After a Lease Is Signed: Avoid These Eight Common Mistakes

If you have recently negotiated a lease, you may think that the lease document was merely an item on a checklist that needed to be dealt with before your client begins its business operations. Those attorneys who fail to realize that a lease is an agreement that can have a profound impact on a business owner's day-to-day operations ' even after the agreement is signed ' may be in for a rude awakening. This article discusses eight common mistakes tenants can make after they execute a lease.

The Eight Mistakes

1. Signing a Subordination Non-Disturbance and Attornment Agreement (SNDA) Without Understanding How It Can Modify a Lease

An SNDA can undo what you have so carefully negotiated with the landlord in your lease. Even though the SNDA states that the lender will not terminate the lease or disturb a tenant's possession of the leased premises, the SNDA may still change the deal you have just made with the landlord. For example, one of the first clauses in many lender SNDAs states, “So long as no default exists under the Lease or this Agreement beyond any applicable grace or cure period, the Lease shall not be terminated ' ” A tenant should respond by claiming that a lender should only be able to terminate a lease in the manner set forth in the lease. The lease's default provisions may have been carefully written to balance the interests of the landlord and the tenant, and this SNDA provision eliminates whatever had been negotiated. Accordingly, the words, “ so long as not in default beyond applicable notice and cure periods” should not be accepted. This provision is just one of the many “lease-changing” clauses contained in a lender's SNDA that a tenant may be asked to sign after it has signed a lease. If a tenant has the bargaining power, it should try and have the SNDA executed before it executes a lease. That way, a tenant will have the best leverage to argue with a lender that it must keep any “lease-changing” provisions to a minimum. If a lender refuses to be reasonable, a tenant can then either “say no” to the deal or ask the landlord to exert pressure on the lender to change its position. Once your client has signed a lease, its ability to walk away from the deal is no longer a valid option.

2. Making Alterations Without the Landlord's Consent

Every sophisticated tenant understands that it must carefully review the terms of its lease before it makes any alterations. In fact, in most cases, if the alterations are substantial, the tenant should try to get its landlord to approve the work before the lease is signed. Nearly all leases provide that structural alterations cannot be performed without the landlord's approval. Many leases also state that a landlord must give its consent for any improvement that has a cost over a certain threshold. If a tenant does not read its lease and makes an improvement that is prohibited by the lease, a landlord can go to court and force the tenant to stop the work before it is completed. A tenant may also expose itself to an action by a landlord to compensate it for any damages that may have been caused to its building as a result of the work performed. This mistake can be avoided easily by carefully reading the alterations provision contained in the lease and, where required, receiving the landlord's consent to any required alterations before they are made.

3. Installing a Sign That Is Not Permitted in the Lease

A sign can be a huge factor contributing to the success of your client's business. Many leases have provisions that are too vague and give the landlord too much discretion either to approve or disapprove signage. Why give a landlord this power to harm your client's business if you can avoid doing so? Again, if a tenant believes that it is critical to have the sign it wants, it may be prudent to have fairly explicit details of signage requirements attached to a lease. The height, size, color, and location are all factors to be considered. Using a picture of a proposed sign may also minimize the chance for a disagreement later on. Finally, if a tenant is leasing at a multi-tenanted location, it should take a look at the signs other tenants are using. Are all the signs uniform? If so, it may be very difficult to have a sign that differs from the others. Do not wait until after a lease is signed to deal with this issue.

4. Sending Notices to the Landlord Without Checking the Lease

Even experienced attorneys make this mistake and it is commonly made by unsophisticated leasing representatives. They want to exercise an option contained in the lease or put the landlord on notice that a lease provision is being violated. They send a letter to the tenant by regular mail or e-mail advising the landlord of same. This could be a critical mistake. If a tenant does not send the notice exactly in the manner set forth in the lease, it runs the risk that the notice it is sending is ineffective. In the case of a lease default, the tenant may be losing valuable time to remedy a problem that is affecting its business operations. If the notice relates to an option, sending notice in a defective manner could mean that a tenant has completely lost the ability to exercise its option. This can have a devastating effect on your client's business, especially if the applicable option has significant value.

5. Failing to Keep Track of Key Option Dates

A lease may have no options or it may have several different types. As I mentioned above, if a tenant has an option to renew its lease, the option may be of great value if the option's rental amount is below the present market rate. In addition, if the tenant has a right to expand, an expansion option may be a more cost-effective alternative to renting additional space elsewhere in the future. If a tenant fails to exercise its option on or before the right to exercise the option lapses (as set forth in the lease), it will, in many cases, lose its right to exercise the option. Although it may be possible to insert a provision that requires a landlord to send a “reminder” notice to a tenant before an option lapses, if such a provision is not in a lease, a tenant will have no legal ground to insist that it should be given the right to exercise its option after the expiration date. Therefore, it is imperative that an attorney tell tenants to carefully docket all important option dates contained in a lease immediately after they are signed. Waiting until some later time to docket the dates only increases the chance that this important task will be overlooked.

6. Failing to Review CAM Expense Increases

Depending upon the lease you have negotiated, a tenant may be responsible for paying all, or a portion (if a cap is imposed), of the Common Area Maintenance (CAM) expense increases after the base year CAM expenses are set. It would be a mistake to assume that the amount the landlord states as a CAM increase is automatically correct. Mistakes can and do occur. It is important to be aware that, in a building with multiple tenants, the operating expense pass-through provision may be different in each lease. The landlord's representative who calculates the CAM expense increases may not be aware of this fact and could be deriving the numbers based on the landlord's so called “standard” lease. Because the landlord prepares the invoice that it sends to a tenant, if a tenant does not contest an inaccurate bill, the mistake will not be discovered. Operating expense pass-throughs can be an expensive component of a tenant's leasing costs. Failing to keep close tabs on these costs can lead to a loss of profits that can be prevented by requesting an audit of CAM expenses on a periodic basis.

7. Failing to Vacate the Premises After the Lease Ends

Tenants may not think there is any legal significance to “holding over” after the term expires. There may be quite a bit of exposure, depending on the circumstances. First, there is usually a clause contained in a lease that specifically spells out what will happen if a tenant fails to vacate on the expiration date. The provision may require that a tenant pay several multiples of the then current rent, e.g., 200%. A typical holdover clause requires that a tenant pay a 125% increase. This is still a big increase. Second, a tenant's failure to vacate may be preventing the next tenant who has rights to the space, from occupying the premises. The prior tenant may be setting itself up for needless legal action by remaining in the space. Third, a landlord may take your client's office equipment and other items left at the premises and store them, all at the tenant's expense. Being aware that there may be costs associated with a failure to vacate is the first step in preventing this problem from occurring.

8. Failing to Advise a Tenant to Consult Its Attorney When the Lease Is Subsequently Amended or Renewed

A tenant may think that a lease amendment or a simple “letter agreement” with the landlord is a minor concern that does not require consultation with its attorney. In certain instances, a tenant may be right, and the matter can be taken care of as a part of the normal day-to-day operations of the business. Nevertheless, it is “better to be safe than sorry” for most lease revisions. At the very least, it is probably a good idea to counsel your clients that they should call you to discuss the proposed revision. Let them know that it will probably be much cheaper to avoid a problem than to fix a problem. Remind your client that if the new language in any way changes the obligations contained in the lease, the modification may impact more than one area of the lease and have unintended consequences. For example, if a landlord is proposing to make the “use” clause more restrictive in return for a reduction in rent, it may make it more difficult for a tenant to sublet or assign the lease later on. Aside from concerns relating to an unintended lease modification, as mentioned earlier, if a letter is sent to a landlord that ineffectively serves as notice to execute an option ' whether it is a result of poor draftsmanship of the notice itself or because the notice was not delivered in the manner specifically set forth in the lease ' it can be a mistake that can have a huge effect on your client's bottom line.

Conclusion

Even if a tenant avoids making any of the blunders listed above, there are many other mistakes that can be made after a lease is signed that may also be detrimental to its interests. For instance, a tenant can, among other things: 1) ignore a landlord's request to sign an estoppel certificate; 2) fail to obtain liability insurance on or before the effective date of the lease; or 3) fail to record a memorandum of lease. Being aware of the potential pitfalls that can occur after a lease is signed and advising your client of these dangers will go a long way toward preventing these problems from ever happening.

Mark Morfopoulos, a member of this newsletter's Board of Editors, is an attorney in Hartsdale, NY. His practice is focused on all aspects of office and retail leasing. He can be reached at [email protected].

If you have recently negotiated a lease, you may think that the lease document was merely an item on a checklist that needed to be dealt with before your client begins its business operations. Those attorneys who fail to realize that a lease is an agreement that can have a profound impact on a business owner's day-to-day operations ' even after the agreement is signed ' may be in for a rude awakening. This article discusses eight common mistakes tenants can make after they execute a lease.

The Eight Mistakes

1. Signing a Subordination Non-Disturbance and Attornment Agreement (SNDA) Without Understanding How It Can Modify a Lease

An SNDA can undo what you have so carefully negotiated with the landlord in your lease. Even though the SNDA states that the lender will not terminate the lease or disturb a tenant's possession of the leased premises, the SNDA may still change the deal you have just made with the landlord. For example, one of the first clauses in many lender SNDAs states, “So long as no default exists under the Lease or this Agreement beyond any applicable grace or cure period, the Lease shall not be terminated ' ” A tenant should respond by claiming that a lender should only be able to terminate a lease in the manner set forth in the lease. The lease's default provisions may have been carefully written to balance the interests of the landlord and the tenant, and this SNDA provision eliminates whatever had been negotiated. Accordingly, the words, “ so long as not in default beyond applicable notice and cure periods” should not be accepted. This provision is just one of the many “lease-changing” clauses contained in a lender's SNDA that a tenant may be asked to sign after it has signed a lease. If a tenant has the bargaining power, it should try and have the SNDA executed before it executes a lease. That way, a tenant will have the best leverage to argue with a lender that it must keep any “lease-changing” provisions to a minimum. If a lender refuses to be reasonable, a tenant can then either “say no” to the deal or ask the landlord to exert pressure on the lender to change its position. Once your client has signed a lease, its ability to walk away from the deal is no longer a valid option.

2. Making Alterations Without the Landlord's Consent

Every sophisticated tenant understands that it must carefully review the terms of its lease before it makes any alterations. In fact, in most cases, if the alterations are substantial, the tenant should try to get its landlord to approve the work before the lease is signed. Nearly all leases provide that structural alterations cannot be performed without the landlord's approval. Many leases also state that a landlord must give its consent for any improvement that has a cost over a certain threshold. If a tenant does not read its lease and makes an improvement that is prohibited by the lease, a landlord can go to court and force the tenant to stop the work before it is completed. A tenant may also expose itself to an action by a landlord to compensate it for any damages that may have been caused to its building as a result of the work performed. This mistake can be avoided easily by carefully reading the alterations provision contained in the lease and, where required, receiving the landlord's consent to any required alterations before they are made.

3. Installing a Sign That Is Not Permitted in the Lease

A sign can be a huge factor contributing to the success of your client's business. Many leases have provisions that are too vague and give the landlord too much discretion either to approve or disapprove signage. Why give a landlord this power to harm your client's business if you can avoid doing so? Again, if a tenant believes that it is critical to have the sign it wants, it may be prudent to have fairly explicit details of signage requirements attached to a lease. The height, size, color, and location are all factors to be considered. Using a picture of a proposed sign may also minimize the chance for a disagreement later on. Finally, if a tenant is leasing at a multi-tenanted location, it should take a look at the signs other tenants are using. Are all the signs uniform? If so, it may be very difficult to have a sign that differs from the others. Do not wait until after a lease is signed to deal with this issue.

4. Sending Notices to the Landlord Without Checking the Lease

Even experienced attorneys make this mistake and it is commonly made by unsophisticated leasing representatives. They want to exercise an option contained in the lease or put the landlord on notice that a lease provision is being violated. They send a letter to the tenant by regular mail or e-mail advising the landlord of same. This could be a critical mistake. If a tenant does not send the notice exactly in the manner set forth in the lease, it runs the risk that the notice it is sending is ineffective. In the case of a lease default, the tenant may be losing valuable time to remedy a problem that is affecting its business operations. If the notice relates to an option, sending notice in a defective manner could mean that a tenant has completely lost the ability to exercise its option. This can have a devastating effect on your client's business, especially if the applicable option has significant value.

5. Failing to Keep Track of Key Option Dates

A lease may have no options or it may have several different types. As I mentioned above, if a tenant has an option to renew its lease, the option may be of great value if the option's rental amount is below the present market rate. In addition, if the tenant has a right to expand, an expansion option may be a more cost-effective alternative to renting additional space elsewhere in the future. If a tenant fails to exercise its option on or before the right to exercise the option lapses (as set forth in the lease), it will, in many cases, lose its right to exercise the option. Although it may be possible to insert a provision that requires a landlord to send a “reminder” notice to a tenant before an option lapses, if such a provision is not in a lease, a tenant will have no legal ground to insist that it should be given the right to exercise its option after the expiration date. Therefore, it is imperative that an attorney tell tenants to carefully docket all important option dates contained in a lease immediately after they are signed. Waiting until some later time to docket the dates only increases the chance that this important task will be overlooked.

6. Failing to Review CAM Expense Increases

Depending upon the lease you have negotiated, a tenant may be responsible for paying all, or a portion (if a cap is imposed), of the Common Area Maintenance (CAM) expense increases after the base year CAM expenses are set. It would be a mistake to assume that the amount the landlord states as a CAM increase is automatically correct. Mistakes can and do occur. It is important to be aware that, in a building with multiple tenants, the operating expense pass-through provision may be different in each lease. The landlord's representative who calculates the CAM expense increases may not be aware of this fact and could be deriving the numbers based on the landlord's so called “standard” lease. Because the landlord prepares the invoice that it sends to a tenant, if a tenant does not contest an inaccurate bill, the mistake will not be discovered. Operating expense pass-throughs can be an expensive component of a tenant's leasing costs. Failing to keep close tabs on these costs can lead to a loss of profits that can be prevented by requesting an audit of CAM expenses on a periodic basis.

7. Failing to Vacate the Premises After the Lease Ends

Tenants may not think there is any legal significance to “holding over” after the term expires. There may be quite a bit of exposure, depending on the circumstances. First, there is usually a clause contained in a lease that specifically spells out what will happen if a tenant fails to vacate on the expiration date. The provision may require that a tenant pay several multiples of the then current rent, e.g., 200%. A typical holdover clause requires that a tenant pay a 125% increase. This is still a big increase. Second, a tenant's failure to vacate may be preventing the next tenant who has rights to the space, from occupying the premises. The prior tenant may be setting itself up for needless legal action by remaining in the space. Third, a landlord may take your client's office equipment and other items left at the premises and store them, all at the tenant's expense. Being aware that there may be costs associated with a failure to vacate is the first step in preventing this problem from occurring.

8. Failing to Advise a Tenant to Consult Its Attorney When the Lease Is Subsequently Amended or Renewed

A tenant may think that a lease amendment or a simple “letter agreement” with the landlord is a minor concern that does not require consultation with its attorney. In certain instances, a tenant may be right, and the matter can be taken care of as a part of the normal day-to-day operations of the business. Nevertheless, it is “better to be safe than sorry” for most lease revisions. At the very least, it is probably a good idea to counsel your clients that they should call you to discuss the proposed revision. Let them know that it will probably be much cheaper to avoid a problem than to fix a problem. Remind your client that if the new language in any way changes the obligations contained in the lease, the modification may impact more than one area of the lease and have unintended consequences. For example, if a landlord is proposing to make the “use” clause more restrictive in return for a reduction in rent, it may make it more difficult for a tenant to sublet or assign the lease later on. Aside from concerns relating to an unintended lease modification, as mentioned earlier, if a letter is sent to a landlord that ineffectively serves as notice to execute an option ' whether it is a result of poor draftsmanship of the notice itself or because the notice was not delivered in the manner specifically set forth in the lease ' it can be a mistake that can have a huge effect on your client's bottom line.

Conclusion

Even if a tenant avoids making any of the blunders listed above, there are many other mistakes that can be made after a lease is signed that may also be detrimental to its interests. For instance, a tenant can, among other things: 1) ignore a landlord's request to sign an estoppel certificate; 2) fail to obtain liability insurance on or before the effective date of the lease; or 3) fail to record a memorandum of lease. Being aware of the potential pitfalls that can occur after a lease is signed and advising your client of these dangers will go a long way toward preventing these problems from ever happening.

Mark Morfopoulos, a member of this newsletter's Board of Editors, is an attorney in Hartsdale, NY. His practice is focused on all aspects of office and retail leasing. He can be reached at [email protected].