In the Spotlight: Things to Think About During Review of a Lease

This month we cover: 1) commencement date memorandum; 2) estoppel certificates; 3) exclusives and prohibited uses; and 4) rules and regulations.

The following is an overview of the analysis that needs to be performed with respect to the above-referenced exhibits as part of a thorough and comprehensive review of a form lease.

Commencement Date Memorandum

This exhibit is a useful tool in memorializing a number of items such as the term commencement date, rent start date, expiration date of the lease term, initial monthly rent and triple net charges, and the amount of any security deposit. The commencement date memorandum is similar to an estoppel certificate in that it states the facts about the lease at a particular given point in time. The commencement date memorandum should be executed by both the landlord and tenant, and could modify the terms of the lease because it is a written statement concerning the lease that is executed by the parties ' so it is an enforceable amendment to the lease. Therefore, it is extremely important to research and confirm that the statements in the commencement date memorandum are accurate. An error in executing the commencement date memorandum could materially affect the administration of the lease.

As previously mentioned, perhaps one of the more important features of the commencement date memorandum is that it establishes a mutually agreed upon date for the commencement of the lease term. For example, a typical lease provision could state that the rent commencement and term commencement dates are 'X' number of days after the landlord turns over the Premises or Tenant's acceptance of the Premises. Without the executed commencement date memorandum, there could be a material misunderstanding between the landlord and tenant regarding when those dates occurred. Consequently, executing a commencement date memorandum should assist in resolving (at an early stage in the lease term) those possible ambiguities. The commencement date memorandum is also a useful tool to further memorialize the terms of the lease that affect the circumstances under which rent may be delayed. Examples include concessions for free rent periods, opening co-tenancies, or seasonal blackout periods.

Estoppel Certificates

As mentioned above, an estoppel certificate is a 'snapshot' in time that certifies certain relevant facts and circumstances concerning the lease. The most common request for executing an estoppel certificate relates to project financing, typically the landlord's request for financing. A landlord will provide its lender with, among other things, the economic information concerning the lease; the landlord's lender will want an independent verification from the tenant of certain facts of the lease. Typical examples of such facts would be verification of the lease commencement date and the termination date; the rent commencement date; the monthly amount of rent and triple net charges; whether there are any claims against the landlord that would affect the payment of rent and triple net charges; and whether there are any claims of an alleged default on the landlord's part under the lease. The estoppel certificate should be executed by both the landlord and tenant, and could modify the terms of the lease. Therefore, it is extremely important to research and confirm that the statements in the estoppel certificate are accurate.

Moreover, one needs to review an estoppel certificate form carefully to determine if the 'form' actually amends the lease. This would occur, for example, when the estoppel certificate to be executed by the tenant has additional conditions such as covenants by the tenant to give the landlord's lender written notice of a landlord default, and an opportunity for the lender to cure the landlord's default. While seeming relatively innocuous, the aforementioned covenants create an additional obligation on the tenant, without a corresponding covenant by the landlord's lender, to provide an assumption of the landlord's obligations under the lease in the event the landlord's lender forecloses on the landlord's interest in the project. These types of written agreements are best left for subordination, non-disturbance, and attornment agreements, and, therefore, stricken from an estoppel certificate. As with the commencement date memorandum, the estoppel certificate should neither create any new obligations nor limit any rights that exist in the lease.

Estoppel certificates also are very useful for tenants; therefore, during lease negotiations, the obligation for executing an estoppel certificate should be made mutual between the landlord and tenant so either party can request an estoppel certificate from the other. One benefit of a tenant's having such a right is that the landlord would have to state whether or not it has a good faith belief that the tenant is not in default of the lease. The estoppel certificate provision of the lease will likely have a time period in which the estoppel certificate needs to be returned to the requesting party (i.e., a contractual obligation to respond). Therefore, in the event that the landlord fails or chooses not to respond and/or address any prior complaints the landlord may have had concerning the performance of the tenant, the landlord may be estopped from alleging a prior claim of nonperformance by the tenant under the lease after the landlord executes an estoppel certificate.

Exclusives and Prohibited Uses

It is highly likely that with many sophisticated landlords and/or large projects there will be attached to the lease as an exhibit a list of exclusives and prohibited uses. The first part of analyzing the lease would be to review the tenant's expressed use clause to determine if the use clause is specifically qualified by the attached list of exclusives and prohibited uses. For example, if a tenant has the right to sell 'widgets,' does the lease state: 'Subject to the exhibit containing the list of exclusives and prohibited uses, tenant shall have the right to sell widgets.' In the alternative: 'Tenant shall have the right to sell widgets, and any other lawful use, which other use shall be subject to the list of exclusives and prohibited uses.' Clearly, from a tenant's point of view the second example is much more advantageous than the first. If confronted with the first example, one must carefully read and analyze the exhibit containing the list of exclusives and prohibited uses to determine if the tenant can sell widgets or whether there is a restriction on the sale of widgets. One problem that often arises is that the tenant must try to interpret the drafting of unrelated third parties (i.e., the landlord and the other occupants of the project). Quite often the list of exclusives and prohibited uses employs defined terms that are only used in the other occupants' lease forms. One suggestion to address this concern is a statement in the lease that provides: 'Landlord represents and warrants that Tenant's right to operate a widget store does not violate the terms and conditions of the list of exclusives or prohibited uses.'

Further, there could be many variations to a list of prohibited uses. One needs to review carefully all the prohibited uses to determine if the prohibited uses are reasonable or even make sense. It could be argued that provisions in the exhibit such as 'Tenant (by way of assignment or sublease) shall not allow any use within the Premises that (i) causes or creates a nuisance, (ii) is obnoxious or (iii) detracts from the general first-class retail nature of the Shopping Center' are vague and ambiguous. One suggestion to address this concern is a statement in the exhibit that further defines the scope of prohibited uses. An example is a clause that states, 'Such prohibited uses shall be limited to (a) second hand stores or flea markets, (b) storage of motor vehicles, boats or trailers, (c) automobile repair operations, (d) 'head shops' or other similar type uses, (e) automobile sales, (f) educational facilities, (g) vocational schools or training classes unrelated to a primary retail use, (h) manufacturing or assembly facilities, (i) churches or places of religious congregations, and (j) adult book stores.' The bottom line is that the more definitive the statements and definitions are concerning the prohibited uses, the less ambiguity there is about any particular use or proposed change in use for a tenant, and the lease will be easier to administer.

Rules and Regulations

An exhibit that contains rules and regulations is quite common in a commercial retail lease. As stated above with regard to prohibited uses, one needs to review all the rules and regulations carefully to determine if they are reasonable or even make sense. Another consideration in analyzing the exhibit is to determine if a breach of a rule or regulation is a corresponding breach of the lease. Rules and regulations can range from the practical (e.g., 'No soliciting with handbills in the common areas') to the impractical due to vague or unreasonable standards (e.g., 'Tenant shall not otherwise interfere in any way with other tenants or persons having business with them.'). One suggestion to address the concern of any vague or unreasonable standards is a statement in the exhibit that provides:

The Lease provisions shall control and supersede any contradictory or inconsistent provisions contained in the rules and regulations. Landlord shall provide reasonable advance notice of any modifications or additions to the rules and regulations, and such modifications or additions shall not materially, or unreasonably interfere with Tenant's conduct of its business or Tenant's use or enjoyment of the Premises, and shall not require payment of additional rent or the incurring of any other costs and expenses.

Conclusion

In order to review a commercial retail form lease adequately and completely, one must review and analyze the document from the cover page to the last page of the entire lease agreement, including all the exhibits attached to the form lease.

Paul Robeznieks is a partner with the Opus Law Group PLLC, with offices in Seattle, Portland, and New York.

To review another party's form commercial retail lease adequately and completely, one must analyze all the attached exhibits. You cannot stop your review at the signature block.

The question one needs to consider is whether the exhibits to the lease either supplement the lease or potentially modify its terms and conditions. The answer to this question will ultimately be of value during the term of the lease, when the lease terms and conditions are being administered.

In an article that ran in January 2007, we discussed the following 'standard' exhibits: 1) legal description; 2) site plan; 3) landlord and tenant work letter, and 4) memorandum of lease. While there are almost an infinite number of exhibits that one could attach to a lease form, certain exhibits are more common than others in the commercial real estate context.

This month we cover: 1) commencement date memorandum; 2) estoppel certificates; 3) exclusives and prohibited uses; and 4) rules and regulations.

The following is an overview of the analysis that needs to be performed with respect to the above-referenced exhibits as part of a thorough and comprehensive review of a form lease.

Commencement Date Memorandum

This exhibit is a useful tool in memorializing a number of items such as the term commencement date, rent start date, expiration date of the lease term, initial monthly rent and triple net charges, and the amount of any security deposit. The commencement date memorandum is similar to an estoppel certificate in that it states the facts about the lease at a particular given point in time. The commencement date memorandum should be executed by both the landlord and tenant, and could modify the terms of the lease because it is a written statement concerning the lease that is executed by the parties ' so it is an enforceable amendment to the lease. Therefore, it is extremely important to research and confirm that the statements in the commencement date memorandum are accurate. An error in executing the commencement date memorandum could materially affect the administration of the lease.

As previously mentioned, perhaps one of the more important features of the commencement date memorandum is that it establishes a mutually agreed upon date for the commencement of the lease term. For example, a typical lease provision could state that the rent commencement and term commencement dates are 'X' number of days after the landlord turns over the Premises or Tenant's acceptance of the Premises. Without the executed commencement date memorandum, there could be a material misunderstanding between the landlord and tenant regarding when those dates occurred. Consequently, executing a commencement date memorandum should assist in resolving (at an early stage in the lease term) those possible ambiguities. The commencement date memorandum is also a useful tool to further memorialize the terms of the lease that affect the circumstances under which rent may be delayed. Examples include concessions for free rent periods, opening co-tenancies, or seasonal blackout periods.

Estoppel Certificates

As mentioned above, an estoppel certificate is a 'snapshot' in time that certifies certain relevant facts and circumstances concerning the lease. The most common request for executing an estoppel certificate relates to project financing, typically the landlord's request for financing. A landlord will provide its lender with, among other things, the economic information concerning the lease; the landlord's lender will want an independent verification from the tenant of certain facts of the lease. Typical examples of such facts would be verification of the lease commencement date and the termination date; the rent commencement date; the monthly amount of rent and triple net charges; whether there are any claims against the landlord that would affect the payment of rent and triple net charges; and whether there are any claims of an alleged default on the landlord's part under the lease. The estoppel certificate should be executed by both the landlord and tenant, and could modify the terms of the lease. Therefore, it is extremely important to research and confirm that the statements in the estoppel certificate are accurate.

Moreover, one needs to review an estoppel certificate form carefully to determine if the 'form' actually amends the lease. This would occur, for example, when the estoppel certificate to be executed by the tenant has additional conditions such as covenants by the tenant to give the landlord's lender written notice of a landlord default, and an opportunity for the lender to cure the landlord's default. While seeming relatively innocuous, the aforementioned covenants create an additional obligation on the tenant, without a corresponding covenant by the landlord's lender, to provide an assumption of the landlord's obligations under the lease in the event the landlord's lender forecloses on the landlord's interest in the project. These types of written agreements are best left for subordination, non-disturbance, and attornment agreements, and, therefore, stricken from an estoppel certificate. As with the commencement date memorandum, the estoppel certificate should neither create any new obligations nor limit any rights that exist in the lease.

Estoppel certificates also are very useful for tenants; therefore, during lease negotiations, the obligation for executing an estoppel certificate should be made mutual between the landlord and tenant so either party can request an estoppel certificate from the other. One benefit of a tenant's having such a right is that the landlord would have to state whether or not it has a good faith belief that the tenant is not in default of the lease. The estoppel certificate provision of the lease will likely have a time period in which the estoppel certificate needs to be returned to the requesting party (i.e., a contractual obligation to respond). Therefore, in the event that the landlord fails or chooses not to respond and/or address any prior complaints the landlord may have had concerning the performance of the tenant, the landlord may be estopped from alleging a prior claim of nonperformance by the tenant under the lease after the landlord executes an estoppel certificate.

Exclusives and Prohibited Uses

It is highly likely that with many sophisticated landlords and/or large projects there will be attached to the lease as an exhibit a list of exclusives and prohibited uses. The first part of analyzing the lease would be to review the tenant's expressed use clause to determine if the use clause is specifically qualified by the attached list of exclusives and prohibited uses. For example, if a tenant has the right to sell 'widgets,' does the lease state: 'Subject to the exhibit containing the list of exclusives and prohibited uses, tenant shall have the right to sell widgets.' In the alternative: 'Tenant shall have the right to sell widgets, and any other lawful use, which other use shall be subject to the list of exclusives and prohibited uses.' Clearly, from a tenant's point of view the second example is much more advantageous than the first. If confronted with the first example, one must carefully read and analyze the exhibit containing the list of exclusives and prohibited uses to determine if the tenant can sell widgets or whether there is a restriction on the sale of widgets. One problem that often arises is that the tenant must try to interpret the drafting of unrelated third parties (i.e., the landlord and the other occupants of the project). Quite often the list of exclusives and prohibited uses employs defined terms that are only used in the other occupants' lease forms. One suggestion to address this concern is a statement in the lease that provides: 'Landlord represents and warrants that Tenant's right to operate a widget store does not violate the terms and conditions of the list of exclusives or prohibited uses.'

Further, there could be many variations to a list of prohibited uses. One needs to review carefully all the prohibited uses to determine if the prohibited uses are reasonable or even make sense. It could be argued that provisions in the exhibit such as 'Tenant (by way of assignment or sublease) shall not allow any use within the Premises that (i) causes or creates a nuisance, (ii) is obnoxious or (iii) detracts from the general first-class retail nature of the Shopping Center' are vague and ambiguous. One suggestion to address this concern is a statement in the exhibit that further defines the scope of prohibited uses. An example is a clause that states, 'Such prohibited uses shall be limited to (a) second hand stores or flea markets, (b) storage of motor vehicles, boats or trailers, (c) automobile repair operations, (d) 'head shops' or other similar type uses, (e) automobile sales, (f) educational facilities, (g) vocational schools or training classes unrelated to a primary retail use, (h) manufacturing or assembly facilities, (i) churches or places of religious congregations, and (j) adult book stores.' The bottom line is that the more definitive the statements and definitions are concerning the prohibited uses, the less ambiguity there is about any particular use or proposed change in use for a tenant, and the lease will be easier to administer.

Rules and Regulations

An exhibit that contains rules and regulations is quite common in a commercial retail lease. As stated above with regard to prohibited uses, one needs to review all the rules and regulations carefully to determine if they are reasonable or even make sense. Another consideration in analyzing the exhibit is to determine if a breach of a rule or regulation is a corresponding breach of the lease. Rules and regulations can range from the practical (e.g., 'No soliciting with handbills in the common areas') to the impractical due to vague or unreasonable standards (e.g., 'Tenant shall not otherwise interfere in any way with other tenants or persons having business with them.'). One suggestion to address the concern of any vague or unreasonable standards is a statement in the exhibit that provides:

The Lease provisions shall control and supersede any contradictory or inconsistent provisions contained in the rules and regulations. Landlord shall provide reasonable advance notice of any modifications or additions to the rules and regulations, and such modifications or additions shall not materially, or unreasonably interfere with Tenant's conduct of its business or Tenant's use or enjoyment of the Premises, and shall not require payment of additional rent or the incurring of any other costs and expenses.

Conclusion

In order to review a commercial retail form lease adequately and completely, one must review and analyze the document from the cover page to the last page of the entire lease agreement, including all the exhibits attached to the form lease.

Paul Robeznieks is a partner with the Opus Law Group PLLC, with offices in Seattle, Portland, and New York.