Property Assemblage

Setting aside the lease question for a moment, if your assemblage includes more than two or three properties, consider using one or two cooperative brokers to put various properties under contract. This should help neutralize competitive sellers and assuage some feelings of seller's remorse. Once the brokers get the properties under contract, have them assign the contract to your client.

If the deal is transparent and the seller is aware of the arrangements, consider adding the following provisions to each agreement whether it is a lease or a purchase agreement (the language in brackets could be added as necessary to address leases):

A. If you want to have the due diligence period end at the same time for all of the properties, the following definition of due diligence period will be helpful:

For this Agreement, “Due Diligence Period” means the one hundred twenty (120) day period commencing on the later to occur of (1) the Effective Date of this Agreement; or (2) the date agreements for both of the Adjacent Parcels become effective, and ending 120 days thereafter. Buyer shall promptly notify Seller in writing of the commencement date of the Due Diligence Period for this Agreement.

B. To make sure your client can acquire all of the necessary properties, include the following due diligence condition:

Within sixty (60) days following the Effective Date of this Agreement, Buyer shall enter into agreements satisfactory in form and substance to Buyer to acquire the following two parcels located adjacent to the Property as shown on Exhibit A and required by Buyer for the Project (the “Adjacent Parcels'): (i) the approximately ____________ -acre parcel owned by ____________ located adjacent to and east of the Property; and (ii) the approximately ____________ -acre parcel owned by ____________ located adjacent to and west of the Property.

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Another paragraph to consider addressing concurrent closings:

Buyer is or expects to be the contract purchaser [or tenant] of the parcels of land that are shown as A, B, C, D & E on the plan that is attached as Exhibit A to this Agreement (“Adjacent Property”). If the Buyer is able to become the contract purchaser [or tenant] of all of the Adjacent Property not later than the Effective Date, it will be an additional condition of Buyer performing Buyer's obligations under this Agreement that the Closing of the Property and the closing of the purchase [acquisition of a leasehold estate] by Buyer of the Adjacent Property occur concurrently. If, through no fault of Buyer, such closings do not occur concurrently, the Buyer will not be obligated to close under this Agreement.

Lease/Sale

As you and your client begin negotiating with the landowners you might encounter the situation where the fee owner of Blackacre will sell, but the fee owner of Greenacre will only lease. As with any other time you encounter a landowner who will only lease rather than sell, your client must make a business decision regarding the quality of the title to accept. Assuming that your client proceeds with acquiring Blackacre in fee and Greenacre on a lease, you have to decide how to handle the various parcels from a practical aspect. You can either have your client take the fee title to Blackacre and lease Greenacre, or have the owner of Greenacre acquire Blackacre and lease the whole parcel as one, to your client.

As suggested above, the sooner you become involved in the process, the better you are able to help your client address the issues that will arise in the transaction. This is especially so when there is a lease involved. Practically speaking, the more you can structure the lease to be like a long-term ground lease, the better off your client will be. Especially in this situation, a long initial term followed by a number of extension options is very desirable. The fewer the performance obligations imposed on the tenant, which could give rise to a default, the better.

As with any ground lease, you will want to negotiate for liberal rights for the tenant to assign the lease. The unfettered right to sublease the property is an absolute must as your client will want to sublease some or all of the property to the ultimate users of the project. At this point too, have the landowner agree to provide a non-disturbance agreement for the subtenant providing that even if the lease is terminated, the subtenant may continue to occupy its premises.

Consider the effects of the landowner's and the tenant's financing on the project. You will want the landowner's financing to be subordinate to the ground lease and you will want the tenant to have the free right to obtain financing. Suggested language is provided below:

Landlord's Financing: Landlord shall have the right, from time to time, and without restriction, to mortgage or otherwise encumber its estate or interest in the Premises, subject in each instance to this Lease. Any such mortgage or other encumbrance shall be, and shall expressly provide, that it is subordinate to this Lease and all rights hereunder as this Lease may be amended, modified or supplemented from time to time.

Tenant's Financing: Tenant shall have the unrestricted right, from time to time, to mortgage or otherwise encumber Tenant's Leasehold Estate to a Leasehold Mortgagee without the prior consent of Landlord.

Consider that your client will want to be able to develop the leased property as your client would develop an owned property. One thing that your client will want in the lease is the right to grant easements necessary for the development. It becomes a matter of negotiation regarding how much oversight the landowner will have over the development of the project. You can assume that most landowners will want at least a minimal level of site plan approval. Include lease language requiring the landlord to cooperate in granting easements necessary to implement the site plan. It often helps to agree with the landlord that the easements will not become effective until the tenant has waived all other contingencies to the lease and that the easements will contain language allowing the landlord to relocate the easements if there is a default under the lease.

Two final items to include in your lease are a right of first refusal if the landowner ever decides to sell the property, and the right to record a memorandum of lease.

The Due Diligence Phase

Even if your assemblage does not include a landowner who would rather lease than sell, during the due diligence phase of an assemblage you might encounter a seller who wants to remain in possession after closing or an existing tenant whose term runs past the closing date. Handle the holdover as you would a tenant in a lease transaction. Obtain for your client all of the protections you would pursue for the landlord in a lease transaction.

If you are dealing with a seller who wants to remain in possession, prepare an occupancy agreement, which is a lease with a short term. Be sure to include indemnities for premises liability and to require the seller to maintain liability insurance. Consider the condition in which the seller is required to deliver the property. Sometimes, a buyer will not object if the seller removes portions of the improvements or the equipment attached to the improvements if the buyer is planning to demolish the improvements anyway. Be careful about letting the seller take out too much; be sure the seller has to deliver the improvements in a manner that they can be secured against vandals and vagrants.

Existing Tenant

If you are dealing with an existing tenant whose lease term runs past the closing date, review the lease early. Determine whether the lease contains a right for the landlord to terminate the lease ' either because the property is being sold or if the landlord pays the tenant some buyout amount. If there is no termination right, your client will have to determine how to approach the tenant to terminate the lease. If the tenant is in material default of the lease, your client's position with the tenant will be stronger, but it still might be worthwhile to consider negotiating a buyout of the lease with payment of a nominal amount. This approach could very well represent a savings of time and money over the alternative of pursuing an eviction action against the tenant. The buyout agreement should require the strongest remedies available to gain possession of the property if the tenant does not vacate when required. Make the seller a party to the buyout agreement.

If the tenant just wants to stay in the property for a short time to wind up business or to allow for an orderly relocation to a new location, the situation becomes easier. You only need to make sure your client is protected against liability and against the tenant not vacating when required.

Whether it is a seller remaining in possession after closing, or a tenant who has agreed to move out earlier than the end of its lease, your agreement should require a significant portion of the purchase price to be placed in escrow to be released when possession of the property is delivered to the buyer.

Whether you use a separate escrow agreement or embody the terms in the occupancy agreement, your client should be allowed to receive a substantial amount if possession is not delivered. If it is a seller remaining in possession after closing, consider charging a daily amount to cover your client's carrying costs for the property. If the seller does not deliver the property when required, in addition to the substantial amount mentioned above, the daily amount should go up by two or three times. If you are dealing with a tenant who will stay in possession after closing, be sure to require an assignment of the lease so that the tenant's obligation to pay rent will inure to your client's benefit.

If you encounter a seller who wants to stay in after the closing or a tenant whose term runs past the closing and with whom you have successfully negotiated a termination agreement, consider obtaining for your client the right to start working on the property after the closing before the holdover vacates. It could be that the holdover's premises contain a couple of acres, but the holdover only needs the existing building and some of the existing parking to wrap up business. Give your client the right to start earth work and demolition on the remainder of the property.

Presumably, your client will also be using the due diligence period to negotiate leases with tenants for the new project. Whether you are dealing with a landowner who would rather lease than sell or a holdover, be sure to coordinate the new tenant's lease term with the lease term of the prime lease or occupancy agreement of the holdover.

In conclusion, the sooner you become involved in an assemblage and are aware of the possibility of lease aspects, the better you will be able to help your client successfully complete the project.

Thomas B. Cahill is the President of Thomas B. Cahill, Attorney at Law, P.C. in Naperville, IL. His practice is concentrated in commercial real estate, representing tenants, developers, buyers and sellers. He can be reached at [email protected] or 630-917-8601.

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Usually a property assemblage is viewed as a transaction involving the purchase of property rather than a lease, but a property assemblage could very well involve a leased parcel. A property assemblage could also include a seller who wants to remain in possession after the closing or a tenant whose lease term runs past the closing date. Both of these situations also introduce the lease to your assemblage. As an initial comment, a property assemblage has all of the same attributes of acquiring a single piece of property. The difference arises when your client needs more than one piece of property to pursue its project. The challenges arise from entering into contracts for all of the necessary properties and helping your client coordinate due diligence. The earlier you get involved, the better you will be able to help your client successfully close the transaction.

The Contract Phase

The central problem with handling an assemblage is acquiring all of the property your client requires. You have to prepare and plan for one of the sellers acting as a hold-out or just reneging on its contract. Occasionally, you will encounter adjoining landowners becoming competitive in how much of a sales price they can extract from the buyer. When one of the landowners insists on leasing rather than selling, the task of getting all of the properties under control becomes even more challenging.

Setting aside the lease question for a moment, if your assemblage includes more than two or three properties, consider using one or two cooperative brokers to put various properties under contract. This should help neutralize competitive sellers and assuage some feelings of seller's remorse. Once the brokers get the properties under contract, have them assign the contract to your client.

If the deal is transparent and the seller is aware of the arrangements, consider adding the following provisions to each agreement whether it is a lease or a purchase agreement (the language in brackets could be added as necessary to address leases):

A. If you want to have the due diligence period end at the same time for all of the properties, the following definition of due diligence period will be helpful:

For this Agreement, “Due Diligence Period” means the one hundred twenty (120) day period commencing on the later to occur of (1) the Effective Date of this Agreement; or (2) the date agreements for both of the Adjacent Parcels become effective, and ending 120 days thereafter. Buyer shall promptly notify Seller in writing of the commencement date of the Due Diligence Period for this Agreement.

B. To make sure your client can acquire all of the necessary properties, include the following due diligence condition:

Within sixty (60) days following the Effective Date of this Agreement, Buyer shall enter into agreements satisfactory in form and substance to Buyer to acquire the following two parcels located adjacent to the Property as shown on Exhibit A and required by Buyer for the Project (the “Adjacent Parcels'): (i) the approximately ____________ -acre parcel owned by ____________ located adjacent to and east of the Property; and (ii) the approximately ____________ -acre parcel owned by ____________ located adjacent to and west of the Property.

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Another paragraph to consider addressing concurrent closings:

Buyer is or expects to be the contract purchaser [or tenant] of the parcels of land that are shown as A, B, C, D & E on the plan that is attached as Exhibit A to this Agreement (“Adjacent Property”). If the Buyer is able to become the contract purchaser [or tenant] of all of the Adjacent Property not later than the Effective Date, it will be an additional condition of Buyer performing Buyer's obligations under this Agreement that the Closing of the Property and the closing of the purchase [acquisition of a leasehold estate] by Buyer of the Adjacent Property occur concurrently. If, through no fault of Buyer, such closings do not occur concurrently, the Buyer will not be obligated to close under this Agreement.

Lease/Sale

As you and your client begin negotiating with the landowners you might encounter the situation where the fee owner of Blackacre will sell, but the fee owner of Greenacre will only lease. As with any other time you encounter a landowner who will only lease rather than sell, your client must make a business decision regarding the quality of the title to accept. Assuming that your client proceeds with acquiring Blackacre in fee and Greenacre on a lease, you have to decide how to handle the various parcels from a practical aspect. You can either have your client take the fee title to Blackacre and lease Greenacre, or have the owner of Greenacre acquire Blackacre and lease the whole parcel as one, to your client.

As suggested above, the sooner you become involved in the process, the better you are able to help your client address the issues that will arise in the transaction. This is especially so when there is a lease involved. Practically speaking, the more you can structure the lease to be like a long-term ground lease, the better off your client will be. Especially in this situation, a long initial term followed by a number of extension options is very desirable. The fewer the performance obligations imposed on the tenant, which could give rise to a default, the better.

As with any ground lease, you will want to negotiate for liberal rights for the tenant to assign the lease. The unfettered right to sublease the property is an absolute must as your client will want to sublease some or all of the property to the ultimate users of the project. At this point too, have the landowner agree to provide a non-disturbance agreement for the subtenant providing that even if the lease is terminated, the subtenant may continue to occupy its premises.

Consider the effects of the landowner's and the tenant's financing on the project. You will want the landowner's financing to be subordinate to the ground lease and you will want the tenant to have the free right to obtain financing. Suggested language is provided below:

Landlord's Financing: Landlord shall have the right, from time to time, and without restriction, to mortgage or otherwise encumber its estate or interest in the Premises, subject in each instance to this Lease. Any such mortgage or other encumbrance shall be, and shall expressly provide, that it is subordinate to this Lease and all rights hereunder as this Lease may be amended, modified or supplemented from time to time.

Tenant's Financing: Tenant shall have the unrestricted right, from time to time, to mortgage or otherwise encumber Tenant's Leasehold Estate to a Leasehold Mortgagee without the prior consent of Landlord.

Consider that your client will want to be able to develop the leased property as your client would develop an owned property. One thing that your client will want in the lease is the right to grant easements necessary for the development. It becomes a matter of negotiation regarding how much oversight the landowner will have over the development of the project. You can assume that most landowners will want at least a minimal level of site plan approval. Include lease language requiring the landlord to cooperate in granting easements necessary to implement the site plan. It often helps to agree with the landlord that the easements will not become effective until the tenant has waived all other contingencies to the lease and that the easements will contain language allowing the landlord to relocate the easements if there is a default under the lease.

Two final items to include in your lease are a right of first refusal if the landowner ever decides to sell the property, and the right to record a memorandum of lease.

The Due Diligence Phase

Even if your assemblage does not include a landowner who would rather lease than sell, during the due diligence phase of an assemblage you might encounter a seller who wants to remain in possession after closing or an existing tenant whose term runs past the closing date. Handle the holdover as you would a tenant in a lease transaction. Obtain for your client all of the protections you would pursue for the landlord in a lease transaction.

If you are dealing with a seller who wants to remain in possession, prepare an occupancy agreement, which is a lease with a short term. Be sure to include indemnities for premises liability and to require the seller to maintain liability insurance. Consider the condition in which the seller is required to deliver the property. Sometimes, a buyer will not object if the seller removes portions of the improvements or the equipment attached to the improvements if the buyer is planning to demolish the improvements anyway. Be careful about letting the seller take out too much; be sure the seller has to deliver the improvements in a manner that they can be secured against vandals and vagrants.

Existing Tenant

If you are dealing with an existing tenant whose lease term runs past the closing date, review the lease early. Determine whether the lease contains a right for the landlord to terminate the lease ' either because the property is being sold or if the landlord pays the tenant some buyout amount. If there is no termination right, your client will have to determine how to approach the tenant to terminate the lease. If the tenant is in material default of the lease, your client's position with the tenant will be stronger, but it still might be worthwhile to consider negotiating a buyout of the lease with payment of a nominal amount. This approach could very well represent a savings of time and money over the alternative of pursuing an eviction action against the tenant. The buyout agreement should require the strongest remedies available to gain possession of the property if the tenant does not vacate when required. Make the seller a party to the buyout agreement.

If the tenant just wants to stay in the property for a short time to wind up business or to allow for an orderly relocation to a new location, the situation becomes easier. You only need to make sure your client is protected against liability and against the tenant not vacating when required.

Whether it is a seller remaining in possession after closing, or a tenant who has agreed to move out earlier than the end of its lease, your agreement should require a significant portion of the purchase price to be placed in escrow to be released when possession of the property is delivered to the buyer.

Whether you use a separate escrow agreement or embody the terms in the occupancy agreement, your client should be allowed to receive a substantial amount if possession is not delivered. If it is a seller remaining in possession after closing, consider charging a daily amount to cover your client's carrying costs for the property. If the seller does not deliver the property when required, in addition to the substantial amount mentioned above, the daily amount should go up by two or three times. If you are dealing with a tenant who will stay in possession after closing, be sure to require an assignment of the lease so that the tenant's obligation to pay rent will inure to your client's benefit.

If you encounter a seller who wants to stay in after the closing or a tenant whose term runs past the closing and with whom you have successfully negotiated a termination agreement, consider obtaining for your client the right to start working on the property after the closing before the holdover vacates. It could be that the holdover's premises contain a couple of acres, but the holdover only needs the existing building and some of the existing parking to wrap up business. Give your client the right to start earth work and demolition on the remainder of the property.

Presumably, your client will also be using the due diligence period to negotiate leases with tenants for the new project. Whether you are dealing with a landowner who would rather lease than sell or a holdover, be sure to coordinate the new tenant's lease term with the lease term of the prime lease or occupancy agreement of the holdover.

In conclusion, the sooner you become involved in an assemblage and are aware of the possibility of lease aspects, the better you will be able to help your client successfully complete the project.

Thomas B. Cahill is the President of Thomas B. Cahill, Attorney at Law, P.C. in Naperville, IL. His practice is concentrated in commercial real estate, representing tenants, developers, buyers and sellers. He can be reached at [email protected] or 630-917-8601.

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