Taming the Tenant's Form of Lease

Part One of a Two-Part Article

Accustomed to manning the ramparts in defense of its landlord client's form of lease, it is always a bit unsettling for a landlord's lawyer to be advised by its client that “for this national tenant, we must work from the tenant's form of lease.” Suddenly, instead of engaging in the familiar determination of which of the tenant's requested lease revisions are acceptable to the landlord, the lawyer is faced with determining which essential provisions of a lease from landlord's perspective are either entirely or substantially missing from the tenant's form of lease and then negotiating to include such provisions. While similar in nature to the task facing a tenant's lawyer working from a landlord's form, perhaps because it is not an everyday occurrence and has major implications for the entire property, the task is generally considered to be more formidable. This article sets forth and discusses some of the major landlord “fixes” often required when working from a tenant's form of lease.

Remeasurement

If the tenant requires a right to remeasure the premises, provide a mechanism whereby the landlord may contest the results of the tenant's remeasurement and, if the parties are unable to agree, a third architect's remeasurement will govern.

Rent

Specify that the obligation to pay rent is an independent covenant and negate any right of reduction, counterclaim, or offset by the tenant except as may be expressly otherwise provided in the Lease (if at all). Style all payments and charges under the Lease except for Base Rent as being “additional rent,” thereby qualifying such payments for collection in summary court proceedings in many jurisdictions.

Taxes

If the tenant seeks the right to itself appeal real estate taxes for the property, provide that it may do so only if the landlord fails to use commercially reasonable efforts to appeal. If the tenant requires that the landlord avail itself of the ability to pay taxes in installments, be sure to include in operating expenses any interest charged on the installments.

Self-Help By the Tenant

Provide that any right of offset by the tenant as a result of tenant self-help expenses not paid by the landlord after notice and a cure period is limited as a percentage of base rent so as to reflect the loan-to-value ratio of any loan secured by the property. That is to say, if the original loan amount is equal to 75% of the value of the property, the amount which the tenant may offset shall be no more than 25% of the monthly payment of base rent. The lender will then see that while potentially its cash flow cushion has been eroded, its base stream of rent remains intact.

Default

Provide for acceleration of all rent payable for the remainder of the term, discounted to present value, with a subsequent refund to the tenant only to the extent of any funds actually collected upon a reletting (net of expenses) during what would have been the remainder of the term of the original lease, up to the amount of the accelerated rent received. Provide for a default rate of interest and for late fees. Insert a waiver of any right of redemption or restoration of the Lease following a judgment, a waiver of jury trial and a waiver of any statutory notice to quit.

Mitigation

If the landlord is required to mitigate damages, limit the obligation to the use of commercially reasonable efforts to relet, define what constitutes such efforts, and indicate what the landlord is not required to do, e.g., lease the defaulted space while the landlord has other space available for lease in the building; lease to tenants having sovereign immunity; lease to parties whose use is incompatible with the building or would violate provisions of another tenant's lease, and the like.

Assignment

Provide for sharing of excess rent (net of expenses of assignment or subletting, amortized over the remainder of the term in the case of an assignment or over the term of the sublease, as the case may be) and for recapture of the premises upon an assignment and upon a sublease to the extent of the premises being offered for sublease.

Provide that upon an assignment of the lease by the landlord, which the landlord may freely do, the landlord will not have any responsibility for obligations of the landlord under the lease accruing after the date on which the assignment occurs.

Require that any transfer to a successor corporation (by merger, consolidation, or sale of substantially all of the assets) will require the landlord's prior written consent if the tangible net worth of the successor corporation does not equal or exceed the tangible net worth of the tenant at the time of execution of the lease.

Subordination

Require unconditional subordination with an agreed-to revision of the landlord's lender's form of Subordination, Non-Disturbance and Attornment Agreement attached to the lease as an exhibit.

Estoppels

Require that tenant to provide customary estoppel certificates within a specified number of days after a written request by the landlord.

Next month's installment will address seven additional “fixes.”

Myles Hannan, a member of this newsletter's Board of Editors, is Senior Counsel with Linowes and Blocher LLP (www.linowes-law.com), located in Bethesda, MD.

Part One of a Two-Part Article

Accustomed to manning the ramparts in defense of its landlord client's form of lease, it is always a bit unsettling for a landlord's lawyer to be advised by its client that “for this national tenant, we must work from the tenant's form of lease.” Suddenly, instead of engaging in the familiar determination of which of the tenant's requested lease revisions are acceptable to the landlord, the lawyer is faced with determining which essential provisions of a lease from landlord's perspective are either entirely or substantially missing from the tenant's form of lease and then negotiating to include such provisions. While similar in nature to the task facing a tenant's lawyer working from a landlord's form, perhaps because it is not an everyday occurrence and has major implications for the entire property, the task is generally considered to be more formidable. This article sets forth and discusses some of the major landlord “fixes” often required when working from a tenant's form of lease.

Remeasurement

If the tenant requires a right to remeasure the premises, provide a mechanism whereby the landlord may contest the results of the tenant's remeasurement and, if the parties are unable to agree, a third architect's remeasurement will govern.

Rent

Specify that the obligation to pay rent is an independent covenant and negate any right of reduction, counterclaim, or offset by the tenant except as may be expressly otherwise provided in the Lease (if at all). Style all payments and charges under the Lease except for Base Rent as being “additional rent,” thereby qualifying such payments for collection in summary court proceedings in many jurisdictions.

Taxes

If the tenant seeks the right to itself appeal real estate taxes for the property, provide that it may do so only if the landlord fails to use commercially reasonable efforts to appeal. If the tenant requires that the landlord avail itself of the ability to pay taxes in installments, be sure to include in operating expenses any interest charged on the installments.

Self-Help By the Tenant

Provide that any right of offset by the tenant as a result of tenant self-help expenses not paid by the landlord after notice and a cure period is limited as a percentage of base rent so as to reflect the loan-to-value ratio of any loan secured by the property. That is to say, if the original loan amount is equal to 75% of the value of the property, the amount which the tenant may offset shall be no more than 25% of the monthly payment of base rent. The lender will then see that while potentially its cash flow cushion has been eroded, its base stream of rent remains intact.

Default

Provide for acceleration of all rent payable for the remainder of the term, discounted to present value, with a subsequent refund to the tenant only to the extent of any funds actually collected upon a reletting (net of expenses) during what would have been the remainder of the term of the original lease, up to the amount of the accelerated rent received. Provide for a default rate of interest and for late fees. Insert a waiver of any right of redemption or restoration of the Lease following a judgment, a waiver of jury trial and a waiver of any statutory notice to quit.

Mitigation

If the landlord is required to mitigate damages, limit the obligation to the use of commercially reasonable efforts to relet, define what constitutes such efforts, and indicate what the landlord is not required to do, e.g., lease the defaulted space while the landlord has other space available for lease in the building; lease to tenants having sovereign immunity; lease to parties whose use is incompatible with the building or would violate provisions of another tenant's lease, and the like.

Assignment

Provide for sharing of excess rent (net of expenses of assignment or subletting, amortized over the remainder of the term in the case of an assignment or over the term of the sublease, as the case may be) and for recapture of the premises upon an assignment and upon a sublease to the extent of the premises being offered for sublease.

Provide that upon an assignment of the lease by the landlord, which the landlord may freely do, the landlord will not have any responsibility for obligations of the landlord under the lease accruing after the date on which the assignment occurs.

Require that any transfer to a successor corporation (by merger, consolidation, or sale of substantially all of the assets) will require the landlord's prior written consent if the tangible net worth of the successor corporation does not equal or exceed the tangible net worth of the tenant at the time of execution of the lease.

Subordination

Require unconditional subordination with an agreed-to revision of the landlord's lender's form of Subordination, Non-Disturbance and Attornment Agreement attached to the lease as an exhibit.

Estoppels

Require that tenant to provide customary estoppel certificates within a specified number of days after a written request by the landlord.

Next month's installment will address seven additional “fixes.”

Myles Hannan, a member of this newsletter's Board of Editors, is Senior Counsel with Linowes and Blocher LLP (www.linowes-law.com), located in Bethesda, MD.