Subrogation: Insured or Not Insured
August 18, 2003
Real estate lawyers have recently been reminded of the importance of carefully crafting 'waiver of subrogation' and 'release of liability' provisions in leases. For instance, in a recent New York case, <i>The GAP, Inc. v. Red Apple Companies, Inc.<i>, 282 A.D.2d 119 (N.Y. App. Div. 2001), such express clauses saved the landlord from liability to its tenant's insurance company; unfortunately, the provisions did not relieve the landlord from responsibility for the cost of its tenant's insurance deductible — a million dollar mistake.
Rent Abatement As Liquidated Damages Or Unenforceable Penalty?
August 18, 2003
Sophisticated parties engaging in complex real estate transactions customarily provide for rent abatement provisions in commercial office leases in order to liquidate damages where delays in landlord's construction would lead to a breach of the contract. That is what occurred in <i>Bates Advertising USA, Inc. v. 498 Seventh, LLC,</i> 291 A.D. 2d 179 (1st Dept. 2002). In a decision that threatened to have a profound impact on commercial office leases in New York City, the New York State Supreme Court, New York County, a trial level court, held a typical rent abatement clause unenforceable by ruling that it was not a liquidated damages provision, but instead, an unenforceable penalty. The tenant appealed, and in a decision that saved the contractual expectations embodied in many similar commercial leases, the Appellate Division's First Department reversed, finding that nothing in the rent abatement provision created an unenforceable penalty or forfeiture, or violated the purpose of the liquidated damages rule.
The 'Landlord Consent To Sublease': Where Landlords And Subtenants Can Get Together
August 18, 2003
During the past two years, from Silicon Valley to Northern Virginia, a huge amount of office space has become available for sublease. Coincident with that phenomenon has been the emergence of increasingly comprehensive forms of the 'Landlord Consent to Sublease' (referred to herein as the 'Consent'). That tri-partite document — among the landlord, the tenant/sublessor and the subtenant — originally served merely to memorialize the landlord's consent to a sublease and perhaps to reassert the primacy of the prime lease terms over those of the sublease. Now, however, it has become a meeting ground of sorts where prime landlords and subtenants can get together and, with privity of contract, set forth their agreements with respect to a number of matters involved in the landlord/subtenant relationship.
THE LEASING HOTLINE
August 18, 2003
Highlights of the latest commercial leasing cases from around the country.
Structuring a Comprehensive Relocation Provision
August 18, 2003
Relocation is one of those issues that often gets little attention at the time a letter of intent to lease is being negotiated and commonly surfaces when the initial lease draft is circulated. In a lease for premises in a multi-tenant project, the typical relocation provision offered by the landlord in its first draft will provide broad rights for the landlord to relocate the tenant coupled with narrow landlord liability for expenses. The landlord is frequently driven by its need to retain flexibility in leasing the property. During negotiations, the landlord will try to convince the tenant that it will not use the relocation right in a way that is detrimental to the tenant's ability to conduct its business. Unless the location of the premises is so critical that any right of relocation would be a deal breaker for the tenant, the tenant's typical response will be to seek to reduce the likelihood that the landlord will exercise its relocation right and to protect itself from expenses related to a forced relocation. In most circumstances, the tenant will seek to include as many direct and indirect expenses as possible in a list of items that will be reimbursed by the landlord in the event of a forced relocation. In some instances, a tenant may also request a fixed amount of compensation or rent abatement if it is relocated. The tenant's approach is often to make relocation very costly to the landlord in order to discourage a relocation.
How to Fight Subordination of a Leasehold
August 18, 2003
Landlords are regularly asked to consent to a tenant's financing, secured by the tenant's equipment and other assets. Such consent proposals are typically accompanied by a further request for the landlord to waive or subordinate its interest in the tenant's personal property, if any, in favor of the claim and lien of the tenant's lender. Today, lenders often go so far as to seek the subordination of the landlord's interest in the lease itself to the interest of the lender under the financing. In response, landlords will routinely resist any subordination of the leasehold, and will require various protections such as excluding fixtures from the lender's collateral and providing that if the lender forecloses on, or takes possession of, the collateral, it will do so peaceably and in compliance with applicable legal process, without interference with the operations of the landlord's shopping center or the businesses of other tenants, and with an obligation by the lender to repair any damage to the premises resulting from the removal of the collateral.
THE LEASING HOTLINE
August 18, 2003
Highlights of the latest commercial leasing cases from around the country.
In the Spotlight: Beware of Operating Expenses Incurred Subsequent to the Lease Term
August 18, 2003
Most leases that provide for a pass-through of operating expenses to tenants provide for an equitable proration of such expenses for any partial lease year. The typical language provides that the tenant is liable for its proportionate share of operating expenses incurred by the landlord for any period during the lease term. The arithmetic is very simple — if the lease expires on March 31st, the tenant is responsible for its share of expenses incurred by the landlord through March 31st.
How Commercial Landlords Can Position Themselves to Deal With Current Marketplace Conditions
August 18, 2003
The uncertainty of the duration of the downturn in the commercial leasing market, the vast amount of available first-and-second generation space and the increasing number of tenant bankruptcies have resulted in a situation where landlords must position themselves to endure potentially devastating economic times. Cutting rental rates and providing previously unheard of tenant concessions such as short-term leases and long periods of 'free rent' may seem like the only alternatives, but they are not. Landlords can enforce existing provisions in their leases and incorporate additional provisions into their lease forms that will improve their position in the marketplace.
