Anatomy of a Commercial Lease

1
Anatomy of a Commercial Lease

• Presented by
• Jim Chynoweth
• Barbara Morgan

2
Date of the Lease

• Necessary for legal and practical reasons
• Does Lease date have to be the date signed?

3
Parties

• Specify using correct legal names
• Is the party a corporation?
• In what state? Are they legal in yours?
• LLC -Partnership?
• Guarantor?

4
Premises

• Describe accurately
• physical address
• legal description
• demised premises vs. building
• supplement with exhibits
• Parking - in common or designated
• What are the common areas?

5
Tenant Improvements

• As Is
• Construction
• New building construction
• Premises construction
• Renovation of existing space
• Who pays, what is the tenant getting?
• Should the Tenant do their own TIs?

6
Term

• Start and finish
• Occupancy date
• Rent commencement
• Term commencement
• Termination date
• Number of years, months, days
• Delay in commencement date?

7
Term (Delay in Commencement)

• What could cause a delay in possession?
• New construction
• Tenant improvements
• Prior tenant
• Force majeure
• Remedies
• Financial
• Right to terminate

8
What are the common lease types?

• Variables (taxes, insurance CAM)
• Full Service
• Gross
• Disgusting
• Net
• Triple Net
• Absolut

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What are the common lease types?

• Variables (taxes, insurance CAM)
• Full Service
• Gross
• Disgusting
• Net
• Triple Net
• Absolute

10
Rent

• Base rent vs. additional rent
• How much? When? Method? Where?
• Interest on late payments
• Grace period
• Escalators

11
Rent (Escalators)

• Fixed vs. indexed
• Frequency
• Issues involved
• Full or partial
• Cap
• Which index

12
Rent (Additional Rent - Taxes)

• Who pays?
• Who pays increases?
• Who pays for special assessment district taxes?

13
Rent (Additional Rent - CAM)

• What is included?

Common area maintenance Common area
utilities Water/Sewer/Refuse Janitorial Security M
anagement fees Ground lease Uninsured losses
(under) Penalties, fines, late fees
Financing fees TIs on other space Remodel
costs Brokerage fees, marketing Legal
fees Executive salaries Employee
benefits Reserves Capital Expenses
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How are charges allocated?

• Square footage
• They arent
• Use

15
When are charges allocated?

• As incurred
• In initial face rate
• Fixed (with or without escalator)
• Increase over expense stop
• Increase over base year
• Estimated net charge with year end reconciliation

16
Use Provisions

• Specify what is permitted
• Limitations on certain uses
• Change in use via sublease
• Compliance with law
• Hazardous substances
• Quiet Enjoyment

17
Tenants Maintenance

• Obligations
• Service contracts
• Limitations
• Landlords right to inspect
• Normal wear tear

18
Landlords Maintenance

• Obligations
• Time frame
• Multi-tenant building

19
Security Deposit

• What type of tenant should make one?
• Why does the Landlord want one?
• How much?
• Interest?

20
Assignment Subletting
21
Sublease
Assignment
Landlord
Landlord
Assignee
Tenant
Tenant
Subtenant
22
Assignment Subletting

• Landlords approval - reasonable or unreasonable
• Tenant remains liable
• Conditions for Landlords approval

23
Insurance

• Building Insurance
• Covers the cost to repair damage to real property
• Replacement cost amount actual cash value vs.
  full replacement cost
• Co-Insurance

24
Co-Insurance

• Did

X Loss
Recovery
Should
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Insurance

• Building Insurance
• Covers the cost to repair damage to real property
• Replacement cost amount actual cash value vs.
  full replacement cost
• Co-insurance

• Rental insurance
• Liability Insurance
• Covers the cost of damages for mistakes
• Coverage typically has annual caps

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Insurance (Cont)

• Tenants personal property leasehold
  improvements
• Extent of coverage
• Definition of what belongs to whom
• Who is insuring tenant improvements?
• Waiver of subrogation
• Should be mutual
• To the extent of coverage?

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Waiver of Claims Indemnification

• Tenant waives claims against Landlord for
  property damage regardless of cause
• What about personal injury?
• Indemnification- Tenant agrees to hold harmless
  Landlord from accidents on premises
  regardless of cause
• except for negligent acts of Landlord
• Landlords indemnification?

28
Insurance

• The Goal of Negotiating Insurance Provisions
• Allocate the risk of loss to the party whose
  insurance will most fully cover that particular
  risk, for the least cost.
• Eliminate fault as the basis for paying property
  damage claims.
• Avoid duplications in coverage

29
Environmental Issues

• Pre-existing condition, how do you define?
• During term of Lease
• Caused by Tenants use
• Who is responsible for actions of third parties?
• After expiration of Lease

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Eminent Domain/ Condemnation

• Probability?
• Partial taking
• Who receives award?
• Who is required to pay for restoration?
• Amount of rent reduction (area vs. utility)
• Does the Lease continue?
• At what point could Tenant cancel?

31
Eminent Domain/ Condemnation

• Total taking
• Lease ends upon taking
• Who is entitled to proceeds?
• Landlords viewpoint
• Tenants viewpoint

32
Alterations and Additions

• When must Tenant get approval in writing?
• Is Landlord obligated to give approval for
  structural or exterior alterations?
• Restoration- Landlords option to keep
  alterations or have Tenant remove.

33
Tenants Default

• Events of default
• Non-payment of rent
• Non-performance of covenants and obligations
• Misrepresentation
• Vacating or abandoning premises
• Bankruptcy or assignment for creditors
• Repeated defaults

34
Landlord Remedies

• Remedies
• Right to repossess (vs. obligation to mitigate)
• Right to terminate
• Right to accelerate
• Injunction
• Right to hold Tenant responsible for costs
• Right to sue for damages
• Landlord lien
• Forcible entry and detainer

35
Tenants Remedies (Landlord Default)

• Self-help
• Right to offset against rent
• Cancellation clauses
• Right to sue
• Constructive eviction

36
Landlords Rights

• Inspect and make repairs, additions alterations
• Enter to redecorate and remodel if Tenant vacates
• Show premises to purchasers, mortgagees and
  prospective tenants
• Place for sale or for rent signs
• Right to cure

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Options

• Types
• Renewal/extension
• Expansion
• Cancellation-full or partial
• Right to purchase
• In what circumstances does Tenant benefit?
• In what circumstances does Landlord benefit?

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Options (cont)

• Option vs. right of first refusal vs. right of
  first offer vs. best efforts
• Rental calculations
• Agreed price
• CPI adjustments
• Fair market - how determined?
• Notice provisions

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Brokerage

• Identify broker(s) and who pays commission
• Indemnify other party against claims of other
  brokers
• What about payment on options?
• Identify agency relationship

40
Surrender/ Holding Over

• Condition of premises on surrender
• Tenancy type on holdovers
• Specify month-to-month, year-to-year or other
• Notice required to cancel
• Rent the same double what is fair?
• Damages - direct and indirect

41
Utilities

• Who provides?
• Which ones?
• Separately metered vs. flat fee vs. charge
• Off hours charges
• Does tenant pay for their share of common area
  utility charges?

42
Subordination

• Subordination
• Tenants rights shall follow (be inferior to)
  lenders rights
• Non-Disturbance
• Tenants right to continue to occupy and perform
  under the terms of the Lease
• Attornment
• Tenant agrees to recognize purchaser at
  foreclosure sale as new landlord and continue to
  perform under lease

43
Miscellaneous Section

• Tenants statements/ Estoppel certificates
• Covenants binding on successors
• Lenders requirements
• Memorandum of Lease
• Execution of lease by Landlord
• Tenants authorization
• Notices

44
Signatures

• Notarization
• Corporate resolutions
• Apparent authority

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Thats All Folks