THE LAW OFFICE OF DENNIS NEGRON

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THE LAW OFFICE OF DENNIS NEGRON
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REDUCING EXPOSURE

• RIGHTS, RESPONSIBILITIES OF TENANTS AND
  LANDLORDS AND IMPORTANT LEASE PROVISIONS

3
HOW TO REDUCE EXPOSURE FOR MY CLIENT?

• Ensure the Lease reflects the deal made by your
  client (memoranda letter of intent)
• Legal activists
• Broker activists
• Client activists.
• Team in place early
• The right team for the deal
• Start early the time necessary to do a fully
  negotiated transaction is often underestimated.

4
SOME LEASE PROVISIONS ARE MORE EQUAL THAN OTHERS?

• Each Lease is a unique transaction and the forces
  that will govern the negotiation are as varied as
  the Landlord, Tenant and the property at issue.
• The Parties need each other but their respective
  positions in a Lease negotiation can be
  diametrically opposed.
• Negotiations by and between the Landlord and
  Tenant are controlled by many factors and all
  must be considered.

5
HOT MARKET - LANDLORD IS LORD

• The hotter the market the less likely a Landlord
  will negotiate its standard form Lease
• If you will not sign the Lease the Landlord has
  five other Tenants that will
• When the market is hot the Landlord will desire
  to minimize its costs by reducing attorneys
  fees
• Time is money and if another viable Tenant will
  take the Lease as is, why spend the time
  negotiating.

6
COLD MARKET TENANT IS KING

• The cooler the market the more precious a viable
  Tenant becomes
• The Tenant now has several options and if this
  Landlord will not negotiate the next one will
• The Landlords standard Lease form becomes highly
  negotiable.

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NORMAL MARKET - EQUAL AS IT GETS

• Alternatives may be available but not desirable
• In this situation the Landlord and Tenant still
  need each other, time becomes a critical factor
• The Landlords standard Lease form is negotiable
  but all issues are vigorously defended.

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FINANCIAL WHEREWITHAL

• He who has the gold makes the rules
• Large well funded Tenants - own parameters for
  any real estate transaction
• Sophisticated in house real estate department -
  certain legal and financial parameters
• Real estate department exceptions.
• Exceptions are rare but not unheard of.
• governing committees
• or different operational executives with the
  organization.
• The larger and more sophisticated the Parties,
  the more demanding they will be during the Lease
  negotiations.

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ORDER OF MAGNITUDE

• Small Transaction
• a lease less than 5,000 rsf with a duration
  (including options) of less than 3 years would be
  considered by most a relatively small lease
  transaction.
• Medium Transaction
• a lease greater than 5,000 rsf up to 30,000 rsf
  with a duration of at least 5 years.
• Large Transaction
• a lease greater than 60,000 rsf with a duration
  of at least 5 years would be considered by most a
  major transaction.

10
DIRECT VS INDIRECT

• Direct Leases - more hotly negotiated than
  assignments and subleases
• Landlords are not excited about expending
  extensive legal fees and time to accommodate an
  assignee or subtenant.
• As between the Sublandlord-Assignor-Subtenant the
  Assignor-Sublandlord will be reluctant to make
  major changes from the Master Lease.

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DURATION OF LEASE

• The longer the commitment the more likely that
  the parties will vigorously negotiate.
• The shorter the commitment the less likely either
  party will expend considerable time and effort
  negotiating
• Even a small lease could be fully negotiated if
  for a relatively long duration.

12
BUILD OUT VS. EXISTING

• Two types of build-out
• Entire Building
• Tenant Improvements.
• The more complex transaction involves the
  construction of a new Building
• Tenant Improvements to raw space
• Tenant Improvements to finished space
• Minor improvements to finished space.

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OWNERSHIP

• The more parties involved the more complex the
  negotiations
• When the Landlord owns the Building and the Land
  upon which the Premises sits the Landlord
  controls its own destiny and can be more flexible
  in its negotiations.

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SOPHISTICATION OF REPRESENTATION

• Representation by a sophisticated broker and
  attorney is essential
• If one party is well represented and the other is
  not then anything can happen
• a great deal of time and effort over issues of
  little import or significance
• While spending little to no time on issues of
  great significance.
• When both parties to the transaction are properly
  represented by experienced brokers and counsel
  there is at least a fair opportunity to address
  most of the major issues.

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THE XV COMMANDMENTS

1. The perfect Lease does not exist
2. Most provisions of a Lease assume bad things are
   going to happen
3. Entrance strategy fun to negotiate exit strategy
   a dread
4. Landlords know their standard form Lease very
   well
5. No such thing as a pure legal or business
   provision
6. Most standard form Leases are drafted by
   Landlords and greatly favor Landlords (what a
   shocker)

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THE XV COMMANDMENTS

1. Landlords do not sign Tenants standard form
   Lease
2. Never say never or take it or leave it
3. Do not concede a point because of the current
   law
4. What does the Lease say
5. Do not ignore boilerplate

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THE XV COMMANDMENTS

1. Statutes that favor Landlord are sacred and
   statutes that favor Tenant are evil or vice
   versa
2. Leases should be read at 400 a.m. slowly with
   strong coffee
3. Most provisions are written in a lawyers blood.
4. Leases are not written for the lawyers but the
   users.

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BIG NINE OR MORE

1. Description of Premises
2. Use
3. Lease Term and Lease Commencement Date
4. Rent and Operating Expenses
5. Assignment and Subleasing
6. Damage and Destruction
7. Parking
8. Options (Additional Space and extension of the
   Lease Term) and
9. Tenant Improvement.

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PREMISES

• Related provisions. Rent, Operating Expenses,
  Use, Rules and Regulations, Insurance, Parking,
  Damage and Destruction, Condemnation, Property
  Taxes, Signs, Compliance with Law and Options
  (Space and Term)
• One of the most overlooked provisions of the
  Lease.

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PREMISES - TENANT

• Must specify what you are getting
• Common areas - how important?
• Telecommunication access - needs
• Measurement of space.
• Rentable tied to Rent
• Usable tied to Tenant Improvement Allowance
• Architects, BOMA
• Other standards (NYC, D.C., Industrial etc.)

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PREMISES - LANDLORD

• Common areas - must have the flexibility to meet
  the needs of the market
• Telecommunications access reasonable
• Measurement of space
• The Rent is what it is
• Measure now or waive.

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PREMISES - RESIDENTIAL

• Typically not an issue in the residential Lease.
  The typical residential Lease will provide a
  street address only and very little else.

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USE

• Related Provisions. Description of Premises,
  Building Services and Utilities, Rules and
  Regulations, Assignment and Subleasing, Hazardous
  Waste, Damage and Destruction, Condemnation,
  Indemnity, Insurance, Abatement of Rent,
  Non-Competition, Tenant Improvements, Compliance
  with Law and Options (Space and Term)
• The importance of this provision cannot be
  overstated
• Entrance and exit strategy.

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USE - TENANT

• any legally permitted use.
• most Tenants would not want a Topless Bar across
  from their business office
• any legally permitted purpose that is consistent
  with the character of the Tenants in the Building
  and that is not prohibited via another tenants
  exclusive use.
• Warranty fit for use
• Buildings Systems (HVAC, electrical, structural,
  plumbing, lighting, etc.)
• Zoning.
• Assignment Subletting - Use provision to be as
  permissible as possible.

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USE - LANDLORD

• Control of Tenant mix
• Maintain the quality and character of their
  Building
• Class A Building where professionals are housed
• Exclude Tenants that are inconsistent (e.g. drug
  rehabilitation center).

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USE - RESIDENTIAL

• Landlord must at all times be wary of use that he
  does not desire on the Premises.
• prohibit illegal activities
• prohibit many undesirable activities which may be
  legal (e.g. kennel, child care, telemarketing,
  etc.).
• Home office - technology - Tenants have
  computers, printers, fax etc., and some operate a
  business out of the residence.
• overload on the electrical or HVAC system of the
  residence.
• Waterbed or other water filled furniture,
  California Civil Code 1940.5 An owner or an
  owner's agent shall not refuse to rent a dwelling
  unit in a structure which received its valid
  certificate of occupancy after January 1, 1973,
  

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USE - RESIDENTIAL

• As a general rule animals can be restricted
  except a seeing-eye dog or signal dog for the
  hearing impaired
• Occupancy limits - discriminatory against
  families with children?
• When business to business disputes occur the
  Courts and Arbitrators are less likely to become
  judicial/arbitrator activists, than in the
  residential arena.

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LEASE TERM

• Related Provisions. Rent, Operating Expenses,
  Tenant Improvements, Options, Default, Damage and
  Destruction, Condemnation, Assignment and
  Subletting, Notices, and Hold Over.
• Leases contain several dates of importance.

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LEASE TERM - DATES

• for reference purposes only for
  identification
• The Effective Date Lease is viable and
  enforceable
• Lease Commencement Date the date the Term
  commences
• Rental Commencement Date the date Tenant must
  commence the paying Basic Rent under the Lease
• Additional Rent Date the date the Tenant must
  commence the payment of operating expense pass
  throughs
• Operating Expense Adjustment Date the date upon
  which the Landlord may adjust the operating
  expense passthroughs

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LEASE TERM - DATES

• Beneficial Occupancy Date - the date in which
  the Tenant is allowed to occupy the Premises
• Free Rent Period the period of time in which no
  Basic Rent and/or Additional Rent is payable
  under the Lease
• Delivery Date - the date the Premises are
  delivered to the Tenant to occupy or to commence
  the construction of Tenant Improvements
• Option Date the date upon which Tenant must
  exercise an option set forth in the Lease
• Expiration Date the date the Lease Term ends on
  its own terms.

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LEASE TERM - TENANT

• During any Early Occupancy Period or Beneficial
  Occupancy Period clarify what is payable if
  anything
• Date Confirmation - the ability to dispute any
  Landlord confirmation of a Lease/Rent
  Commencement Date or any other rental trigger
  date in the Lease
• Lease Extensions discussed in more detail below.

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LEASE TERM - LANDLORD

• Tenant occupies must pay Rent
• The most sacred provision in the Lease to the
  Landlord is Rent Commencement Date.
• Does not desire to debate this issue with their
  Tenants.
• May allow some sort of ADR process so long as the
  Tenant pays the Rent (even if he pays it under
  protest).

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LEASE TERM - RESIDENTIAL

• Most of the time the Term of the Lease is not an
  issue in a residential situation exception poor
  documentation.
• Notice requirements for termination have changed.
  The month to month tenancy only required one
  months prior written notice to terminate. The
  California Civil Code 1946.1 requires the owner
  of a residential dwelling to provide at least
  sixty (60) days' notice of termination if the
  Tenant has lived in the residence for a year or
  more.

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ACCEPTANCE

• Existing Space
• No TIs - walk through by Tenant and Landlord
  confirmed in writing
• TIs
• Tenant constructs walk through on Delivery by
  Landlord
• Landlord constructs walk through on completion.

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ACCEPTANCE

• Defects
• Patent
• Latent
• Punch list.
• Documentation is King Honeymoon vs. Divorce

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ACCEPTANCE - TENANT

• Latent defects excluded
• Patent defects some grace period
• Punch list
• Diligently
• Timely
• No disruption
• Off Tenant hours
• Fumes
• Noise
• Access
• Large vs. small transaction

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ACCEPTANCE -LANDLORD

• Latent defects Tenant must
• Promptly report when discovered
• Diligently investigate
• Not cause loss of warranty.
• Patent defects one time shot.
• Punch list
• Reasonable
• During Building Hours
• Minimize disruption
• Memorialize
• Cannot be Tenant caused (move in)
• Large vs. small transaction

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ACCEPTANCE RESIDENTIAL

• Very seldom documented
• Exception property managers
• No inspections
• Mostly visual walk through
• Punch list usually carpet, paint and necessary
  repairs

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RENEWAL, EXPANSION AND TERMINATION

• Related Provisions. Premises, Parking, Term,
  Rent, Security Deposit, Use, Hazardous Waste,
  Tenant Improvement Allowance, Brokers Fees,
  Notices, Default, Surrender and Hold Over.
• This provision normally takes an inordinate
  portion of the time devoted to Lease
  negotiations.
• Rarely exercised as set forth in the Leases.
• Each party is insistent that the rights are
  clearly defined
• The process of exercising these Options must be
  specifically identified with a timetable that
  actually works.

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RENEWAL, EXPANSION AND TERMINATION

• Types
• Renewal Expansion
• ROFR
• ROFO
• NEGOTIATE
• Early Termination

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RENEWAL - TENANT

• The extension and expansion options can be very
  critical to the Tenant.
• When committed?
• Transferable to an Assignee or a Subtenant?
• What is the expansion size?
• All or a part thereof?

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RENEWAL - TENANT

• How many extension options?
• Is it a real option or does it only occur if
  space becomes available?
• Is it a right of first refusal or a right of
  first offer?
• What triggers this right?
• Types
• (i) expand or reduce the Premises,
• (ii) extend or early terminate of the Lease Term,
  
• In Options (i) and (ii) the first issue that must
  be resolved is the Rent.

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RENEWAL - TENANT

• In Option (i) (ii) if during the Lease Term or
  any renewal or extension period thereof, the Rent
  should be the lower of
• the Rent in the Lease or
• the Fair Market Rental Rate
• a percentage of the Fair Market Rental Rate (e.g.
  90).
• Transferable to
• Any Transferee
• Subtenant/Assignee
• Affiliates/Subsidiaries.

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RENEWAL - TENANT

• Disputes as to Rent.
• Negotiation, Mediation, Arbitration
• Baseball
• Averaging
• Arbitrator determined.
• Fair Market Rental Rate - comparable Premises,
  Buildings, size, location, floor, Term of Lease,
  parking, brokers fee and other privileges and all
  forms of market concessions currently available.
• Additional Space and Upgrades
• Sign rights
• Parking privileges

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RENEWAL - TENANT

• Two articles on Renewal available at
• TO RENEW OR NOT TO RENEW?
• THE MEDIUM LEASE
• http//www.dirtatty.com/publications/Renewal_VOL_I
  _20RV_7-17-03.pdf
• TO RENEW OR NOT TO RENEW?
• THE MAGNUM LEASE
• http//www.dirtatty.com/publications/Renewal_Vol_I
  I_rv_7-18-03.pdf

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RENEWAL - LANDLORD

• Landlords are not in the business of selling
  options in their Buildings
• Landlords are often forced to concede this point
  to a significant Tenant that anticipates growth
  and longevity in the Building.
• Landlords generally attempt to restrict the
  Tenants options assuming that nothing has
  changed, that is extension of Term OK if Tenant
  has not sublet or assigned and occupies all of
  the Premises.

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RENEWAL - LANDLORD

• Expansion of space only if Tenant has not sublet
  or assigned.
• No right to reduce space.
• At Landlords then applicable Building Rent.
• No Transfer of rights.
• No upgrades.
• Will agree to negotiation, mediation and
  arbitration.
• Must take is this really an option.
• Early determination timing
• Lack of default.
• Never vs. oops but cured

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RENEWAL - RESIDENTIAL

• Tenants are seldom granted a right to renew
• Most become month to month rentals pursuant to
  the Terms of a written Lease.

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RENT, ADDITIONAL RENT, SERVICES

• Related Provisions. Description of Premises,
  Tenant Improvements, Security Deposit, Operating
  Expenses, Damage and Destruction, Condemnation,
  Abatement of Rent, Assignment and Subletting,
  Late Charge, Interest on Past Due Obligations,
  Compliance with Law, Repairs and Maintenance,
  Utilities and Services, Insurance, Transfer of
  Landlords Interest and Options.

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RENT, ADDITIONAL RENT, SERVICES

• Types
• Base Rent this number is generally the absolute
  bottom line figure that the Landlord desires to
  recover on a monthly basis and all other Rents
  are in addition to this Rent. As a result this
  is the first real number the Tenant and Landlord
  discuss and frequently the most negotiated Rent
  in a Lease. Unfortunately the myriad of Lease
  forms that call themselves Gross or Net (labels
  mean little) make it impossible to determine
  exactly what the Tenant gets for the payment of
  the Base Rent, without a thorough reading of the
  Lease.
• Caution in a long Term Lease it is not unheard
  of for the Operating Expenses, Additional Rent to
  exceed the Base Rent.

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RENT, ADDITIONAL RENT, SERVICES

• Additional Rent generally consists of several
  Rents due under the Lease
• Operating Expense is Rent intended to reimburse
  the Landlord for the operating costs of the
  Building
• CAM Charges most lease forms include the common
  area maintenance charges in the Operating
  Expenses but sometimes they are separate.
• Services and Utilities most Lease forms provide
  that if the Tenant requires additional services
  (special events or needs) or additional utilities
  (after HVAC), the Landlord shall bill for those
  additional charges as part of the Additional Rent
  provision.

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RENT, ADDITIONAL RENT, SERVICES

• Percentage Rent mostly seen in shopping centers
  Leases in addition to all other Rent payable
  under the Lease whereby the Tenant is to pay the
  Landlord a percentage of gross revenues.
• Parking fees sometimes part of the Rent at
  other times a separate and distinct fee. Visitor
  parking always an issue to be discussed.
• Hidden Rent this is the type of Rent that many
  new entrepreneurs simply forget to include in
  their business plans. These would include the
  obligations to provide repairs and maintenance,
  insurance, comply with a law, shortfalls in the
  Tenant Improvement Allowance, if any.

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RENT, ADDITIONAL RENT, SERVICES

• On smaller leases the Rent is generally very
  ascertainable. In larger more complex Leases
  often it is unclear what is included in the Base
  Rent and what is an Additional Rent item.
• Each Lease should address
• Where paid
• When paid
• What happens if paid late
• Prorations for partial months
• When and how Rent is adjusted.
• The Building services included in the Basic Rent
  or Operating Expense pass throughs must be
  specified
• Janitorial specifications
• What is extra

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RENT, ADDITIONAL RENT, SERVICES - TENANT

• Tenants prefer certain methodology
• Modified Gross Lease or a Modified Net Lease
  Large Lease
• Full Service Gross Small Lease (since small
  keep it simple).
• Flat Rent - Short duration.
• Basic Rent adjustment
• fixed amount
• annual CPI adjustment
• fair market rental rate
• Landlords determination
• Rent in the Building
• favored nations clause.

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RENT, ADDITIONAL RENT, SERVICES - TENANT

• Basic Rental in a Lease - Right of offset for any
  Abatement of Rent.
• Dispute as Rent - the right to pay any Basic
  Rent, Additional Rent and Rent set forth in the
  Lease under protest.
• Assignment of Lease - the Landlord should not be
  allowed to assign the Lease until Landlord has
  paid for or escrowed the dollar value of all of
  the Rental concessions. Landlords will strongly
  resist any restriction on Landlords right to
  assign.

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RENT, ADDITIONAL RENT, SERVICES - TENANT

• Rental Concessions
• free Rent
• discounted Rent
• moving allowance
• relocation allowance
• sign allowance
• FFE
• advertising and promotion
• assumption of existing leases
• Tenant Improvement Allowance (design and
  construction)
• Free parking and Visitor validations
• Documentation
• specifically set forth
• or cross-referenced in this provision.

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RENT, ADDITIONAL RENT, SERVICES - TENANT

• Operating Expense.
• The Base Year methodology sets forth a calendar
  year which serves as the base line for operating
  expense increases. The Base Years should be
  grossed up as if the Building was 100 (or
  another agreed upon percentage) occupied during
  such Base Year. Only increases over this Base
  Year will be added to the Rent.
• If the Base Year is to be the last year of the
  previous tenants occupancy, then first and
  foremost, you must ensure that the previous
  tenant in the Building was fully occupied and had
  similar use of the Premises and requirements for
  all the utilities in the Building. If not, then
  the Base Year (depending on which one is used)
  may be insufficient to handle Tenants needs.

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RENT, ADDITIONAL RENT, SERVICES - TENANT

• Ideally, the Base Year operating expense should
  be the first full year that Tenant is in the
  Premises fully grossed-up and the pass-throughs
  do not commence until after a full year of
  occupancy. This will hopefully establish a
  realistic basis from which to increase the Rent.
• Types of Protections
• Base Year (implied cap)
• Expense Stop
• Stipulated Base
• Hybrids.

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RENT, ADDITIONAL RENT, SERVICES - TENANT

• Additional Rental. Here the Tenant is paying for
  any additional charges he may incur for after
  hours utilities and non standard services. The
  biggest issue here is the determination when
  these charges are triggered.
• utilities are generally triggered on what is
  commonly referred as after-hours or over standard
  use (discussed under metering).
• Landlords and Tenants often conflict on what
  services are provided as part of the Base Rent,
  Operating Expenses and what is an Additional Rent
  item. Who does the catch all favor?

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RENT, ADDITIONAL RENT, SERVICES - TENANT

• Proposition 13 8 reassessments.
• Tenant also desires to avoid Operating Expense
  increase resulting from a change of ownership
  California Revenue and Taxation Code 60 69.5
  (especially in an escalating market).
• In such circumstance the Rent will be increased
  without any benefit to the Tenant. If the Base
  Year is low due to a Proposition 8 reduction for
  that year, the Base Year shall be grossed up
  retroactively when an if the Proposition 8
  reduction expires. In other words the Base Year
  should be a valid number.
• Exclusions and Inclusion Lists - All real estate
  professionals have lists of operating expense
  exclusions. I have seen some as short as 5 (for
  small leases) and as numerous as 75 (for larger
  transactions). It is important that the list of
  exclusions and inclusions are appropriate for the
  transaction at hand. For an excellent sample
  list see http//www.cyberleasellc.com/boca.html.
  

61
RENT, ADDITIONAL RENT, SERVICES - TENANT

• Tenants desire the right to audit the Landlord
  for compliance with those exclusions and
  inclusions to the operating expenses.
• (a) for how long
• (b) at what point does the cost of the audit
  shift
• (c) how are audit results handled (solicitation,
  confidentiality)
• (d) who can audit
• (e) what the Landlord must provide, when, where
  and how.
• Shopping center leases caution, some Tenants
  may be restricted by law from paying a percentage
  rent although such rents are typical for shopping
  centers.

62
RENT, ADDITIONAL RENT, SERVICES - TENANT

• Shopping Center and Triple Net form leases
  harshest of the Landlord standard forms.
• Why
• Anchors.
• Metering.
• Why
• Tenant is a low utility user and the other
  tenants in the Building are high utility users.
• Landlord initiates
• Tenant is not using excess utilities, Landlord
  pays
• Tenant is using excess utilities, Tenant will
  have the option of (a) paying such excess and
  costs of the metering, or (b) challenging
  independently metering same.
• Tenant initiates
• Landlord overcharging, Landlord pays
• Landlord is not overcharging, Tenant pays
• Retroactive?

63
RENT, ADDITIONAL RENT, SERVICES - TENANT

• Assignment and Subletting. On those occasions
  where the Tenant has a very favorable Rent, the
  Tenant will want that favorable Rent to be passed
  on to an Assignee or Subtenant (see below
  Assignment and Subletting).

64
RENT, ADDITIONAL RENT, SERVICES - LANDLORD

• Basic Rental. Landlords need their Basic Rent in
  order to pay their mortgages and to make a
  profit. Rights of offset will be very narrowly
  defined if allowed at all. The right for the
  Tenant to Abate Rent should only be in those
  cases where the Tenant has exhausted a very
  onerous notice and right to cure process set
  forth in the Lease. In many circumstances the
  Landlord may be restricted from allowing
  Abatement of Rent due to (a) insurance policies
  and (b) Lender requirements.
• Dispute as to Rent. Landlords as a general rule
  do not overly object to the Tenants paying any
  Rent under protest, so long as timely paid.
  Some Landlords will require certain information
  be provided when paying Rent under protest and
  that the Tenant must take action within a
  specified period of time after the protest or
  waive its rights concerning the particular
  payment under protest.

65
RENT, ADDITIONAL RENT, SERVICES - LANDLORD

• Rental Concessions. Landlords will often go out
  of pocket for rental concessions in order to
  obtain a particular Tenant for their Building.
  In the event the Tenant terminates the Lease
  prematurely or assigns or sublets the Landlord
  will desire to recover the cost of the rental
  concessions on an amortized basis. On occasion
  the Landlord will specifically set forth the
  payment of the unamortized portion of the Tenant
  concessions as a condition precedent to any
  assignment or sublease of space in the Premises.
  

66
RENT, ADDITIONAL RENT, SERVICES - LANDLORD

• Additional Rental. Applies to
• After hours utilities,
• Overstandard utilities and services
• Late charges and backcharges.
• Proposition 13 8 reassessments
• ability to transfer their asset at its highest
  value.
• Landlord may accept some prohibition on
  Proposition 13 pass through for a limited period
  of time (3-5 years).
• If Landlord agrees to seek Proposition 8 property
  tax reductions, it must only be obligated to do
  so when in Landlords good faith judgment the
  benefit will exceed the cost of obtaining the
  reduction.

67
RENT, ADDITIONAL RENT, SERVICES - LANDLORD

• Tenants desire the right to audit the Landlord
  for compliance with the operating expense
  provision. There are many issues raised here
  (a) for how long (b) at what point does the cost
  of the audit shift (c) how are audit results
  handled (d) who can audit.
• Metering. If Landlord meters he wants the Tenant
  to pay for so long as Landlord had a reasonable
  suspicion of over use. If the Tenant is found to
  be a high utility user the Landlord will either
  (a) a fair allocation of the utility costs (b)
  direct pass through.
• Capital Expenditures. Take time to define.
  Often during the Term of a Lease (the longer the
  Lease Term the more likely), a Landlord will make
  improvements to the Building and the Common
  Areas. Landlords will vigorously oppose any
  opposition to the passing on of Capital
  Improvements, however they will generally concede
  to amortization over the useful life of the
  Capital Improvement.

68
RENT, ADDITIONAL RENT, SERVICES - RESIDENTIAL

• Unlike in commercial Leases, where market
  conditions always dictate what the Rent will be
  residential Landlords have the additional
  challenge imposed in those jurisdictions where
  rent-control applies.
• Notice requirements are dictated by state law for
  month-to-month and other tenancies that do not
  have a fixed term. Those procedures for
  increasing Rent must be strictly complied with
  otherwise the Landlord could face a viable
  challenge.
• In fixed Term Leases Rent increases are generally
  governed by the provisions of the Lease. Again
  in those jurisdictions in which Rent control does
  not apply, the Lease may specify automatic rent
  increases, at any time specified in the Lease.

69
REPAIRS AND MAINTENANCE

• Related Provisions. Hazardous Materials, Tenant
  Improvements, Compliance with Laws, Alterations
  and Additions, Use, Abatement of Rent, Building
  Services and Utilities, Parking, Damage and
  Destruction, Consents, and Assignment and
  Subletting.
• Three categories
• Tenant Responsible
• Landlord Responsible
• Landlord does, Additional Rent.

70
REPAIRS AND MAINTENANCE

• Landlords will perform certain repair type
  services and then charge the Tenant for the cost
  of such services plus a fee.
• Many Leases attempt to segregate the
  responsibilities so that the Tenant is
  responsible for the Premises Systems and the
  interior of the Premises and the Landlord is
  responsible for the Building Systems and
  everything external to the Premises. Even then
  some of the items interior to the Premises are
  customarily Landlord duties (e.g., light bulbs,
  fixtures etc.). In such event the only question
  is whether or not chargeable to Tenant and what
  charge.

71
REPAIRS AND MAINTENANCE - TENANT

• Repair and maintenance obligations should be
  limited to the Premises Systems, and the
  interior walls, ceiling tile and suspension
  system therefor, and all systems or equipment
  that serve only the Premises regardless of where
  they are located (roof, common areas).
• Contractors. A point of contention between the
  Landlord and the Tenant is the use of certain
  contractors and suppliers.
• any qualified and competent supplier and
  contractor, union or not, who will not void any
  warranty applicable to the Base Building
  Systems, or any part thereof.

72
REPAIRS AND MAINTENANCE - TENANT

• Timing of the Tenant repairs.
• Tenant, prior to being in default of the Lease,
  must have written notice thereof and thirty (30)
  days to complete the repair and/or maintenance.
• If more than thirty (30) days are required to
  complete the repair and/or maintenance of such
  item, then Tenant should be given a reasonable
  amount of time to complete such
  repair/maintenance so as long as Tenant commences
  the repair as soon as reasonably possible and
  pursues the repair/maintenance in a diligent
  fashion.
• Chargeback. In either event, after thirty (30)
  days notice and the party notified of their
  repair and/or maintenance responsibility has not
  complied with the terms of the Lease, the other
  party, that is, the non-breaching party, shall
  have the right to self-help to effectuate the
  repair and charge back the other party.
• Additional Rent
• Offset
• Emergency

73
REPAIRS AND MAINTENANCE - LANDLORD

• Landlords have a vested interest in making sure
  that a Tenants space is in good order and
  repair.
• The interior and exterior of a Building must
  remain attractive and in good order to attract
  Tenants that the Landlord desires.
• Control over day to day appearance
• janitorial,
• light bulbs,
• lights etc.
• Although the Landlord may perform all of these
  some may be backcharged as Additional Rent.

74
REPAIRS AND MAINTENANCE - RESIDENTIAL

• Tenants have a statutory right of self help set
  forth in the California Civil Code 1942 to self
  help under certain conditions set forth in the
  statute.
• Uninhabitable
• Cannot
• Waive this right
• exceed more than one month's Rent and
• be used more than twice in any consecutive twelve
  month period.

75
REPAIRS AND MAINTENANCE - RESIDENTIAL

• In many circumstances if the habitability of the
  Premises are impacted by significant problems the
  cost of repairs could be in excess of one months
  Rent (HVAC, roof, sewer, electrical etc.).
• Although well intended I would personally caution
  any Tenant to use this only as a last ditch
  effort.
• It is not going to thrill the Landlord,
• what happens if the repairs are defective?
• What if someone is later injured?
• What happens if the repairs are negligently
  performed and they actually harm the Building
  (make roof leak worse).

76
SECURITY DEPOSIT LEASE GUARANTIES

• Related Provisions. Rent, Transfer of Landlords
  Interest, Options, Assignment and Subletting,
  Notices, and Hold Over.
• Landlords will always ask for a security deposit
  and poorly represented Tenants pay as a mandatory
  and customary fee.
• Often Tenants prefer to provide alternative
  security (see below)
• Credit checks
• Commercial small entities
• Residential almost all

77
SECURITY DEPOSIT LEASE GUARANTIES

• The California Civil Code 1950.8 provides in
  part. (a) This section applies only to
  commercial leases and nonresidential tenancies of
  real property. (b) It shall be unlawful for any
  person to require, demand, or cause to make
  payable any payment of money, including, but not
  limited to, "key money," however denominated, or
  the lessor's attorney's fees reasonably incurred
  in preparing the lease or rental agreement, as a
  condition of initiating, continuing, or renewing
  a lease or rental agreement, unless the amount of
  payment is stated in the written lease or rental
  agreement.

78
SECURITY DEPOSIT, LEASE GUARANTIES AND CREDIT
CHECKS - TENANT

• Most of the Tenants that are represented by
  sophisticated practitioners will ask the question
  is a security deposit really necessary?
• Tenants do not desire to pay a security deposit
• Earn interest and segregated.
• Use of the security deposit must be very narrowly
  defined (e.g., delinquent rent, repairs etc.).

79
SECURITY DEPOSIT LEASE GUARANTIES - TENANT

• Alternative Security
• Letter of credit,
• Corporate guarantee,
• Personal guarantee,
• Lease Bond,
• CD pledge,
• Stock pledge.
• Triggering events careful drafting

80
SECURITY DEPOSIT LEASE GUARANTIES - TENANT

• Transfer or sale of the Building.
• Estoppel Certificate - something is happening
• The whereabouts of the security deposit can
  become an issue.
• Nondisturbance, Subordination and Attornment
  Agreement for the benefit of Tenant and a
  Recognition Agreement for the benefit of any
  Subtenant in a form acceptable to the Tenant and
  its Subtenant, as the case may be.

81
SECURITY DEPOSIT LEASE GUARANTIES - TENANT

• Additionally, the Landlord cannot transfer the
  property and security deposit to a new Landlord
  as a subterfuge to limit Landlords liability
  under the Lease.
• Upon termination of the Lease, the security
  deposit is to be returned to Tenant within thirty
  (30) days after the expiration of the Lease
  (Civil Code 1950.7 (c) (3)).
• In the event there is a dispute on the amount of
  the security deposit to be returned to Tenant,
  the Landlord should pay to Tenant the undisputed
  portion of the security deposit.

82
SECURITY DEPOSIT LEASE GUARANTIES - TENANT

• Use of any security deposit must be in strict
  compliance with the California Civil Code
  1950.7.
• Any dispute will be subject to Alternative
  Dispute Resolution provision of the Lease.
• Personal guarantees.
• Loss of corporate shield
• To be avoided if possible
• Burn off

83
SECURITY DEPOSIT LEASE GUARANTIES - LANDLORD

• The Landlord will always desire a security
  deposit.
• No matter how sound the entity.
• Previously invincible entities.
• Tenet
• Dotcoms
• The more volatile the industry the more likely
  this problem can arise (e.g. Internet,
  Healthcare, Defense etc.).
• New entities
• personal guarantees
• Letter of credit
• Lease bond
• Use during the Term of a Lease - the Landlord
  will desire that the Tenant restore the security
  deposit within a few days of notice.

84
SECURITY DEPOSIT LEASE GUARANTIES - RESIDENTIAL

• It is not unusual for a residential Landlord to
  ask for a security deposit.
• Over legislated?
• problem tenant, bad credit, bad everything but
  has convinced you the Landlord that he/she has
  made a new start in life.
• However the legislature has protected these
  Tenants so well that they may not be able to Rent
  a place from you.
• The legislature limited the total security
  demanded or received by a landlord for a
  residential rental it may not exceed an amount
  equal to two months' rent for an unfurnished
  Premises and an amount equal to three months'
  rent on a furnished Premise, see the California
  Civil Code 1950.5(c)
• Alternative solution. This subdivision does not
  prohibit an advance payment of not less than six
  months' rent if the term of the lease is six
  months or longer.

85
SECURITY DEPOSIT LEASE GUARANTIES - RESIDENTIAL

• Confusion can occur by and between advance Rent
  paid and the actual security deposit. Advance
  rent is not part of the security deposit.
• Some jurisdictions,
• require payment of interest
• regardless of whether the deposit is
  characterized as a security deposit or as last
  month's rent.
• Many residential Lease forms provide how and when
  the interest will be paid. Often these
  provisions have a sunset provision that basically
  provides that Landlord will pay this interest
  only as long as the Landlord is legally required
  to do so.

86
SECURITY DEPOSIT LEASE GUARANTIES - RESIDENTIAL

• Arguably the Landlords use of the security
  deposit is limited to (i) delinquent Rent (ii)
  damages to the Premises in excess of normal wear
  and tear and (iii) any necessary cleaning of the
  Premises after Tenant vacates. Some Landlord
  counsel advise their clients that the use of the
  security deposit is much broader and actually
  intended to cure any default by Tenant, others
  take the more conservative route.

87
CREDIT CHECKS

• Credit checks are seldom used by and between
  major entities.
• Landlords obtain the necessary prescreening and
  permission to run a credit check via the use of a
  written Tenant Application.
• must be signed by all parties that intend on
  being a Tenant under the Lease or month to month
  rental.
• Some applications provide for multiple applicants
  and other forms are intended for a married or
  individual applicant.

88
CREDIT CHECKS

• Several entities or individual applicants should
  each complete a separate Tenant Application.
• Non-refundable screening fee.
• False information
• entities named as references, including but not
  limited to former Landlords, employers, etc
• contents of the Tenant Application
• credit report
• release the Landlord from any liability that may
  be incurred during the application review and
  investigation process.

89
CREDIT CHECKS

• The typical information set forth in a Tenant
  Application is substantial similar to any credit
  application you may encounter with some
  additional information that is pertinent to a
  Lease.
• Primarily the Landlord desires to rent to a party
  who is stable (job and debts), has ability to pay
  the rent stated in the Lease. The other problem
  a residential Landlord must be wary of whom the
  Tenant is and who has rights. The law tends to
  punish nice guy Landlords.

90
CREDIT CHECKS

• The Law concerning the use of credit report
  information is complex and provides many triggers
  beyond the purview of today's seminar. In
  general the residential applicant is very
  protected under various sections of the
  California Civil Code 1950.6. California Civil
  Code 1785.1-1785.35) commonly known as the The
  Consumer Credit Reporting Agencies Act, and
  1786-1786.56) commonly known as the
  Investigative Consumer Reporting Agencies Act
  control the use of consumer credit or
  investigative reports as a basis for accepting or
  rejecting Tenants of a dwelling For Tenants
  seeking to Lease a commercial unit the same
  protections are not available.

91
CREDIT CHECKS

• Landlord must within three (3) days of requesting
  an investigative consumer report (a) disclose to
  the Tenant(s) that an investigative consumer
  report will be prepared on the applicant's
  character, general reputation, personal
  characteristics, and mode of living and (b)
  provide the Tenant(s) with the name and address
  of the agency preparing the report and a summary
  of the provisions of the California Civil Code
  1786.22, which governs the Tenant(s) right to
  inspect the agency's files that contain
  information about the Tenant(s).

92
CREDIT CHECKS

• If the residential applicant is rejected or the
  Rent is increased based on an investigative
  report, the California Civil Code 1786.40 (a)
  Whenever insurance for personal, family, or
  household purposes, employment, or the hiring of
  a dwelling unit involving a consumer is denied,
  or the charge for that insurance or the hiring of
  a dwelling unit is increased, under circumstances
  in which a report regarding the consumer was
  obtained from an investigative consumer reporting
  agency, the user of the investigative consumer
  report shall so advise the consumer against whom
  the adverse action has been taken and supply the
  name and address of the investigative consumer
  reporting agency making the report.

93
CREDIT CHECKS

• On occasion a Landlord will desire to report a
  defaulting Tenant to a credit reporting agency.
  If the Landlord is going to do this he/she must
  give notice to the Tenant, prior to or within
  thirty (30) days after the Landlords transmittal
  of such credit information. This notice must be
  provided by personal delivery or first class mail
  to the tenant's last known address California
  Civil Code 1785.26(c).

94
ASSIGNMENT AND SUBLETTING

• Related Provisions. Use, Rent, Term, Security
  Deposit, Consent, Brokers Fees, Tenant
  Improvements, Alterations, Repairs and Options.
• In small leases of relatively short duration
  Landlord tends to hang very tough on these
  issues.
• In a large leases be prepared to spend a lot of
  time negotiating the rights and obligations
  during an Assignment, Subletting or Transfer.
• Unless the Lease specifies to the contrary the
  Tenant is generally free to transfer (assign or
  sublet) all or any portion of its interest in the
  Lease, California Civil Code 1995.010,
  1995.210(b) and 1044.

95
ASSIGNMENT AND SUBLETTING

• California Civil Code 1995.230. Allows for an
  absolute restriction but this is rare. Often you
  will see language in the Landlords sole and
  absolute discretion which sounds fairly harsh.
  The effect of this language is somewhat tempered
  by the California law which requires the Landlord
  to act "reasonably" when granting or withholding
  consent to a proposed transfer. Since the
  California law favors transferability Courts to
  often narrowly construe restrictions and any
  ambiguity in a Lease will favor of
  transferability California Civil Code 1995.220.
  
• There is no doubt that the sophisticated and
  Landlord and Tenant fully recognize that in a
  long Term Lease of significant magnitude an
  Assignment, Subletting or other Transfer are
  highly likely to occur during the Term.
  Therefore these provisions are a battleground for
  much wordsmithing. Although the Landlords and
  Tenants interest are not clearly diametrically
  opposed that certainly can be.

96
ASSIGNMENT AND SUBLETTING - TENANT

• E E E2 Exit strategy Entrance strategy.
• Recapture
• Timing and
• Profit Sharing.
• Consent.
• Assignments by operation of law are not to be
  prohibited.
• Landlord must consent or provide Tenant all its
  objections in reasonably sufficient detail within
  five (5) business days.
• Cure improper transfer.
• Where no consent is to be required, Tenant will
  provide a sufficient prior written notice of
  transfer affiliates and subsidiaries).
• Transfer Fee.
• Recognition Agreement.
• Release contingent liability.
• Expansion/Term Options.
• Vacancy Credit

97
ASSIGNMENT AND SUBLETTING - LANDLORD

• Landlords Right to Collect Rent from
  Subtenant/Assignee. The right to collect Rent
  directly from a Subtenant/Assignee if Tenant is
  in default of the Lease.
• CAUTION material vs. technical default.
• Recognition Agreement. Landlord will only sign a
  Recognition Agreement with each and every
  Subtenant of a material nature.
• Release. Releasing of the Assignor is never an
  easy issue for the Landlord to accept. The
  Landlord sees little incentive in releasing the
  Assignor unless there is some direct benefit to
  the Landlord, e.g., the Assignee will extend the
  Lease, and the Assignee is financially sound and
  desires to commence negotiations for a direct
  deal but desires the Assignor out of the way. Of
  primary concern to the Landlord is an
  economically viable tenant that can meet the
  obligations under the Lease. Great
  Assignee/Subtenant and Landlord more flexible.

98
ASSIGNMENT AND SUBLETTING - LANDLORD

• Profit Sharing. Landlords position is simple.
  We leased this space to you the Tenant, real
  estate is our business not yours. We are not
  asking for the original deal to be changed but we
  are asking that you adhere to the original deal.
  We are happy to accommodate you but it is our
  Building and any profits must be ours. We do not
  desire to share in costs that you have initiated.
• Expansion/Term Options. On most occasions the
  Landlord will not desire that the Assignee
  receive options for either Term or Expansion. If
  Landlord concedes these points it will not desire
  to release the Tenant. Once a Tenant desires to
  leave the Landlords Building the Landlord
  desires to maintain optimum control over the
  tenant mix and Use of the space. The more
  financial security for the Landlord the better.
• Vacancy Credit. Although hard to argue the
  logic, most Landlords do not maintain accounting
  or Building Systems that are capable of
  accommodating this request. As many Landlord and
  Property Managers have confided in me that it
  cost them more to comply with this provision that
  it would benefit the Tenant.

99
ASSIGNMENT AND SUBLETTING - RESIDENTIAL

• Although the absolute prohibition on transfer to
  the Lease is permitted pursuant to the California
  Civil Code 1995.230 this right may be limited
  due to local ordinances.
• Given the law, Landlord may decide to absolutely
  prohibit any assignment or subleasing or to
  require the Landlords prior written consent. If
  the Landlord should determine to absolutely
  prohibit transfer of the Lease he will forfeit
  his remedy set forth in the California Civil Code
  1951.4 "The lessor has the remedy described in
  California Civil Code Section 1951.4 (lessor may
  continue lease in effect after lessee's breach
  and abandonment and recover rent as it becomes
  due, if lessee has right to sublet or assign,
  subject only to reasonable limitations)."
• As with commercial Leases I would recommend
  specifying what circumstances would allow the
  Landlord to withhold its consent in the Lease.

100
COMPLIANCE WITH LAW

• Related Provisions. Representations and
  Warranties, Maintenance and Repair, Tenant
  Improvements, Rules and Regulations, Hazardous
  Waste, Default, Entry by Landlord, Notices, Rent,
  Operating Expenses, Alterations, Indemnity,
  Insurance, and Abatement of Rent.
• That darn boilerplate!
• In 1994 Hadian v Schwartz (1994) 8 C4th 836, 35
  CR2d 589, and Brown v Green (1994) 8 C4th 812, 35
  CR2d 598, by the California Supreme Court. The
  Court considered whether the Landlord or the
  Tenant is responsible for certain repairs to the
  Premises. The issue at hand was whether or not
  the Compliance with Law required certain repairs
  or renovations to Premises. The Leases at issue
  were standard form Leases contained essentially
  identical clauses concerning responsibility for
  Repair and Maintenance of the Premises and
  Compliance with Laws. The oddity is that the
  Court found that the Landlord was responsible for
  repair in one case and the Tenant in the other
  case.

101
COMPLIANCE WITH LAW

• In the Hadian case, the Court developed a
  six-factor test as to whom will bear the burden
  of the repair (i) The relationship of the cost
  of the curative action to the rent reserved under
  the lease (ii) The term for which the lease was
  made (iii) The relationship of the benefit to
  the tenant to that of the landlord (iv) Whether
  the curative action is structural or
  nonstructural in nature (v) The degree to which
  the curative action will interfere with the
  tenant's enjoyment of the premises and (vi) The
  likelihood that the parties, especially the
  tenant, anticipated the application of the law or
  order in question. In Hadian the Court held that
  the Landlord must pay for seismic work required
  by law because the Lease, taken as a whole,
  indicated that the parties did not intend the
  Landlord to forgo the advantages of ownership and
  the Tenant did not anticipate having to
  reconstruct the Building during the short Term of
  its Lease.

102
COMPLIANCE WITH LAW

• In the Brown case, the Court ruled that the
  Tenant must pay for asbestos abatement work
  required by law because the Lease indicated that
  the parties intended to transfer substantially
  all the responsibilities of ownership (including
  government-ordered asbestos cleanup) to the
  Tenant (Brown).

103
HAZARDOUS WASTE AND SICK BUILDING SYNDROME

• Related Provisions. Representations and
  Warranties, Compliance with Law, Use, Landlords
  Right of Entry, Alterations, Indemnification,
  Repairs and Maintenance, Default, Rules and
  Regulations, Insurance, Indemnity, Abatement of
  Rent, Landlords Right of Entry and Assignment
  and Subletting.
• We have now come to the understanding that all
  Buildings and homes have Hazardous Materials in
  them. The only real question is whether or not
  they are harmful. The extreme fright that use to
  be associated with Hazardous Materials and Sick
  Building Syndrome has somewhat subsided.
  Landlords, Tenants, Contractors and their
  Attorneys have now had several years to deal with
  these issues. Although most of us know what
  Hazardous Waste is many of us are confused on
  what we call Sick Building Syndrome.

104
HAZARDOUS WASTE AND SICK BUILDING SYNDROME

• Further adding to the confusion is that Hazardous
  Waste can cause a Sick Building Syndrome but you
  can have Hazardous Waste without a Sick Building
  Syndrome. Sick Building Syndrome occurs when the
  occupants of the Building are experiencing
  fatigue, allergic reactions, headaches, sinus
  problems, eye irritation, breathing issues as a
  result of some material in the Building. This
  material can be Hazardous Material or it can be a
  naturally occurring substance that just happens
  to be in higher quantities in the Building than
  external to the Building.

105
HAZARDOUS WASTE AND SICK BUILDING SYNDROME

• The biggest challenge in this area is bad
  science, overreaction to an issue and the ongoing
  onslaught of scientists claiming a new substance
  causes problems. I often receive a call from a
  client (Landlord or Building owner) advising that
  one of its Tenants or employees has claimed a
  problem with a Building. On some occasions the
  employee or Tenant has a Dr. report that implies
  it must be the Building causing the problem.
  Naturall