Lease Drafting and Negotiation: A Checklist of Easily Overlooked Details

Not surprisingly, most of the time we spend negotiating leases is devoted to discussions of significant, fairly predictable aspects of the landlord/tenant relationship: the fundamental business terms of the deal, details of business terms that were not fully settled before the lawyers became involved, and a variety of legal issues from assignment to zoning. As we all know, these substantive negotiations can sometimes consume more billable hours than our clients would prefer and (if we are fortunate) there are always other deals waiting in line demanding our attention. If we focus only on the major points, though, we may miss some meaningful issues and potential traps, for both the principals and their counsel, lurking in the mundane, “boilerplate” provisions of our leases. This article will explore several such provisions, not necessarily in order of importance. Although some specific suggestions are made and some sample provisions are included, the primary intent of this discussion is to provide a checklist of easily overlooked items to be examined.

Introduction; Start on the Right Foot. The introductory paragraph provides exactly what it says ' an introduction to the parties and the transaction. Be sure, then, that it states the full, correct legal name and state of residence or organization. If your form lease includes addresses in this paragraph, be sure that they are complete and correct. Finally, for ease of reference, the agreed-upon effective date of the lease should be set forth here, at the beginning of the document. (See more about the “Effective Date” below.)

Authority. The lease should contain a representation and warranty that the individuals executing the lease on behalf of any entity have the requisite power and authority to do so. Be certain, as well, to check and to comply with any legal requirements under applicable state law concerning which officers, partners, members or managers may be required to execute such documents.

Term. Be certain that your lease clearly states a commencement date and the length of the initial term, as well as any renewal or extension terms. Commercial leases typically include the concept of a “Lease Year” so, for example, a 10-year term will not necessarily end exactly 10 years after the commencement date, but rather on a date aligned with one party's fiscal year.

Rent, and Where to Pay It. Does your lease clearly state the correct rental rate, expressed both as an annual and monthly amount? If the rent increases periodically, are those increases accurately described, either as specific amounts or by stating the correct adjustment formula? And finally, does the lease state where rent payments are to be made, and how that address may be changed? The latter point should be covered by the lease provision regarding notices (see below), but note that the address for rent payments, particularly if the landlord is a large business, may differ from the general address included in the introductory paragraph and the address for notices included in the notices provision.

Additional Rent. Landlords should seek to characterize all payments made by the tenant besides regular, periodic rent as “additional rent” to make certain that a tenant's nonpayment of any such amount is actionable as a rent default, if applicable in the relevant jurisdiction. Tenants may resist, but the “additional rent” provision is typical.

Condition Upon Surrender. Does your lease specify the condition in which the premises are to be returned upon expiration or termination of the lease? “Broom clean” is typical, but other standards are possible if, for example, the premises are built out for a specialized tenant, or are to be demolished at the end of the term. Remember to address the disposition of any fixtures installed by or for the tenant, as well as the tenant's personal property, both to clarify what is to be done with such items in the case of a normal lease expiration as well as the disposition of items left by a tenant that vacates unexpectedly.

Notices: Who, Where and How. Keep this provision simple, complete and (cautiously) modern. Be sure to cover the essentials: how notices may be given, when they will be deemed effective, and where they are to be sent for each party. I suggest “modernizing” the provision because I have seen recently drafted provisions that still permit notice to be given only by personal delivery or by registered or certified mail, thereby ignoring overnight delivery, fax and e-mail. I urge caution modernizing however, particularly with regard to fax and e-mail. Fax machines have been known to malfunction and there is always the possibility that your critical fax notice will be stapled to the back of a fax going to your office neighbor who just left on vacation, thereby residing in his or her in-box for a week or two. As for e-mail, rely on it as your sole method of notice only if your computer system has never crashed. If you choose to include fax and e-mail as permissible methods of sending notices, consider requiring that a copy also be sent by one of the other permitted means.

Also consider providing that notices be deemed given upon deposit with the carrier, while the time for response will not begin until actual or deemed delivery. This simplifies the sending party's task of determining when to send a notice in a timely fashion, without penalizing the recipient.

Including the appropriate addresses for each party seems simple enough, but be certain to provide an effective, usable address for each party for each permitted method of giving notice. In other words, do not provide for personal delivery or delivery by private, overnight courier while listing only a post office box address, and do not provide for fax and e-mail delivery without listing fax numbers and e-mail addresses. If the landlord wishes the rent to be sent to a specific address that is different from the landlord's address elsewhere in the lease, that fact should be so noted. Finally, the notice provision should address the effect of refusing to accept delivery or inability to deliver, and it may be helpful to state that notices may be given by a party's attorney or other representative.

The following provision addresses the foregoing points:

“Notices. All notices, requests, demands or other communications hereunder (collectively, “Notices”) shall be in writing and deemed given (i) when delivered personally, or (ii) on the day deposited in the U.S. Mail, by registered or certified mail, return receipt requested, postage prepaid, or (iii) on the day deposited with a recognized overnight courier service (such as Federal Express), in all events addressed as set forth below (or to such other address which a party may from time to time hereafter designate by Notice given in accordance with this Section). Notices may also be given by electronic mail or by confirmed facsimile transmission, and shall be deemed given upon transmission by either of such means, provided that a duplicate notice is simultaneously sent by one of the other methods set forth in clauses (i), (ii) and (iii) above. In all events, the time period in which a response to any Notice must be given, or any action taken with respect thereto, shall commence running from the date of actual delivery to the proper addressees. Refusal to accept delivery by any party or inability to deliver any Notices because of a changed address of which no Notice has been given in accordance with this Section shall for all purposes constitute delivery. Notices may be given by a party's attorney or other representative.”

But It's a Holiday! Common sense would lead us, and the general public, to believe that if a critical date or deadline falls on a weekend or holiday, the time for performance is extended through the next business day. Unfortunately, absent a clear agreement of the parties, this aspect of common sense is not necessarily the law in all jurisdictions. Therefore, be certain that your lease clearly addresses this concern and defines “business day.” Note that holidays in multiple jurisdictions may need to be recognized.

It's Governed by the Law of Where? We often draft a new lease by starting with a document from an earlier transaction, whether because it includes pre-negotiated terms between the same parties, or similar transaction structure, or for other reasons of convenience. However, few things can be more embarrassing, as well as holding the potential for legal harm, than failing to adequately “cleanse” the old lease form of negotiated terms that do not apply in the new transaction, references to other locations or parties, and similar errant facts. You really do not want to have to explain why the lease you drafted for the property in New York says that the premises are in Florida and that the lease is governed by California law.

Formalities. As noted earlier, some jurisdictions require execution by a particular class of corporate officers, especially for recorded instruments (such as a memorandum of lease). It is no longer a matter of simply identifying the appropriate individual, general partner or corporate officer to sign a document; with the proliferation of limited liability companies and limited liability partnerships, accompanied by a variety of management structures, determining the proper signatory has become a little more complicated. Finally, remember to include any necessary witnesses and appropriate acknowledgements if required under applicable state law.

Memorandum of Lease. What may be generically referred to as a “Memorandum of Lease” goes, as well, by other names as a result of custom, practice, and applicable law: “Notice of Lease” and “Short Form Lease” are two common variants. Be certain to use the form applicable for the state in question, not just a “national” form; some states require specific words of conveyance, for example. It is good practice to attach an agreed-upon form to the lease as an exhibit if it will not be recorded immediately upon lease execution (in a development deal which has not yet gone “hard,” for example), even if the memorandum is executed at the same time and held for later recording. Do not forget to comply with the requisite formalities and to establish in the lease which party will pay the recording costs.

Transfer Tax. Some states may tax long-term leases in a manner similar to a conveyance of fee title. This factor, if applicable, must be analyzed for its effect on the structure of the business transaction, and the responsibility for payment of any applicable transfer taxes should be made clear in the lease.

Amendment and Modification. Most leases and agreements typically provide that any amendment or modification must not only be in writing but must be executed by both parties. Is this really necessary or even wise? Under this requirement, even the simplest modification (a landlord's one-time extension of a tenant's deadline, for example) calls for a full-blown amendment document, or at least a letter agreement, signed with all requisite formalities by both parties, a potentially time-consuming and expensive prospect. A more practical approach, at least for relatively minor modifications and amendments, is to require only a writing signed by the party to be charged with the effect of such change; in the example above, the landlord could extend the deadline with a simple, unilateral letter to the tenant without the parties having any concern about the validity of the modification because both parties did not sign.

Effective Date. We have all probably seen leases with no date on the first page, with separate execution dates noted on the signature pages, and with no evidence of any agreed-upon acceptance date or effective date. To solve this problem, consider including a provision such as the following:

“Effective Date. This Lease shall not be deemed to be an offer by the first party signing this Lease and shall have no legal effect until signed and delivered by both parties hereto. In order for this Lease to be effective, the same must be fully executed and delivered to both parties. The Effective Date of this Lease shall be the date the last party to execute this Lease does so, and at least one fully-executed counterpart of this Lease is hand-delivered to the other party or its counsel, or is deposited in the mail or with an overnight courier service for delivery to the other party or its counsel, and such date shall be inserted on page one of this Lease.”

When determined by the foregoing procedure, the “Effective Date” is inserted in the introductory paragraph at the beginning of the lease. Transmittal correspondence from the last-signing party may further confirm the effective date.

Other practitioners may note additional routine provisions which, all too frequently, may go perilously unexamined. Whatever the list, the point remains the same: Do not forget to examine, and draft, the entire lease in each transaction.

Not surprisingly, most of the time we spend negotiating leases is devoted to discussions of significant, fairly predictable aspects of the landlord/tenant relationship: the fundamental business terms of the deal, details of business terms that were not fully settled before the lawyers became involved, and a variety of legal issues from assignment to zoning. As we all know, these substantive negotiations can sometimes consume more billable hours than our clients would prefer and (if we are fortunate) there are always other deals waiting in line demanding our attention. If we focus only on the major points, though, we may miss some meaningful issues and potential traps, for both the principals and their counsel, lurking in the mundane, “boilerplate” provisions of our leases. This article will explore several such provisions, not necessarily in order of importance. Although some specific suggestions are made and some sample provisions are included, the primary intent of this discussion is to provide a checklist of easily overlooked items to be examined.

Introduction; Start on the Right Foot. The introductory paragraph provides exactly what it says ' an introduction to the parties and the transaction. Be sure, then, that it states the full, correct legal name and state of residence or organization. If your form lease includes addresses in this paragraph, be sure that they are complete and correct. Finally, for ease of reference, the agreed-upon effective date of the lease should be set forth here, at the beginning of the document. (See more about the “Effective Date” below.)

Authority. The lease should contain a representation and warranty that the individuals executing the lease on behalf of any entity have the requisite power and authority to do so. Be certain, as well, to check and to comply with any legal requirements under applicable state law concerning which officers, partners, members or managers may be required to execute such documents.

Term. Be certain that your lease clearly states a commencement date and the length of the initial term, as well as any renewal or extension terms. Commercial leases typically include the concept of a “Lease Year” so, for example, a 10-year term will not necessarily end exactly 10 years after the commencement date, but rather on a date aligned with one party's fiscal year.

Rent, and Where to Pay It. Does your lease clearly state the correct rental rate, expressed both as an annual and monthly amount? If the rent increases periodically, are those increases accurately described, either as specific amounts or by stating the correct adjustment formula? And finally, does the lease state where rent payments are to be made, and how that address may be changed? The latter point should be covered by the lease provision regarding notices (see below), but note that the address for rent payments, particularly if the landlord is a large business, may differ from the general address included in the introductory paragraph and the address for notices included in the notices provision.

Additional Rent. Landlords should seek to characterize all payments made by the tenant besides regular, periodic rent as “additional rent” to make certain that a tenant's nonpayment of any such amount is actionable as a rent default, if applicable in the relevant jurisdiction. Tenants may resist, but the “additional rent” provision is typical.

Condition Upon Surrender. Does your lease specify the condition in which the premises are to be returned upon expiration or termination of the lease? “Broom clean” is typical, but other standards are possible if, for example, the premises are built out for a specialized tenant, or are to be demolished at the end of the term. Remember to address the disposition of any fixtures installed by or for the tenant, as well as the tenant's personal property, both to clarify what is to be done with such items in the case of a normal lease expiration as well as the disposition of items left by a tenant that vacates unexpectedly.

Notices: Who, Where and How. Keep this provision simple, complete and (cautiously) modern. Be sure to cover the essentials: how notices may be given, when they will be deemed effective, and where they are to be sent for each party. I suggest “modernizing” the provision because I have seen recently drafted provisions that still permit notice to be given only by personal delivery or by registered or certified mail, thereby ignoring overnight delivery, fax and e-mail. I urge caution modernizing however, particularly with regard to fax and e-mail. Fax machines have been known to malfunction and there is always the possibility that your critical fax notice will be stapled to the back of a fax going to your office neighbor who just left on vacation, thereby residing in his or her in-box for a week or two. As for e-mail, rely on it as your sole method of notice only if your computer system has never crashed. If you choose to include fax and e-mail as permissible methods of sending notices, consider requiring that a copy also be sent by one of the other permitted means.

Also consider providing that notices be deemed given upon deposit with the carrier, while the time for response will not begin until actual or deemed delivery. This simplifies the sending party's task of determining when to send a notice in a timely fashion, without penalizing the recipient.

Including the appropriate addresses for each party seems simple enough, but be certain to provide an effective, usable address for each party for each permitted method of giving notice. In other words, do not provide for personal delivery or delivery by private, overnight courier while listing only a post office box address, and do not provide for fax and e-mail delivery without listing fax numbers and e-mail addresses. If the landlord wishes the rent to be sent to a specific address that is different from the landlord's address elsewhere in the lease, that fact should be so noted. Finally, the notice provision should address the effect of refusing to accept delivery or inability to deliver, and it may be helpful to state that notices may be given by a party's attorney or other representative.

The following provision addresses the foregoing points:

“Notices. All notices, requests, demands or other communications hereunder (collectively, “Notices”) shall be in writing and deemed given (i) when delivered personally, or (ii) on the day deposited in the U.S. Mail, by registered or certified mail, return receipt requested, postage prepaid, or (iii) on the day deposited with a recognized overnight courier service (such as Federal Express), in all events addressed as set forth below (or to such other address which a party may from time to time hereafter designate by Notice given in accordance with this Section). Notices may also be given by electronic mail or by confirmed facsimile transmission, and shall be deemed given upon transmission by either of such means, provided that a duplicate notice is simultaneously sent by one of the other methods set forth in clauses (i), (ii) and (iii) above. In all events, the time period in which a response to any Notice must be given, or any action taken with respect thereto, shall commence running from the date of actual delivery to the proper addressees. Refusal to accept delivery by any party or inability to deliver any Notices because of a changed address of which no Notice has been given in accordance with this Section shall for all purposes constitute delivery. Notices may be given by a party's attorney or other representative.”

But It's a Holiday! Common sense would lead us, and the general public, to believe that if a critical date or deadline falls on a weekend or holiday, the time for performance is extended through the next business day. Unfortunately, absent a clear agreement of the parties, this aspect of common sense is not necessarily the law in all jurisdictions. Therefore, be certain that your lease clearly addresses this concern and defines “business day.” Note that holidays in multiple jurisdictions may need to be recognized.

It's Governed by the Law of Where? We often draft a new lease by starting with a document from an earlier transaction, whether because it includes pre-negotiated terms between the same parties, or similar transaction structure, or for other reasons of convenience. However, few things can be more embarrassing, as well as holding the potential for legal harm, than failing to adequately “cleanse” the old lease form of negotiated terms that do not apply in the new transaction, references to other locations or parties, and similar errant facts. You really do not want to have to explain why the lease you drafted for the property in New York says that the premises are in Florida and that the lease is governed by California law.

Formalities. As noted earlier, some jurisdictions require execution by a particular class of corporate officers, especially for recorded instruments (such as a memorandum of lease). It is no longer a matter of simply identifying the appropriate individual, general partner or corporate officer to sign a document; with the proliferation of limited liability companies and limited liability partnerships, accompanied by a variety of management structures, determining the proper signatory has become a little more complicated. Finally, remember to include any necessary witnesses and appropriate acknowledgements if required under applicable state law.

Memorandum of Lease. What may be generically referred to as a “Memorandum of Lease” goes, as well, by other names as a result of custom, practice, and applicable law: “Notice of Lease” and “Short Form Lease” are two common variants. Be certain to use the form applicable for the state in question, not just a “national” form; some states require specific words of conveyance, for example. It is good practice to attach an agreed-upon form to the lease as an exhibit if it will not be recorded immediately upon lease execution (in a development deal which has not yet gone “hard,” for example), even if the memorandum is executed at the same time and held for later recording. Do not forget to comply with the requisite formalities and to establish in the lease which party will pay the recording costs.

Transfer Tax. Some states may tax long-term leases in a manner similar to a conveyance of fee title. This factor, if applicable, must be analyzed for its effect on the structure of the business transaction, and the responsibility for payment of any applicable transfer taxes should be made clear in the lease.

Amendment and Modification. Most leases and agreements typically provide that any amendment or modification must not only be in writing but must be executed by both parties. Is this really necessary or even wise? Under this requirement, even the simplest modification (a landlord's one-time extension of a tenant's deadline, for example) calls for a full-blown amendment document, or at least a letter agreement, signed with all requisite formalities by both parties, a potentially time-consuming and expensive prospect. A more practical approach, at least for relatively minor modifications and amendments, is to require only a writing signed by the party to be charged with the effect of such change; in the example above, the landlord could extend the deadline with a simple, unilateral letter to the tenant without the parties having any concern about the validity of the modification because both parties did not sign.

Effective Date. We have all probably seen leases with no date on the first page, with separate execution dates noted on the signature pages, and with no evidence of any agreed-upon acceptance date or effective date. To solve this problem, consider including a provision such as the following:

“Effective Date. This Lease shall not be deemed to be an offer by the first party signing this Lease and shall have no legal effect until signed and delivered by both parties hereto. In order for this Lease to be effective, the same must be fully executed and delivered to both parties. The Effective Date of this Lease shall be the date the last party to execute this Lease does so, and at least one fully-executed counterpart of this Lease is hand-delivered to the other party or its counsel, or is deposited in the mail or with an overnight courier service for delivery to the other party or its counsel, and such date shall be inserted on page one of this Lease.”

When determined by the foregoing procedure, the “Effective Date” is inserted in the introductory paragraph at the beginning of the lease. Transmittal correspondence from the last-signing party may further confirm the effective date.

Other practitioners may note additional routine provisions which, all too frequently, may go perilously unexamined. Whatever the list, the point remains the same: Do not forget to examine, and draft, the entire lease in each transaction.