rather than to the lease, the landlord may reduce the likelihood – perhaps already rather low – that the tenant’s bankruptcy estate could “claw back” any L/C proceeds above the landlord’s permitted claim for rent in the tenant’s bankruptcy.
21. Inability to Perform
Triggering Event. If the tenant negotiates a force majeure clause, the tenant must promptly notify the landlord of any “force majeure” event. Extension of time continues only so long as such triggering event actually causes the tenant delay.
Exception to Force Majeure. Force majeure should not cover any monetary obligation.
Governmental Consents. For the landlord, force majeure should include failure to obtain governmental consents and permits.
Additional Insureds. Include the landlord and its managing agent and mortgagee as “additional insureds,” not “named insureds,” because the latter may owe premiums.
Changed Requirements. Conform insurance requirements to those in the mortgage (and any modifications or replacements thereof). Allow the landlord to change such requirements as needed to comply with the landlord’s and any mortgagee’s reasonable requirements.
Business Interruption Insurance. Any rental/business interruption insurance should cover additional rent (e.g., escalations and tax-passthroughs) and percentage rent as well as base rent.
Evidence of Insurance. Require “evidence” of insurance (ACORD 27 form) or a copy of policy at lease signing, not a “certificate” of insurance (ACORD-25 form), which is regarded as worthless unless modified. Try to get an ACORD 27 form (or equivalent) for liability insurance too.
Landlord Insures. Consider having the landlord insure the tenant’s improvements (with the tenant reimbursing the premium either directly as additional rent or as an operating expense), and the landlord having the right to restore or to require the tenant to do so with any insurance proceeds.
Plate Glass Insurance. Require any retail tenant to carry plate glass insurance.
Insurance Broker. Allow the landlord (at its option) to deal directly with the tenant’s insurance broker to obtain insurance documents, as the lease requires.
Approval Rights. The landlord can approve the identity and financial condition of the tenant’s insurers.
Waiver of Subrogation. Understand “waiver of subrogation” -- a tricky topic, often handled wrong. These clauses should always 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.
Tenant’s Rights to Proceeds. Any right of the tenant to receive insurance proceeds is subject to the rights of the landlord’s mortgagee.
Tenant Failure to Insure. If the tenant fails to insure and a fire occurs, then the tenant is 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.)
Insurance Advice. Work with the landlord’s insurance broker/consultant to update and improve the insurance requirements of the lease.
23. Landlord’s Access To Premises
Emergency Contact. The tenant should provide the name and telephone number of an emergency contact.
Reconfiguration. The landlord may reconfigure and/or change the means of access to the premises.
Prior Notice. The landlord may enter without notice in an emergency. Even in a nonemergency, oral notice to someone on site should suffice.
Keys. The tenant should deliver copies of all keys and access codes to the landlord. The landlord should consider, though, whether it truly wants the liability, especially if the tenant’s inventory or other property is unusually valuable. The landlord may prefer to be selective about requiring keys and access code.
No Eviction. The landlord’s entry to or inspection of the premises does not entitle the tenant to any rights or remedies – it is not an actual or constructive eviction of the tenant - or any claim, offset, deduction, or abatement of rent.
Purpose of Access. The landlord may: (a) show the premises to prospective purchasers, mortgagees or appraisers or, during the last ___ months of the term, to prospective tenants, and (b) post “for sale” and “for rent” signs.
24. Landlord’s Liability
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, etc.
Landlord Default. Give the landlord the same open-ended cure periods for nonmonetary defaults that tenants typically obtain – no landlord default so long as the landlord has commenced and is diligently prosecuting cure of its default.
Liability. No further liability of the landlord if the landlord transfers or assigns its rights and obligations in the premises.
Liability for Prior Owner’s 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 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
Express Not Implied. No implied covenants, representations, or warranties of the landlord, only those expressly set forth in the lease.
Merger. Provide for the merger of any agreements, written or otherwise, predating the lease. Any statements or representations on the landlord’s website are not part of the lease.
Other Leases. 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
No Overtime. The landlord has no obligation to do any work at overtime or premium rates.
Tenant’s Obligation. The tenant must maintain and repair parts of the building – including storefronts and sidewalks – that exclusively serve the premises.
Right to Perform. The landlord can perform, at the tenant’s expense, repairs necessitated by the tenant that affect other premises.
Broad Repair Obligations. Where the tenant has broad repair obligations, expressly include “ordinary or extraordinary, structural or non-structural, foreseen or unforeseen” repairs.
Specify Repair Obligations. Avoid distinguishing repairs as “structural” and “non-structural.” Rather, be specific. Otherwise, a court may decide what the parties intended.
“As Is” Condition. The tenant should represent and acknowledge it takes possession of the premises in its “as is, where is” condition as of the commencement date.
No Obligation Except Specific Work. The landlord need not perform any work or make any installations to prepare for the tenant’s occupancy, except as the lease expressly requires.
Tenant Covenants. The tenant should covenant to fixturize, open for business and operate for at least a certain minimum period.
28. Percentage Rent and Radius Clause
Increases. Provide for an increase in percentage rent upon any change of use or change of the tenant.
Inclusions/Exclusions. For percentage rent purposes, include any catalog or internet sales made through the store. No credit for return of goods purchased through a catalog or over the internet (unless included in store sales). Exclude sales to the tenant’s employees only if they are made at a discount.
Limit Percentage Rent Penalty Period. In a retail lease, if a co-tenancy problem triggers the tenant’s right to pay only percentage rent, the lease should restore fixed rent when the problem is solved or limit the percentage rent only period (e.g., after a certain period, the tenant must either terminate or resume paying full fixed rent).
Effect of Casualty. If the premises are closed part of the year because of a casualty or condemnation, adjust the “breakpoint” for percentage rent downward. (This assumes the “breakpoint” is expressed as a fixed dollar amount rather than as a formula referring to actual fixed rent payable from time to time.)
Gross Sales. Define gross sales to include sales by subtenants and concessionaires.
Fixed Rent Increases. Increase fixed minimum rent (and percentage rent breakpoint) periodically over time based on increasing gross sales.
Audit Right. Allow the landlord to audit the tenant’s gross sales. If the tenant underpaid percentage rent by more than 3 percent, the tenant pays interest and costs of audit.
Kickout Right. The landlord may terminate if percentage rent has not reached a certain level by a certain date.
Recordkeeping. Require the tenant to maintain records sufficient to make any audit meaningful.
Radius Clause. Include a “radius clause” in any lease requiring percentage rent, i.e., the tenant may not compete with itself within restricted area without the landlord’s consent.
Violation. If the tenant violates the radius clause, consider requiring the tenant to include as “gross sales” (for percentage rent purposes) the greater of (i) a specified percentage of gross sales at the premises or (ii) the gross sales of the tenant’s store in the restricted area.
29. Quiet Enjoyment
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 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 under the lease.
Limit Obligation To Provide Services. Limit the landlord’s obligation to provide services and other obligations regarding the building to bare occupancy and express obligations under the lease. Prevent 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
Tax Contests. The tenant may not contest 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 (assuming the tenant did not need to pay the taxes as a condition to the contest).
Business Improvement District (“BID”) Charges and Special Assessments. Include any “BID” charges and special assessments of any kind in the definition of “Real Estate Taxes.”
Base Year Real Estate Taxes. Define “Base Year Real Estate Taxes” as “net of any special assessments” and “as finally determined.”
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.
Adjustment for Condominium. Allow the landlord to equitably adjust tax calculations, operating expense formulas, and tenants’ proportionate shares if the building becomes a condominium or is otherwise changed.
Tax Pass-Through Challenges. Limit time during which the tenant may challenge tax pass-throughs. All the tenant’s obligations for real estate taxes and operating expenses should survive the expiration or sooner termination of the lease.
Estimated Tax Payments. Consider requiring the tenant to make monthly estimated tax payments (especially where the landlord’s mortgagee requires tax escrow payments).
Management Fee. If the landlord protests real estate taxes, impose an extra management fee to compensate for the time, trouble, and effort.
Imperiled Abatement. If the property has the benefit of any form of tax abatement, deferral, or the like, state that if anyone ever challenges the validity of such benefit, then the landlord can require the tenant to pay monthly (just like a regular payment of real estate taxes) an appropriate contribution toward whatever incremental taxes the landlord might owe if the challenge succeeds. These payments would be refunded if the challenger loses beyond right of further appeal.
Transfer Taxes. Remember that New York State, for example, imposes transfer tax on leases with terms beyond 49 years (including extension periods).
Contest Expenses. Have the tenant pay its proportionate share of the cost of the landlord’s real estate tax counsel in seeking to lower assessment, instead of merely subtracting the landlord’s legal fees in the event of a successful tax contest.
31. Remedies of Landlord
Yellowstone Injunction. Consider whether the landlord can proactively add language to the lease to limit the availability and impact of so-called “Yellowstone” injunctions under New York law. For example:
A. Require the tenant to waive its right to bring a “Yellowstone” injunction (probably not enforceable).
B. The tenant should acknowledge no “Yellowstone” injunction is available for financial defaults, even if uncertainty or disagreement exists about the tenant’s obligations (which will always be the case when the problem arises). The tenant must pay first, fight later.
C. The tenant may obtain an extended cure period – and a period in which to litigate an alleged default -- by depositing with the landlord as security an amount equal to the landlord’s estimate of the cost to cure the alleged default. The making of such a deposit is the only way the tenant can evidence its ability and desire to cure the default. (Such a mechanism, if honored by the courts, may eliminate the theoretical basis for “Yellowstone” injunctions.)
D. State that a “Yellowstone” injunction, if granted, limits only the landlord’s right to terminate the lease and does not limit any other rights or remedies (e.g., late charges, default interest, reimbursement of the landlord’s expenses).
E. State that if the landlord obtains a warrant of eviction, the tenant will automatically have – or the landlord can agree at any time to grant the tenant -- a short final cure period before the landlord proceeds with actual eviction. A “last clear opportunity to cure” at the end of the eviction proceeding would substantially undercut the basis for a “Yellowstone” injunction.
Default Rate. The tenant covenants to pay interest at the agreed default rate on amounts past due even after judgment (when only the statutory judgment rate would otherwise apply).
Interest and Late Charge. Provide for interest on late payments (in addition to a late charge). Multiple defaults or bounced checks within a specified period have special consequences. For example: a higher late fee; next default is incurable; or future payments – or at least all payments for the next ___ months – must be made by certified or cashier’s checks or wire transfer.
Waiver of Counterclaims. Require the tenant to waive counterclaims other than compulsory counterclaims.
Rights of Redemption. Require the tenant to waive any and all rights of redemption under existing or future laws.
Nonpayment. If the tenant does not pay rent, allow the landlord to exercise a "conditional limitation" right and terminate the lease, not merely commence nonpayment proceedings. (Many Standard Leases establish a “conditional limitation” only for defaults other than nonpayment of rent.) The lease should expressly provide that even if the landlord tries to exercise a conditional limitation right to terminate the lease, the landlord may still prosecute a proceeding for nonpayment of rent.
No Mitigation. Provide that the landlord has no obligation to mitigate damages.
Inducement Repayments. If an Event of Default occurs, the tenant must repay the unamortized balance of the landlord’s rent concessions, brokerage commissions and contribution to the tenant’s work. (The tenant will argue that this gives the landlord double compensation. That may be true – but only if the tenant actually pays the damages provided for in the lease. The landlord can agree to offset any liquidated damages provided for in the lease by the damages suggested in this paragraph if the tenant actually pays them.)
Right to Cure. The landlord can cure the tenant’s defaults and bill the tenant for the landlord’s expenses, with interest at the default rate as additional rent.
Specific Performance. Try to provide that the landlord can obtain specific performance regarding all non-monetary covenants, both negative and affirmative (supervised and monitored by a special master if necessary).
Intermediate Remedies. Establish intermediate remedies for defaults that a court would never accept as a basis to terminate a lease – for example, failure to deliver financial information or an estoppel certificate. These intermediate remedies could be meaningful without being draconian, such as a nuisance fee, a temporary rent adjustment, a suspension or deferral of some privilege or benefit, or the like. And if the tenant’s “minor” default continues for a specified period, it might then become an Event of Default.
Abandonment. The landlord’s seizure of the premises based on “abandonment” can be dangerous, because of uncertainty about what “abandonment” means. Try to define it in the lease, e.g., nonpayment of rent and physical absence from the premises for ___ months. Before seizing the premises, consider sending an “estoppel” notice to the tenant reiterating the lease provision and inviting the tenant to respond otherwise. If there is any doubt that abandonment has occurred, consider using a summary possession action rather than self-help to avoid a wrongful eviction action.
All Payments Are “Rent.” Describe/define all payments to be made by the tenant under the lease as “rent” to obtain “summary dispossess” rights for nonpayment. This will also affect treatment in bankruptcy.
Payment. The lease should include an express covenant to pay rent, not merely a schedule of rental amounts. Allow the landlord to require all payments by wire transfer.
Rent Concessions. The landlord should have the right to undo a rent concession if the tenant defaults before the concession has been fully applied. Also, consider extending a rent concession for a longer period (e.g., six months of 50 percent rent rather than three months of free rent) or in stages over the lease term (e.g., one month free every 24 months rather than several months free at the beginning). Condition any rent concession on the tenant’s finishing its initial alterations by a certain date.
Rent Not Per Square Foot. State rent as a flat amount rather than based on the square footage of the premises (to avoid controversy about square footage and remeasuring). Avoid any statement about the square footage or rentable square footage of the premises.
Remeasurement. If possible, negate any remeasurement of the space or the common areas. If the tenant insists on the right to remeasure, provide for a particular formula for measurement (e.g., BOMA) with the landlord’s architect/space planner to certify such measurement to the landlord. If the tenant later brings an action against the landlord for bad measurement, the landlord may have a claim over against the design professional.
Stock Options. For tenants with IPO potential, consider whether to require (or accept) stock, options, or warrants. (This paragraph was added early in the development of this checklist. Recognizing that business cycles have not yet been repealed, the subcommittee decided to leave this paragraph in place, as it may become important again.)
Waiver. The tenant waives New York Real Property Law Section 232(a) and (c), which automatically convert a terminated lease into a month-to-month tenancy (with notice requirements for termination) if the tenant keeps paying. (Some subcommittee members reject such a waiver, arguing that the cited statutes are reasonable and equitable.)
Free Rent. Define free rent period to end on a particular date (defined in the term sheet), not a certain number of months after the occurrence of an event (e.g., lease signing or delivery of premises). This approach shifts to the tenant the financial risk of protracted lease negotiations.
Commercial Rent Control. Leases already require the tenant to make a corrective payment when rent control terminates. Consider requiring the tenant to escrow the shortfall amount with the landlord each month during any the rent control, and pay interest on the shortfall.
Lockbox. If the tenant pays rent into a lockbox, the landlord should not be deemed to have accepted a rent payment until ten days after deposit in the lockbox. Deposit of the check does not waive the landlord’s right to object. This preserves the landlord’s right to correct the lockbox administrator’s mistakes.
33. Rules and Regulations
Compliance. The tenant must comply strictly with the rules and regulations attached as an exhibit to the lease, and any later changes (reasonable changes?) that the landlord makes.
No Liability. No liability if the landlord does not enforce the rules or regulations against other tenants, or if other tenants violate them.
Lease Incorporation. If the rules and regulations contain anything unusually important, move it to the body of the lease. Courts may ignore rules and regulations. Provide that if any conflict exists between the rules and regulations and the lease, the lease governs.
Recycling. Consider requiring the tenant to separate its waste. The landlord’s requirement may exceed those of applicable law.
Segregated Account. Comply with any state-specific requirements regarding how to hold security deposits (e.g., New York General Obligations Law Section 7-103 and related provisions). Where such provisions require notices to the tenant relating to the security deposit, try to build those notices into the lease if possible.
Letter of Credit. Consider requiring security deposit to be in the form of a letter of credit to try to reduce impact of any possible tenant bankruptcy.
Letter of Credit Requirements. If the security deposit is in the form of a letter of credit, require that (i) the issuing bank be a New York Clearinghouse bank, (ii) the letter of credit be drawable at a bank branch in the same city as the landlord upon presentation of merely a sight draft (no drawing certificate); (iii) the letter of credit must be an “evergreen” or the bank must notify the landlord within not less than ____ days of any failure to renew and the landlord may draw, (iv) even if the letter of credit is an “evergreen,” the issuer must confirm the current expiry date upon request; (v) the letter of credit will not expire until at least ___ days after lease expiration; and (vi) the landlord can transfer the letter of credit without charge to the landlord’s lender or purchaser.
Waiver. Require the tenant to waive any damages claim against the landlord for wrongful drawing on the letter of credit, and any right to enjoin or otherwise interfere with a drawing on the letter of credit.
Security Deposit is Additional Rent. Provide that the obligation to deliver any security deposit (or increase therein) is deemed Additional Rent.
Replenishment. Require the tenant to promptly replenish the amount of any security that the landlord draws, and/or restore the letter of credit accordingly.
Increased Security. A rent increase should trigger a requirement to post increased security. Are there any other circumstances that should trigger such a requirement?
Mortgagee Requirements. Accommodate future mortgagee requirements (e.g., a right to pledge the landlord’s interest in the security deposit or to transfer any letter of credit to the mortgagee).
Lien on Personalty. Consider taking a lien on the tenant’s personal property, perfected with a UCC-1 filing.
35. Services Provided by Landlord
Additional Services. If the landlord agrees to provide additional electricity and/or HVAC condenser water at the tenant’s expense if available at the premises, the landlord should have the sole right to determine how much it needs for other tenants, including a reservation of capacity for future needs.
HVAC. Express HVAC standards as design criteria, not as performance specifications. The landlord’s only obligation is to operate HVAC in conformance with design criteria. The tenant is responsible for distribution within the premises in accordance with American Society of Heating, Refrigeration and Air Conditioning Engineers (“ASHRAE”) standards.
Tenant Complaints. Limit who can complain about any building services. Require a written notice of any such complaint, signed only by specified officer(s) of the tenant.
Tenant-Provided Services. Prohibit the tenant from providing its own services, especially where this could create labor problems.
Changes in Building Operation. The landlord to have the right to change how the building operates and the services the landlord provides, subject to reasonable standards.
Early Air Conditioning. If the landlord provides air conditioning early in the season (due to hot weather or tenant requests), the landlord may charge tenants for that extra service, even if the lease does not yet require air conditioning.
Specifications. To the extent that the landlord agrees to specifications for any services to be provided, consider the assumptions that underlie those specifications. For example, elevator specifications assume a certain level and distribution of occupancy and usage. If the tenant suddenly installs a cafeteria, this may alter traffic patterns so much that the landlord should no longer be bound by the elevator specifications.
Telecommunications/Fiber Optics Cable Provider. Consider requiring the tenant to use the landlord’s telecommunications/fiber optics cable provider. The landlord can change providers and has no obligations to the tenant to continue to use any particular provider. (This area is under constant review and change by the FCC.)
36. Subordination and Landlord’s Estate
Financeability Provisions. To avoid negotiating SNDA’s with the landlord’s mortgagees, include directly in the lease all mortgagee protections and benefits that an SNDA would typically give a mortgagee. Require the tenant to confirm these protections if a mortgagee so requests, with the form of confirmation attached as an exhibit. Build in future flexibility to add any other SNDA protections that a mortgagee might (reasonably?) require.
SNDA Form. Require the tenant to execute the SNDA form required by the landlord’s mortgagee. If the landlord delivers that form of SNDA and the tenant does not sign and return it within a specified period, then the landlord is deemed to have performed all its obligations regarding obtaining an SNDA from that mortgagee.
Expenses. Require the tenant to reimburse the landlord’s expenses for delivering any SNDA from the landlord’s mortgagee, including the landlord’s reasonable attorneys’ fees.
Condominium or Ground Lease. The landlord should retain rights to create a condominium regime or to enter into a ground lease. The tenant must cooperate, as reasonably necessary, provided there is no material adverse impact on the tenant.
Mortgagee Modifications. The tenant should agree to any reasonable modification a mortgagee requests, if it does not materially reduce the tenant’s rights or increase its obligations.
Mortgagee Right to Subordinate. Any mortgagee can unilaterally subordinate its mortgage to the lease, in whole or in part, and the tenant shall be bound by such subordination, whether or not the tenant has been notified of it.
Lease Subordinate. Provide that the lease is automatically subject and subordinate to the landlord’s existing or any future fee mortgage. Don’t condition subordination on delivery of a nondisturbance agreement.
37. Tenant’s Equipment and Installations
Electromagnetic Fields (“EMF”). The tenant should covenant not to cause any EMF interference. If the tenant interferes, the tenant must remedy and the landlord has no liability. The landlord can control placement of machines that may cause EMF, even within the premises.
Satellite Dishes. The landlord should control roof rights including penetration, relocation, and size and weight of dish. The tenant should remove its dish and restore the roof at the end of the term. The tenant should indemnify the landlord from all liability in connection with the tenant’s rooftop equipment. The landlord can charge for the tenant’s use of rooftop space. The landlord may require the tenant to relocate equipment elsewhere on the roof.
Conduits and Risers. The landlord should control/coordinate use of conduits and risers that run through or adjacent to the premises. The tenant should restore at the end of the term, and remove cables and conduits that the tenant installed. No landlord liability for claims arising out of the tenant’s use of conduits and risers. The landlord can recapture unused conduit or riser space.
Signage and Identity. The landlord controls all rights to exterior signage (including name of building, flagpole and column rights) even if they affect light and air. The landlord should prepare and install all signs at the tenant’s expense. Alternatively, the tenant’s signs must comply with signage criteria to be attached as a lease exhibit, as the landlord may modify or update from time to time. For future changes in signage criteria, perhaps give the landlord an express right to upgrade the tenant’s signs, though at the landlord’s expense. The tenant must cooperate.
Uniform Elevator Lobbies, Signage, Entrance Doors and Window Shades. Require all tenants to maintain uniform elevator lobbies, signage, entrance doors and window shades. Alternatively, consider giving the landlord the right to require future uniformity.
Supplemental HVAC/Back-Up Generator and/or Fuel Tank. The tenant must maintain its equipment in compliance with law and good practices (e.g., monthly inspections), and keep written maintenance records. These installations become the property of the landlord at the end of the term, delivered in good working order together with permits, warranties, and maintenance history documents. Restrict testing of back-up generator (very noisy).
Narrow Use. Draft use clause narrowly (e.g., not general office use, but general office use for computer consulting). Then say: “and for no other use.”
Recapture Right. In a retail lease with an operating covenant, consider negotiating a continuous or periodic recapture right if the tenant ceases to operate for a stated period. Structure it so a lender may exercise it after foreclosure. For example, it should not be a one-time right.
Prohibited Use. Prohibit the tenant from reselling to other tenants any telecommunication services, satellite capacity, electricity, or other utility or service.
Internet. In a retail lease, consider prohibiting in-store advertising promoting the purchase of merchandise over the internet. (Some members of the subcommittee note that landlords who have tried to establish such prohibitions were generally laughed at, and such prohibitions do not seem likely in the future.) Consider requiring the tenant to include the name and address of the premises, as appropriate, in all internet advertising. The tenant’s internet sales from the store should be subject to the same use limits as the sales the lease otherwise allows.
Single-Store Operation. Require the premises to be used and operated only as a single retail entity (no separate stores or stalls). No part of the premises can be segregated from the balance for use as a separate store, with or without a separate entrance.
Exclusive Uses. Track exclusive uses to avoid conflict. The landlord would ideally have no liability for conflicting exclusive use clauses or enforcement of exclusive use clauses. Alternatively, consider having the tenant’s only remedy for the landlord’s violation of the exclusive use clause be the right to pay percentage rent only or to obtain an assignment from the landlord of its rights against the infringer. Carve out from any “exclusive use” any store that operates the same use as one of multiple uses, but not its primary use.
Loss of Exclusive. If the tenant does not use its exclusive use right, then the right permanently terminates. (A temporary termination is not very helpful to the landlord.)
Covenant of Continuous Operation. Require the tenant to open and stay open during certain prescribed hours with sufficient personnel and inventory. What measure of damages for breach? Provide for remedies other than injunction (e.g., higher rent), because an injunction probably won’t be granted.
Certificate of Occupancy. Provide that delivery of a certificate of occupancy is not a representation by the landlord that the tenant may use the premises for the permitted use.
Co-Tenancy. Provide for flexibility in co-tenancy requirements to accommodate possible future changes in the retail marketplace. Avoid such tight requirements that over time they may become impossible to satisfy. Provide that the co-tenancy requirements terminate after a certain period.
39. Vault Space
Use and Occupancy. Vault space may be outside the boundaries of the landlord’s property. The landlord makes no representation about any right to use or occupy such space. If the tenant uses the vault space, the tenant must maintain, repair, and pay municipal fees.
Diminution. Any reduction of vault space (e.g., use by any government or utility) does not entitle the tenant to any rights.
Recapture Right. The landlord may recapture any vault area as required by a public utility in connection with furnishing utility services to the building or the premises or otherwise.
Continued Status. The tenant should agree to update its representations and warranties from time to time and to maintain good standing throughout the lease term.
Survival. The tenant’s obligations and liabilities under the lease should survive expiration or sooner termination of the lease.
Independence of Covenants; No Termination Right. The tenant acknowledges the independence of covenants and waives any right to terminate for the landlord’s default.
Diplomatic Immunity. If applicable, the tenant should waive diplomatic immunity.
Tenant’s SEC Filing. A publicly held tenant whose lease is a “material obligation” must file a copy of the lease with the tenant’s publicly available SEC filing. Consider having the tenant: (i) represent that the lease is not a “material obligation”; (ii) agree to notify the landlord if the tenant is later required to publicly file the lease; and (iii) agree to try to have rental information redacted or given “confidential” treatment.
Undesirable Elements. The tenant is responsible for any undesirables that the tenant attracts (e.g.; vandals, protesters, etc.).
Confidentiality. The tenant shall keep the terms of the lease confidential.
Arbitration. If the tenant can arbitrate disputes, condition this right on no rent default. Expressly exclude any rent dispute from the arbitration right.
Concessions. To the extent that the landlord gives the tenant any special “right” or “privilege,” condition it on certain minimum occupancy? No default? Other criteria? Should the lease require the tenant to satisfy any other conditions? What were the landlord’s assumptions when the landlord agreed to the concession, and what happens if those assumptions stop being true? For example, if the tenant’s good credit eliminates any requirement for bonds or other landlord protections, undo this concession if the tenant’s credit turns bad. Can the tenant exercise any privilege only once or within a certain period? Or does it apply throughout the lease term? Can the tenant assign the privilege if the tenant assigns the lease? If the tenant exercises any privilege or right, should the landlord be able to require an estoppel certificate or other documents? These issues potentially arise for every tenant “right” or “privilege,” including permitted assignments, release from liability, options, exclusive uses, etc.
Marked Leases. When preparing final lease documents for signature, mark them against landlord’s standard form to facilitate future lease review projects and administration.
41. Due Diligence; Other Documents
Credit. Credit check and UCC search for the entity that will be the tenant under the lease (not just its parent or affiliate).
Financial Statements. The tenant’s and guarantor’s financial statements.
Good Standing, Etc. Review the tenant’s good standing certificate and organizational documents. The tenant should provide an organizational chart if its structure is complex and/or to explain its structure for a downstream guaranty.
References. Obtain references for the tenant and its principals.
Tenant Representations. Obtain representation and warranty regarding the ownership structure of the tenant, perhaps backed by a secretary’s certificate and copies of documents.
Identities of Tenant and Guarantor. Determine the entity on the lease, identity of any guarantor and stock ownership. Obtain certified copies of filed charters, etc., to confirm exact names.
Opinion of Counsel. For a major lease, consider obtaining the tenant’s opinion of counsel regarding due authorization, execution, and delivery, and possibly enforceability.
SEC Filings. If the tenant is publicly held and any previous lease of such tenant was a “material obligation,” then the tenant should have incorporated that prior lease in a previous SEC filing. As a strategic matter, the landlord may wish to review this filing.
Taxpayer Identification Number; W-9 Form. Require the tenant’s taxpayer identification number under the tenant’s signature. (Sooner or later the landlord will need it.) Consider incorporating the tenant’s W-9 Form certifications into the body of the lease.
Brokerage. Consider the impact of a possible tenant default on the landlord’s liability for unpaid brokerage commissions. What about an early lease negotiated termination based on a change in the tenant’s financial condition? Try to negate any further payment obligations to the broker in any such event.
42. Post-Closing; Monitoring
Insurance. Monitor expiration dates of insurance. Update coverage limits and requirements as markets change.
Delivery of Premises. Formal notice and confirmation of delivery of the premises.
Future Deliveries. To the extent that the lease requires the tenant to make future or periodic deliveries (e.g., financial statements, certificate of ownership structure, estoppel certificates), ask for them.
Future Events. Memorialize any exercise of an option, delivery of additional space, etc., and resulting rent adjustments.
L/C’s. Monitor expiration dates; draw at earliest possible opportunity if necessary.
Tickler Reminders. If the tenant persuaded the landlord to remind the tenant of certain matters (e.g., restoration obligations, option exercise deadlines), establish appropriate reminders in the landlord’s calendar. Counsel may also wish to make appropriate “tickler” entries but should avoid creating ambiguity about counsel’s responsibility for remembering.
Future Amendments. If the landlord and the tenant amend the lease, the landlord may want to obtain guarantor consent; amend any recorded memorandum of lease; and take other steps to protect the landlord’s interests.
Estoppels. The landlord may wish to request periodic estoppel certificates simply to try to prevent future issues.
Advice and Administration Memo. The landlord may desire a memorandum summarizing important provisions of the lease and advising the landlord on actions the landlord should remember to take to avoid problems, issues, or disputes.
S.H. Spencer Compton is a vice president and special counsel at First American Title Insurance Company of New York in New York City. Prior to joining First American Title Insurance Company of New York, he was a practicing real estate attorney for eleven years in New York City.
Joshua Stein is a real estate and finance partner in the New York City office of Latham & Watkins, a member of the American College of Real Estate Lawyers, chair of the Practising Law Institute’s annual two-day seminar on commercial real estate finance, and author of A Practical Guide to Real Estate Practice (ALI-ABA 2001). His books on New York Commercial Mortgage Transactions and Drafting and Negotiating Commercial Mortgage Loan.
Documents are scheduled for publication by Aspen Law & Business.
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