'Condominiumized' Buildings

When the building is a condominium, rather than merely stating that the premises contains all or part of a particular floor(s) of a building, it is important to mention that the demised space comprises all or a portion of the specific condominium “unit” described in the condominium documents. Reference should be made to the condominium documents to make sure that the leased space is described as all or a portion of a particular unit in the condominium.

Units are usually described by condominium numbers or letters, such as “Unit 1001″ or “Unit A,” or some combination of letters and numbers, such as “Unit A-2.” But sometimes the units are described in the condominium documents based on the use permitted for such units, i.e., “Commercial Unit(s),” “Retail Unit(s)” and/or “Residential Units.” As in all leases, it is important to accurately describe what portion of the building is being leased. Where the building is a condominium, it is even more important since the condominium documents also set forth various rights and obligations relating to each of the condo units. These rights and obligations may be different, depending upon which unit is being leased.

For example, the permitted use for retail units will be different from the permitted use for residential or even office units. The percentage of each unit owner's interest in the common elements may also be different, depending upon which unit is owned and will be used to determine “common charges” imposed upon condo unit owners. In many instances, these common charges may be passed through to tenants or be factored into the rental rate paid by a tenant.

Real Estate Taxes and Insurance

In a lease where there is no condominium property regime, a tenant may be required to pay all or a portion of real estate taxes imposed upon the entire building (or pay increases of such taxes over a base year). When the building is a condominium, each unit is a separate tax lot and the unit owners will each receive a separate tax bill. A tenant that is leasing all or a portion of a condo unit, rather than paying a percentage of the tax bill for the entire building, should only be paying for all or a portion of the real estate taxes assessed for the unit that it is leasing. Therefore, the definition of “Real Estate Taxes” should specifically mention that such taxes only include the taxes assessed against the unit (designating the actual tax lot for that unit) and not the taxes assessed against the entire building.

In a lease where there is no condominium property regime, there are usually no other documents that control what insurance the tenant must procure other than the lease itself. When the building is a condominium, the condominium documents may require each unit owner to obtain specific types of insurance coverages. These basic insurance requirements may or may not be passed on to the tenant.

Operating Expenses

In leases where there is no condominium property regime, a tenant may be required to pay a percentage of operating or common area expenses for the building. Typically, the standard condominium provisions added to a lease may also require that a tenant pay for any maintenance or common area charges imposed by the condominium against that unit. Since the parties do not intend for a tenant to be charged twice for the same expenses, the “standard” condo provisions relating to maintenance charges can either be entirely deleted or the operating expense provision can be revised to take into account that the tenant is responsible for paying a portion of the condominium's maintenance charges. In such a case, the definition of “operating expenses” in the lease can be drafted to state that such expenses are equal to the condo maintenance charges imposed upon the unit.

Signage, Alterations and Other Restrictive Provisions

Before a lease is drafted, it is critical that the condominium documents be reviewed to see if the use contemplated by the lease is prohibited in the condominium documents. Make sure to examine the rules and regulations, which may have provisions that restrict the use permitted in a unit. Moreover, although the condominium documents may permit a particular use, there may be a requirement that the condominium board consent to a lease before the lease is effective. There may also be restrictive provisions relating to the erection of signs, performance of alterations, assignment and subletting where the condominium documents may require the consent of the condominium board or other unit owners before any of such actions may be taken. Finally, the condominium may also impose fees and other charges in connection with any consent request, and the landlord and tenant will need to determine who will pay such fees.

Repairs, Maintenance and Restoration

Unlike in a lease without a condominium property regime (where the landlord is the owner of the entire building), a landlord may not be the “responsible party” under the condominium documents as they relate to performing certain repairs, maintenance and restoration of the premises and/or the building. Therefore, a landlord should be mindful that it should not agree to perform certain maintenance and/or repair work if it does not have the authority to perform such work. Instead, a landlord should insist that it will use “commercially reasonable efforts” to cause the condominium board to perform whatever work the condominium is required to perform under the condominium documents. Depending on the bargaining power of the parties, a tenant may insist that it is not enough for a landlord to simply write a letter or make a few phone calls in an attempt to enforce the terms of the condominium documents. Instead, a tenant may require the landlord to take all appropriate legal action to protect the tenant's rights, including filing a lawsuit against the condominium.

The Lease As 'Subject and Subordinate'

To avoid any problems as to which document “controls” after a lease is signed, the landlord should: 1) add a provision that the lease is “subject and subordinate to” the condominium documents; and 2) specifically reference the recorded condominium documents in the lease. A tenant, however, may counter that if there are any subsequent modifications to the condominium documents, such changes may not increase the obligations of the tenant or diminish in any manner the rights of the tenant under the lease unless the tenant consents to same. Further, in those situations where the lease is in effect prior to the date the condominium is formed, a tenant may also want to add specific provisions in the condominium documents which protect the tenant's rights under the lease as an “existing lease;” i.e., the condominium documents would provide that “existing leases” would not be subject to certain provisions in the condominium documents that would otherwise be applicable to all other leases entered into after the condominium is formed.

Conclusion

Leases cannot be negotiated in a vacuum. If there are important agreements, such as condominium documents, that affect the rights and obligations of a both the landlord and a tenant, they must be carefully reviewed and taken into account when a lease is prepared. Understanding how and in what ways the condominium documents can have an effect on a lease is critical in order to properly draft a lease in a building where there is a condominium property regime.

Mark Morfopoulos, a member of this newsletter's Board of Editors, is an attorney in the real estate department at Wachtel Missry LLP. Reach him at [email protected].