THE LEASING HOTLINE
August 18, 2003
Highlights of the latest commercial leasing cases from around the country.
The Reserved Use ' A Modern Approach To 'Use Restrictions'
August 18, 2003
Most modern leases contain one or more paragraphs addressing the use of the premises. Pursuant to these paragraphs the landlord and tenant agree, among other things, that the tenant is entitled to use the leased premises for one or more specified uses, an 'Allowable Use.' The parties may also agree that certain uses, 'Obnoxious or Prohibited Uses,' would be inappropriate for the tenant space or for any other space in the shopping center occupied by another tenant. In shopping centers where one or more tenants are acting as the initial anchor, that tenant will frequently require the landlord to agree not to let any other occupant have the right to use any portion of the center for a specified use (an 'Exclusive Use'). Sometimes the exclusive is coterminous with the anchor tenant's Allowable Use, but frequently it will be more narrowly drafted to include only a portion of the Allowable Use. In shopping centers where the initial anchor is a grocery store or other readily definable use and where the tenant has significant bargaining power, this process can be quite simple and, with the use of a well-drafted declaration of restrictions, can be applied with relative ease.
Early Access Letters
August 18, 2003
It's hard to imagine financing construction on a premises in which you have no legal interest. However, in order to meet construction schedules, opening date projections and cash flow targets, a tenant must sometimes consider whether it is willing to commence construction without having an executed lease or agreement in place. While this decision may expose the tenant to considerable risk, under certain circumstances both the landlord and the tenant may be willing to proceed with construction, absent the existence of an executed lease or agreement. In order to allow a tenant to construct its space prior to executing a lease for the space, a landlord and a tenant would be wise to enter into an Early Access Agreement providing for certain understandings between the parties, prior to the time that the lease or agreement is executed. The Early Access Letter need not be a long or complicated document, but should provide for certain crucial understandings to establish the rights and protect against the liabilities of each party, as well as to create an understanding of the relationship between the parties. At a minimum, the Early Access Letter should cover the following topics: i) plans; ii) insurance; iii) indemnification; and iv) what happens if a lease is not executed by the parties; and v) construction rules and regulations.
Strategies For No-Grief Rent Relief
August 18, 2003
Recent downturns in the economy have increasingly found retail and office tenants in the position of having to seek rent relief in varying degrees from their landlords in an effort to overcome short-term financial difficulties. While the landlord finds unpalatable the prospect of reducing a rental income stream to which it has become accustomed, the prospect of having a vacancy in a shopping center, with its attendant adverse effect on neighboring tenants, as well as the additional costs involved in replacing the tenant through the payment of brokerage fees and lease inducements, may be even more unpalatable.
THE LEASING HOTLINE
August 18, 2003
Highlights of the latest commercial leasing cases from around the country.
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.
