The Lease Year: Let's Keep It Simple

To avoid these complications and help reduce the possibility of successful lease audits, wise practitioners utilize something called the “Lease Year.” It self-corrects the difficulties caused by starting the term on a day other than the first of a month. It causes the ending date for the first year of the lease and each year thereafter to be set so that each of those dates ends on the last day of a month. Leasehold milestones, such as rent and additional rent dates, can then be set to start on the first day of a month. If rent and additional rent are due on the first day of a month, it is easy to monitor these dates accurately. Further, if option renewal dates are tied to expiration dates ending at the last day of the month, they are also easier to monitor, and the parties are less prone to make mistakes in determining these dates. The Lease Year concept is especially helpful when either a landlord or tenant needs to keep track of many leases at the same time. Imagine checking 100 leases with different rent payment and renewal dates for nearly every deal! Using the Lease Year method averts this problem. The Lease Year, therefore, not only affects the beginning of the lease, but also “benignly” affects many other significant leasehold obligations and notice dates.

The Lease Year Defined

There are two basic types of “Lease Year” definitions. Although the definitions are different, they are variations on the same theme: the first and last Lease Year for each of them ends on the last day of a month. The first type of Lease Year changes the ending of the initial “Lease Year” to the last day of the twelfth full calendar month following the Commencement Date. Therefore, if the lease begins in the middle of a month, a Lease Year extends the term of the first year of the lease to include, not only a 365-day calendar year period, but also that portion of the month immediately preceding that calendar year period. It also apportions rent for that part of the first Lease Year that exceeds 12 calendar months.

Model Lease Language

The term of this Lease shall be ten (10) Lease Years. The term of the Lease shall commence on the Commencement Date (as defined herein) and shall expire (Expiration Date”) at the very end of the day on the last day of the tenth (10th) Lease Year, unless otherwise terminated in accordance with the terms hereof. As used herein, the first “Lease Year” shall be the period beginning on the Commencement Date and ending on the last day of the twelfth (12th) full calendar month following the Commencement Date. The second Lease Year shall commence on the day following the last day of the first Lease Year and shall end on the last day of the twelfth (12th) month thereafter. Each succeeding Lease Year shall have the same anniversary dates as the second Lease Year. If the first Lease Year is longer than twelve months, rent shall be increased pro rata for such additional period.

In the example above, if the Commencement Date of the lease is Sept. 24, 2012, the first Lease Year would end on Sept. 30, 2013 and the Expiration Date would be Sept. 30, 2022. If the Lease Year concept is not used, and the actual Commencement Date is utilized as a benchmark to set the Expiration Date, the lease would end on Sept. 22, 2022 and lease renewal notice dates would be determined using that mid-month date. Such an approach could be confusing, as well as difficult to track and is not recommended.

The second type of Lease Year calculates the ending of the first “Lease Year” so that, no matter when the lease begins, the first Lease Year ends the following Dec. 31 (or the last date of some other arbitrary month, such as June 30th) even if such
period is significantly shorter than one full calendar year. It also apportions rent to take account of the shortened first Lease Year period.

Model Lease Language

The term of this Lease shall be ten (10) Lease Years. The term of the Lease shall commence on the Commencement Date (as defined herein) and shall expire (Expiration Date”) at the very end of the day on the last day of the tenth (10th) Lease Year, unless otherwise terminated in accordance with the terms hereof. As used herein, “Lease Year” means each period commencing on Jan. 1 and ending on the following Dec. 31, except that the first Lease Year shall commence on the Commencement Date and end at the very end of the following December 31. If the first Lease Year is shorter than twelve months, rent shall be decreased pro rata for such additional period.

In the example above, if the lease's effective date is Sept. 24, 2012, the first Lease Year would end at the very end of the day on Dec. 31, 2012. Thus, the first “year” of the lease would only be a little more than three months in duration.

Drafting Considerations

When you are crafting your definition of “Lease Year,” make sure to confirm with your client that you are defining Lease Year according to his/her intentions. The first definition mentioned above extends the term for a few extra days or weeks while the second definition could shorten the term by several months, if not longer. This could make an important impact on the bottom line of your deal!

Finally, if you are drafting a lease using a template from a previous deal, be especially vigilant if the prior lease template did not use a “Lease Year” provision. Not only could actual dates have been used to determine the Commencement and Expiration Dates but they could also turn up in many other sections of the lease. For instance, the rent and free rent periods (if applicable) in prior deals could have utilized specific dates that may need to be revised or eliminated altogether. The clauses used in your template pertaining to CAM, insurance charges, and lease renewal dates could also set forth specific dates that need to be modified in your current deal. One size does not fit all documents and all dates mentioned in the lease must, of course, be carefully scrutinized.

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

The date that a lease begins, which is usually called either the “commencement date” or the “effective date,” is an extremely important lease term. It signifies the date when many lease obligations begin and can be a benchmark used for determining not only a lease's expiration date, but also other key lease dates. For many leases, the commencement date starts on the first day of the month. For ease in bookkeeping, this is the simplest approach. But life is not always so simple, especially where the parties want the lease term to begin on some date other than the first day of a month. For example, many leases state that the “commencement date” is a specified number of days after a landlord has notified a tenant that it is ready to deliver the demised premises (usually after certain itemized “landlord's work” is substantially completed). The beginning of the lease term would thus be a “moving target,” i.e., the commencement date could easily start somewhere in the middle of a month ' or at any time during the month.

Creating a 'Lease Year'

If the commencement date is not set on the first day of a month, key leasehold provisions that may be tied to the commencement date, such as rent, free rent and additional rent, may also use dates that do not fall on the first day of a month. It may also mean that the expiration date will not end on the last day of a month, and renewal option notice dates would need to be calculated based on an expiration date falling somewhere between the first and the last day of the month. Keeping track of leasehold milestones occurring mid-month may cause administrative headaches and increase the likelihood that incorrect tracking dates may be used.

To avoid these complications and help reduce the possibility of successful lease audits, wise practitioners utilize something called the “Lease Year.” It self-corrects the difficulties caused by starting the term on a day other than the first of a month. It causes the ending date for the first year of the lease and each year thereafter to be set so that each of those dates ends on the last day of a month. Leasehold milestones, such as rent and additional rent dates, can then be set to start on the first day of a month. If rent and additional rent are due on the first day of a month, it is easy to monitor these dates accurately. Further, if option renewal dates are tied to expiration dates ending at the last day of the month, they are also easier to monitor, and the parties are less prone to make mistakes in determining these dates. The Lease Year concept is especially helpful when either a landlord or tenant needs to keep track of many leases at the same time. Imagine checking 100 leases with different rent payment and renewal dates for nearly every deal! Using the Lease Year method averts this problem. The Lease Year, therefore, not only affects the beginning of the lease, but also “benignly” affects many other significant leasehold obligations and notice dates.

The Lease Year Defined

There are two basic types of “Lease Year” definitions. Although the definitions are different, they are variations on the same theme: the first and last Lease Year for each of them ends on the last day of a month. The first type of Lease Year changes the ending of the initial “Lease Year” to the last day of the twelfth full calendar month following the Commencement Date. Therefore, if the lease begins in the middle of a month, a Lease Year extends the term of the first year of the lease to include, not only a 365-day calendar year period, but also that portion of the month immediately preceding that calendar year period. It also apportions rent for that part of the first Lease Year that exceeds 12 calendar months.

Model Lease Language

The term of this Lease shall be ten (10) Lease Years. The term of the Lease shall commence on the Commencement Date (as defined herein) and shall expire (Expiration Date”) at the very end of the day on the last day of the tenth (10th) Lease Year, unless otherwise terminated in accordance with the terms hereof. As used herein, the first “Lease Year” shall be the period beginning on the Commencement Date and ending on the last day of the twelfth (12th) full calendar month following the Commencement Date. The second Lease Year shall commence on the day following the last day of the first Lease Year and shall end on the last day of the twelfth (12th) month thereafter. Each succeeding Lease Year shall have the same anniversary dates as the second Lease Year. If the first Lease Year is longer than twelve months, rent shall be increased pro rata for such additional period.

In the example above, if the Commencement Date of the lease is Sept. 24, 2012, the first Lease Year would end on Sept. 30, 2013 and the Expiration Date would be Sept. 30, 2022. If the Lease Year concept is not used, and the actual Commencement Date is utilized as a benchmark to set the Expiration Date, the lease would end on Sept. 22, 2022 and lease renewal notice dates would be determined using that mid-month date. Such an approach could be confusing, as well as difficult to track and is not recommended.

The second type of Lease Year calculates the ending of the first “Lease Year” so that, no matter when the lease begins, the first Lease Year ends the following Dec. 31 (or the last date of some other arbitrary month, such as June 30th) even if such
period is significantly shorter than one full calendar year. It also apportions rent to take account of the shortened first Lease Year period.

Model Lease Language

The term of this Lease shall be ten (10) Lease Years. The term of the Lease shall commence on the Commencement Date (as defined herein) and shall expire (Expiration Date”) at the very end of the day on the last day of the tenth (10th) Lease Year, unless otherwise terminated in accordance with the terms hereof. As used herein, “Lease Year” means each period commencing on Jan. 1 and ending on the following Dec. 31, except that the first Lease Year shall commence on the Commencement Date and end at the very end of the following December 31. If the first Lease Year is shorter than twelve months, rent shall be decreased pro rata for such additional period.

In the example above, if the lease's effective date is Sept. 24, 2012, the first Lease Year would end at the very end of the day on Dec. 31, 2012. Thus, the first “year” of the lease would only be a little more than three months in duration.

Drafting Considerations

When you are crafting your definition of “Lease Year,” make sure to confirm with your client that you are defining Lease Year according to his/her intentions. The first definition mentioned above extends the term for a few extra days or weeks while the second definition could shorten the term by several months, if not longer. This could make an important impact on the bottom line of your deal!

Finally, if you are drafting a lease using a template from a previous deal, be especially vigilant if the prior lease template did not use a “Lease Year” provision. Not only could actual dates have been used to determine the Commencement and Expiration Dates but they could also turn up in many other sections of the lease. For instance, the rent and free rent periods (if applicable) in prior deals could have utilized specific dates that may need to be revised or eliminated altogether. The clauses used in your template pertaining to CAM, insurance charges, and lease renewal dates could also set forth specific dates that need to be modified in your current deal. One size does not fit all documents and all dates mentioned in the lease must, of course, be carefully scrutinized.

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