The Lease Is Fully Executed

To make sure that the landlord diligently proceeds with the work that it is obligated to perform prior to delivery, attorneys who represent tenants often ask that a clause be inserted in the lease stating that if the landlord does not turn over the space to the tenant on or before a certain date (often referred to as the “Outside Date”), the tenant will have the right to abate the rent one day for every day that the premises is not delivered to the tenant. If such date is specifically mentioned in the lease, it is imperative that this date be calendared.

Landlords should insist that if such a clause is added, the provision should be subject to “tenant delays” and force majeure events (with both of such terms being defined elsewhere in the lease so that their meanings are clear). Since the goal of the parties is to make sure that the landlord is working diligently to deliver the premises to tenant with landlord's work in substantially completed condition, adding such landlord-friendly language is a fair request.

Many tenant's will also ask that if the lease is not delivered within a certain number of days following the Outside Date, that it shall have the further right to terminate the lease. Especially if a tenant is facing high holdover fees if it fails to vacate its existing space on or before the expiration date of its existing lease, this may also be a reasonable request. On the other hand, if a landlord is investing a large sum to build out the space, the landlord may be reluctant to agree to such a provision. The parties often compromise by agreeing to a “drop dead” date far enough into the future so as to make it very unlikely that this “nuclear option” could be used.

Failure to Satisfy Other Delivery Conditions

Delivering the space on or before a particular date with all landlord work substantially completed is rarely the only instance where delivery conditions must be satisfied by a date certain. If the landlord is financing the property, the landlord may need to obtain the approval of its lender within a certain number of days after the lease is signed before the lease is effective. If a tenant is investing large sums performing leasehold improvements, it may require that the landlord obtain a subordination and non-disturbance agreement from the landlord's lender (and a recognition agreement from the condominium and/or the ground lessor if the premises is subject to a condominium regime or a ground lease) within a certain number of days after the lease is signed. In a shopping center setting, leases may have a co-tenancy provision where another tenant must open for business within the center before a certain date or penalties will accrue to the landlord. A landlord's failure to satisfy those conditions could result in a day-for-day abatement of rent, or even the right to terminate the lease. These dates have a nasty habit of creeping up on a landlord, and the results could be very costly. Keeping track of these dates is, therefore, very important.

Burn-Down of Security Deposit/Letter of Credit

Although tenants may be required to post a cash security or a letter of credit to ensure the faithful performance by the tenant of its obligations under the lease, some leases contain a provision stating that if the tenant is not in default beyond notice and cure periods for a particular period of time following the commencement date of the lease — i.e., three years — the security will be reduced. If a tenant does not keep track of such a date, don't count on the landlord doing so for the tenant's benefit. Similarly, if the lease requires that the landlord pay the tenant to fund tenant improvements which are to be performed on some future date within the premises, a tenant would be wise to calendar the date(s) to make sure that the payments are timely made.

Miscellaneous Options Held By Landlord and Tenant

A lease may have one or more options, which may be held by either the landlord or the tenant. Examples of leasehold options include renewal, expansion, termination and relocation options. Each of these options usually contain a provision that they must be exercised on or before a certain date (in the case of renewal and expansion options) or after a certain date (in the case of termination and relocation options). Especially if the lease also provides that “time is of the essence” in exercising these options, the failure to exercise such rights could result in the forfeiture of the option. In many instances, this loss could have disastrous consequences. For example, if a tenant forfeits a renewal option for a fixed rental amount where the market rent on the option date is substantially higher than the option rent provided for in the lease, the tenant would lose the opportunity to lock in the below-market rental rate that was bargained for when the lease was signed.

Moreover, a tenant will be better prepared in the event the landlord actually decides to exercise an option to relocate the premises or terminate the lease if it keeps track of such dates beforehand and discusses them with the landlord well before the date set in the lease.

All Adverse Consequences Are Preventable

In the event a landlord or tenant fails to keep track of certain key dates, that party can expose itself to monetary penalties and/or having its leasehold rights terminated. The good news, however, is that the possibility of such occurrences happening can be greatly reduced, and in many cases completely eliminated, by simply calendaring the event well in advance.

Dates that may seem very far away can come up faster than expected, especially if you are keeping track of a large number of leases at the same time. Taking the time to calendar key dates should not be an optional exercise, because failing to do so is risky business.

*****
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].

After a lease is fully executed, many attorneys may be tempted to think that their role in the leasing “process” is over. However, depending on the capabilities of your client to understand and administer the terms of the lease, not paying attention to “post-lease” signing details may be a perilous proposition.

Failure to Deliver the Premises By a Certain Date

Some leases state that the “commencement date” begins on the date the lease is signed. Many other leases, however, provide that the commencement date will be determined as of the date the premises is delivered with certain “landlord's work” substantially completed.

To make sure that the landlord diligently proceeds with the work that it is obligated to perform prior to delivery, attorneys who represent tenants often ask that a clause be inserted in the lease stating that if the landlord does not turn over the space to the tenant on or before a certain date (often referred to as the “Outside Date”), the tenant will have the right to abate the rent one day for every day that the premises is not delivered to the tenant. If such date is specifically mentioned in the lease, it is imperative that this date be calendared.

Landlords should insist that if such a clause is added, the provision should be subject to “tenant delays” and force majeure events (with both of such terms being defined elsewhere in the lease so that their meanings are clear). Since the goal of the parties is to make sure that the landlord is working diligently to deliver the premises to tenant with landlord's work in substantially completed condition, adding such landlord-friendly language is a fair request.

Many tenant's will also ask that if the lease is not delivered within a certain number of days following the Outside Date, that it shall have the further right to terminate the lease. Especially if a tenant is facing high holdover fees if it fails to vacate its existing space on or before the expiration date of its existing lease, this may also be a reasonable request. On the other hand, if a landlord is investing a large sum to build out the space, the landlord may be reluctant to agree to such a provision. The parties often compromise by agreeing to a “drop dead” date far enough into the future so as to make it very unlikely that this “nuclear option” could be used.

Failure to Satisfy Other Delivery Conditions

Delivering the space on or before a particular date with all landlord work substantially completed is rarely the only instance where delivery conditions must be satisfied by a date certain. If the landlord is financing the property, the landlord may need to obtain the approval of its lender within a certain number of days after the lease is signed before the lease is effective. If a tenant is investing large sums performing leasehold improvements, it may require that the landlord obtain a subordination and non-disturbance agreement from the landlord's lender (and a recognition agreement from the condominium and/or the ground lessor if the premises is subject to a condominium regime or a ground lease) within a certain number of days after the lease is signed. In a shopping center setting, leases may have a co-tenancy provision where another tenant must open for business within the center before a certain date or penalties will accrue to the landlord. A landlord's failure to satisfy those conditions could result in a day-for-day abatement of rent, or even the right to terminate the lease. These dates have a nasty habit of creeping up on a landlord, and the results could be very costly. Keeping track of these dates is, therefore, very important.

Burn-Down of Security Deposit/Letter of Credit

Although tenants may be required to post a cash security or a letter of credit to ensure the faithful performance by the tenant of its obligations under the lease, some leases contain a provision stating that if the tenant is not in default beyond notice and cure periods for a particular period of time following the commencement date of the lease — i.e., three years — the security will be reduced. If a tenant does not keep track of such a date, don't count on the landlord doing so for the tenant's benefit. Similarly, if the lease requires that the landlord pay the tenant to fund tenant improvements which are to be performed on some future date within the premises, a tenant would be wise to calendar the date(s) to make sure that the payments are timely made.

Miscellaneous Options Held By Landlord and Tenant

A lease may have one or more options, which may be held by either the landlord or the tenant. Examples of leasehold options include renewal, expansion, termination and relocation options. Each of these options usually contain a provision that they must be exercised on or before a certain date (in the case of renewal and expansion options) or after a certain date (in the case of termination and relocation options). Especially if the lease also provides that “time is of the essence” in exercising these options, the failure to exercise such rights could result in the forfeiture of the option. In many instances, this loss could have disastrous consequences. For example, if a tenant forfeits a renewal option for a fixed rental amount where the market rent on the option date is substantially higher than the option rent provided for in the lease, the tenant would lose the opportunity to lock in the below-market rental rate that was bargained for when the lease was signed.

Moreover, a tenant will be better prepared in the event the landlord actually decides to exercise an option to relocate the premises or terminate the lease if it keeps track of such dates beforehand and discusses them with the landlord well before the date set in the lease.

All Adverse Consequences Are Preventable

In the event a landlord or tenant fails to keep track of certain key dates, that party can expose itself to monetary penalties and/or having its leasehold rights terminated. The good news, however, is that the possibility of such occurrences happening can be greatly reduced, and in many cases completely eliminated, by simply calendaring the event well in advance.

Dates that may seem very far away can come up faster than expected, especially if you are keeping track of a large number of leases at the same time. Taking the time to calendar key dates should not be an optional exercise, because failing to do so is risky business.

*****
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].