Heading for the Exits

These can be difficult goals to achieve if a major tenant has a long period of time (say, in excess of 30 days, or worse, no specified period of time at all) in which to return an executed estoppel. In that instance, including the time it takes for a seller to prepare and a purchaser to review the estoppel, the estoppel process for a given tenant could be much longer than a seller or purchaser is willing to accept. Therefore, when drafting an estoppel provision in a lease, every effort should be made by landlord's counsel to minimize the amount of time that a tenant has to return an executed estoppel to the landlord.

Ideally, the lease should state that an executed estoppel must be returned within a week to 10 days after it has been received by the tenant from the landlord, with perhaps a maximum of 20 days. If an estoppel is not returned in the specified time period, the lease should state that the tenant is deemed to have executed the estoppel in the form submitted by the landlord, or that the landlord is designated as tenant's attorney-in-fact for purposes of executing the estoppel. While sophisticated tenants are not likely to permit such a provision (and sophisticated purchasers may not allow “deemed executed” estoppels to count toward meeting a closing condition for major tenant required estoppels), it should be included in the standard form lease. Particularly for meeting shop space tenant estoppel thresholds in purchase and sale contracts, such a provision may permit a sale, which would otherwise be held up, to go forward.

A corollary issue is how often estoppels can be requested of tenants. With investors and lenders still relatively skittish, it is not uncommon for the seller of a commercial property to have a contract (or multiple contracts) terminated before consummating a sale. If a contract termination occurred after estoppels have been circulated and possibly even returned (a not-unheard-of possibility), a seller, upon getting the property back under contract, would then most likely have to circulate a second estoppel to the tenant naming the new purchaser and updating the “facts.” If a given tenant's lease contained a severely restrictive annual limit on the number of times a seller could request an estoppel, then a seller could quickly find itself in a corner (particularly if any lender involved in the sale requires its own estoppel).

Typically, only a larger or national tenant would negotiate such a limitation, and most purchasers will specifically require estoppels from such tenants and refuse to accept a seller estoppel in lieu of a tenant estoppel in such cases. As such, it is important that landlord's counsel resist, if at all possible, a tenant's attempt to limit estoppel requests to a very low annual number (say, one or two), and in any event, landlord's counsel should try to “carve out” estoppel requests in the context of the sale or financing of the property from the tenant's overall limit.

Not surprisingly, a significant estoppel issue in the context of a purchase and sale transaction is the content of the estoppel itself. Ideally for the seller/landlord, the lease will state that a tenant must return an executed estoppel in a form requested by landlord that certifies to the standard estoppel requests (e.g., the term of the lease, the existence of renewal or expansion rights, the existence of any tenant allowances or inducements, the amount of rent [including percentage rent, if any, and additional rent or operating expenses], whether landlord or tenant is in default, as well as “any other matter that [landlord] reasonably requests”). The last catch-all phrase is important, because in the context of the sale of property, a purchaser or lender might request that certain non-standard information be included in an estoppel (say, regarding the tenant's solvency, or its use of hazardous materials).

A sophisticated tenant's lease will frequently: 1) allow for the delivery of a specified form estoppel; and/or 2) provide that the tenant may qualify, “to its knowledge,” all or some estoppel certifications. With respect to a form estoppel, in the context of a lease negotiation with a major tenant, a landlord will have little choice but to start with the tenant's standard form estoppel, but from there, landlord's counsel should try to include as many additional certifications as possible, as well as ensure that any knowledge qualifiers are appropriately limited. For example, knowledge qualifiers should be limited to “subjective” matters. A tenant should be able to certify without a knowledge qualifier to the amount of its rent, the term of its lease, and whether it does or does not have renewal or expansion rights; however, and more understandably, a tenant might not want to certify, without qualification, that the landlord is not in default.

If a knowledge qualifier is inserted into a particular certification by tenant's counsel, landlord's counsel might attempt to negotiate it further; for example, a standard “to tenant's knowledge” qualifier might become “to the best of tenant's knowledge” or “to tenant's actual knowledge after due inquiry,” thereby shading slightly in the seller/landlord's favor. As modified, these qualifications hold the tenant to a higher standard and allow the estoppel beneficiary a plausible argument that a tenant is estopped from raising a claim if, for example, the tenant's store or office manager had knowledge of a landlord default, but the corporate office failed to inquire regarding same and did not raise it in the estoppel. And a brief point as to the “estoppel beneficiary” ' landlord's counsel should take care to draft the estoppel lease provision, or the estoppel form itself, to provide expressly that the estoppel may be relied upon by the seller/landlord, the purchaser/successor landlord, purchaser's lender, and their respective successors and assigns. These relatively simple drafting items, if successfully raised by landlord's counsel during lease negotiations, can make the estoppel process run much more smoothly, to the benefit of the seller, during the purchase and sale transaction.

Financial Statements; Sales Reports

As part of its due diligence, a potential purchaser of commercial property will want to know the financial wherewithal of its prospective tenants, in particular any large or anchor tenants, in order to assess the property fully. Obtaining this information can be challenging if the tenants are private. However, this problem can be remedied if the applicable leases allow the seller/landlord to request financial statements of the tenants and/or guarantors, to be delivered to the landlord within a reasonable period of time (say, 20 days or less) after request from the landlord. Again, a sale can be facilitated with proper lease drafting at the front end. Similarly, particularly in purchases and sales of retail properties, prospective buyers will want to know each tenants' sales generated from the subject property (probably over a several year period). Proper lease drafting will facilitate obtaining this information.

Commencement Date Certificates

To evaluate a lease rental stream properly, a purchaser of commercial property needs to know the rent commencement date. Where rent commencement is triggered off an event (e.g., substantial completion of the space) rather than a date certain, an obligation of a tenant ' contained in a well-drafted lease ' to execute a commencement date certificate can eliminate guesswork and uncertainty. The section of the lease addressing the commencement date should include an express agreement by the tenant to execute a commencement date certificate upon the request of the landlord, the form of which should be attached to the lease as an exhibit and should include the start and end dates of the term of the lease, as well as a rent chart.

Conclusion

All of the above tips are simple enough to address in a lease, but are often overlooked as the parties tend to negotiate more contentiously the “substantive” provisions such as prohibited uses, co-tenancy provisions, exclusive uses and termination rights; however, a focus by landlord's counsel on the above matters can significantly redound to the client's benefit when it is time to sell the asset.

Garland Reid is an associate and Eric Sidman is a partner in the Real Estate Practice Group of Seyfarth Shaw LLP. Their practices focus on the disposition, acquisition, development, leasing and financing of commercial real estate properties. Ms. Reid can be reached in the Atlanta office at 404-881-5462 or [email protected]. Mr. Sidman can be reached in the New York office at 212-218-5529 or [email protected]. The views expressed in this article are those of the authors, and not necessarily those of Seyfarth Shaw.

Although the volume of sales of commercial real estate properties has certainly increased since 2008 and 2009, investors and lenders continue to be relatively cautious, and minor leasing deficiencies or ambiguities can have a negative impact on ' or even freeze ' a sale. This article discusses select leasing issues that we have seen arise in recent investment sales transactions, and suggests drafting pointers that can be used to avoid or limit the negative impact these issues may have on the sale of a property.

Tenant Estoppels

Often dealt with at the end of a lease negotiation, when both landlord and tenant are worn out and looking forward to lease execution, tenant estoppel provisions can negatively impact a future sale of the property if not handled properly by landlord's counsel. For example, if it is true that “time kills deals,” lease provisions governing the timing of a tenant's obligation to return an estoppel certificate should, if possible, not be at odds with the seller/landlord's goals, in the sale context, of a short due-diligence period for the purchaser and a quick closing.

These can be difficult goals to achieve if a major tenant has a long period of time (say, in excess of 30 days, or worse, no specified period of time at all) in which to return an executed estoppel. In that instance, including the time it takes for a seller to prepare and a purchaser to review the estoppel, the estoppel process for a given tenant could be much longer than a seller or purchaser is willing to accept. Therefore, when drafting an estoppel provision in a lease, every effort should be made by landlord's counsel to minimize the amount of time that a tenant has to return an executed estoppel to the landlord.

Ideally, the lease should state that an executed estoppel must be returned within a week to 10 days after it has been received by the tenant from the landlord, with perhaps a maximum of 20 days. If an estoppel is not returned in the specified time period, the lease should state that the tenant is deemed to have executed the estoppel in the form submitted by the landlord, or that the landlord is designated as tenant's attorney-in-fact for purposes of executing the estoppel. While sophisticated tenants are not likely to permit such a provision (and sophisticated purchasers may not allow “deemed executed” estoppels to count toward meeting a closing condition for major tenant required estoppels), it should be included in the standard form lease. Particularly for meeting shop space tenant estoppel thresholds in purchase and sale contracts, such a provision may permit a sale, which would otherwise be held up, to go forward.

A corollary issue is how often estoppels can be requested of tenants. With investors and lenders still relatively skittish, it is not uncommon for the seller of a commercial property to have a contract (or multiple contracts) terminated before consummating a sale. If a contract termination occurred after estoppels have been circulated and possibly even returned (a not-unheard-of possibility), a seller, upon getting the property back under contract, would then most likely have to circulate a second estoppel to the tenant naming the new purchaser and updating the “facts.” If a given tenant's lease contained a severely restrictive annual limit on the number of times a seller could request an estoppel, then a seller could quickly find itself in a corner (particularly if any lender involved in the sale requires its own estoppel).

Typically, only a larger or national tenant would negotiate such a limitation, and most purchasers will specifically require estoppels from such tenants and refuse to accept a seller estoppel in lieu of a tenant estoppel in such cases. As such, it is important that landlord's counsel resist, if at all possible, a tenant's attempt to limit estoppel requests to a very low annual number (say, one or two), and in any event, landlord's counsel should try to “carve out” estoppel requests in the context of the sale or financing of the property from the tenant's overall limit.

Not surprisingly, a significant estoppel issue in the context of a purchase and sale transaction is the content of the estoppel itself. Ideally for the seller/landlord, the lease will state that a tenant must return an executed estoppel in a form requested by landlord that certifies to the standard estoppel requests (e.g., the term of the lease, the existence of renewal or expansion rights, the existence of any tenant allowances or inducements, the amount of rent [including percentage rent, if any, and additional rent or operating expenses], whether landlord or tenant is in default, as well as “any other matter that [landlord] reasonably requests”). The last catch-all phrase is important, because in the context of the sale of property, a purchaser or lender might request that certain non-standard information be included in an estoppel (say, regarding the tenant's solvency, or its use of hazardous materials).

A sophisticated tenant's lease will frequently: 1) allow for the delivery of a specified form estoppel; and/or 2) provide that the tenant may qualify, “to its knowledge,” all or some estoppel certifications. With respect to a form estoppel, in the context of a lease negotiation with a major tenant, a landlord will have little choice but to start with the tenant's standard form estoppel, but from there, landlord's counsel should try to include as many additional certifications as possible, as well as ensure that any knowledge qualifiers are appropriately limited. For example, knowledge qualifiers should be limited to “subjective” matters. A tenant should be able to certify without a knowledge qualifier to the amount of its rent, the term of its lease, and whether it does or does not have renewal or expansion rights; however, and more understandably, a tenant might not want to certify, without qualification, that the landlord is not in default.

If a knowledge qualifier is inserted into a particular certification by tenant's counsel, landlord's counsel might attempt to negotiate it further; for example, a standard “to tenant's knowledge” qualifier might become “to the best of tenant's knowledge” or “to tenant's actual knowledge after due inquiry,” thereby shading slightly in the seller/landlord's favor. As modified, these qualifications hold the tenant to a higher standard and allow the estoppel beneficiary a plausible argument that a tenant is estopped from raising a claim if, for example, the tenant's store or office manager had knowledge of a landlord default, but the corporate office failed to inquire regarding same and did not raise it in the estoppel. And a brief point as to the “estoppel beneficiary” ' landlord's counsel should take care to draft the estoppel lease provision, or the estoppel form itself, to provide expressly that the estoppel may be relied upon by the seller/landlord, the purchaser/successor landlord, purchaser's lender, and their respective successors and assigns. These relatively simple drafting items, if successfully raised by landlord's counsel during lease negotiations, can make the estoppel process run much more smoothly, to the benefit of the seller, during the purchase and sale transaction.

Financial Statements; Sales Reports

As part of its due diligence, a potential purchaser of commercial property will want to know the financial wherewithal of its prospective tenants, in particular any large or anchor tenants, in order to assess the property fully. Obtaining this information can be challenging if the tenants are private. However, this problem can be remedied if the applicable leases allow the seller/landlord to request financial statements of the tenants and/or guarantors, to be delivered to the landlord within a reasonable period of time (say, 20 days or less) after request from the landlord. Again, a sale can be facilitated with proper lease drafting at the front end. Similarly, particularly in purchases and sales of retail properties, prospective buyers will want to know each tenants' sales generated from the subject property (probably over a several year period). Proper lease drafting will facilitate obtaining this information.

Commencement Date Certificates

To evaluate a lease rental stream properly, a purchaser of commercial property needs to know the rent commencement date. Where rent commencement is triggered off an event (e.g., substantial completion of the space) rather than a date certain, an obligation of a tenant ' contained in a well-drafted lease ' to execute a commencement date certificate can eliminate guesswork and uncertainty. The section of the lease addressing the commencement date should include an express agreement by the tenant to execute a commencement date certificate upon the request of the landlord, the form of which should be attached to the lease as an exhibit and should include the start and end dates of the term of the lease, as well as a rent chart.

Conclusion

All of the above tips are simple enough to address in a lease, but are often overlooked as the parties tend to negotiate more contentiously the “substantive” provisions such as prohibited uses, co-tenancy provisions, exclusive uses and termination rights; however, a focus by landlord's counsel on the above matters can significantly redound to the client's benefit when it is time to sell the asset.

Garland Reid is an associate and Eric Sidman is a partner in the Real Estate Practice Group of Seyfarth Shaw LLP. Their practices focus on the disposition, acquisition, development, leasing and financing of commercial real estate properties. Ms. Reid can be reached in the Atlanta office at 404-881-5462 or [email protected]. Mr. Sidman can be reached in the New York office at 212-218-5529 or [email protected]. The views expressed in this article are those of the authors, and not necessarily those of Seyfarth Shaw.