Tenant’s Checklist of Silent Lease Issues
By S.H. Spencer Compton
Senior Vice President and Special Counsel
First American Title Insurance Company of New York
Latham & Watkins
Silence is golden—but not necessarily in a lease.
When a prospective tenant asks you to review and negotiate a lease, you will need to think about at least two very different types of issues.
First, you will deal with issues suggested by the express terms of the lease. For example, you may ask for longer notice periods, the opportunity to cure defaults, “reasonableness,” a narrowing of any open-ended tenant obligations or landlord discretion, flexibility on use and transfers, absolute clarity regarding all monetary and other significant obligations, deletion of inappropriate or excessive obligations and restrictions, correction of errors and internal inconsistencies, and other issues that jump out from the language of the lease. To identify issues like these, you will need to read the proposed lease and propose revisions based on your experience and knowledge and the tenant’s specific needs.
Second, you will need to identify and deal with issues that a landlord’s typical standard lease doesn’t mention at all, but may nonetheless be important to your client. These are the “silent lease issues.” Unlike the first category of issues, the silent issues are not necessarily easy to identify, because nothing in the landlord’s standard lease form would alert you to them.
Genesis Of This Checklist
In 1998, a subcommittee of the Commercial Leasing Committee of the New York State Bar Association began to develop a checklist of silent lease issues for use by attorneys who represent commercial space tenants. That checklist, which follows, is intended to help tenants’ attorneys identify and (if they choose to) raise “silent lease issues” when they review a typical landlord’s standard commercial lease.
The checklist project expanded to include other issues (not just silent issues) that tenant’s counsel may wish to raise in lease negotiations. Reminders were also added for some, but not all, “due diligence” a tenant might want to undertake before signing a lease.
This checklist mentions each issue only once, even if it might reasonably belong under more than one heading. Any user of this checklist should read it from beginning to end.
What The Checklist Is And Does
This checklist discusses a tremendous range of issues, representing or at least touching on almost every possible issue or event that could arise or occur when two parties have potentially conflicting interests in the same real property over potentially a very long time.
A lease amounts to a private statute. But unlike a legislative statute, there is no way to change it, except to persuade the other party to agree to a change. It needs to be right. Before embarking upon the relationship that the statute will govern, each party has an opportunity to shape the statute that will govern the relationship. This checklist is intended to assist you in taking advantage of that opportunity.
Which Issues Should You Raise?
Depending on the market, the parties, the transaction, its timing, the scope and terms of your engagement, and any other circumstances, you may or may not choose to raise issues from this checklist. Even if you do raise these issues, there is, of course, no guarantee that you will prevail on any of them. Therefore, the fact that any particular lease doesn’t reflect positions suggested here doesn’t necessarily mean that tenant’s counsel did a bad job. To the contrary, to serve its client best, sometimes tenant’s counsel should raise no issues at all and just get the deal signed, or identify and raise issues that are outside this checklist.
Conversely, if the tenant’s business strategy is to prolong lease negotiations as much as possible—an easy goal to achieve—this checklist will provide plenty of help. More than almost any other category of real estate negotiations, lease negotiations can take as much or as little time as the parties want. For example, the definition of “operating expenses,” in and of itself, can raise dozens of knotty issues that may amount to a reinvention of cost accounting.
What Types of Leases?
This checklist applies mainly to substantial commercial space leases, for both retail and office tenants. Most issues here will apply to some leases but not others. You should interpret almost every item in the checklist as if prefaced by the words “if applicable, appropriate, desired, and possible under the circumstances, taking into account the size and nature of the transaction, the condition of the market, the tenant’s business and anticipated use of the premises, the needs and negotiating positions of the parties, the timing, and all other circumstances.”
Some items on the list are appropriate only for very large tenants, occupying all or most of a large building. For a smaller tenant to raise some of these issues would be odd.
Certain issues in this checklist will apply only to certain types of leases. The checklist does not attempt to explain which issues apply to which types of leases. The checklist also does not suggest how a landlord might respond to any of these issues. Because of these limitations, this checklist is suited more to an experienced lease negotiator than to a novice. Even a novice, however, will find this checklist useful. All users should use this checklist prudently.
The checklist doesn’t deal with “triple-net” leases, ground leases, “bondable” leases, “synthetic” leases, “build-to-suit” leases, leases from a seller to a purchaser of a company, or other specialized leasing transactions.
The checklist does not represent a position statement or recommendation by the publisher or by the New York State Bar Association or its Real Property Law Section, Commercial Leasing Committee, or any of their subcommittees. The checklist doesn’t establish a “minimum standard of practice” and is not exhaustive or complete. The checklist is provided merely as a resource for leasing practitioners. It creates no legal duties or obligations. Users of this checklist are cautioned not to rely on it in any way or for any purpose.
This checklist, as published by The Practical Real Estate Lawyer, represents a substantial revision of an earlier version published in the New York State Bar Association Real Property Law Journal in 1999. The previous version of the checklist consisted of a list of topics for the lease negotiator to consider, without any statements of recommendation.
In the editing process for the current republication, it was decided to express the “silent lease issues” as affirmative recommendations, in the interests of a more direct and lively presentation. Thus, the discussion now sometimes states that a tenant “should” consider or even “should” obtain certain provisions. Each such statement must be taken with a bushel of salt, because the authors do not purport to establish or define “standard” requirements for what any lease “should” or “should not” say. Every lease is its own negotiation, depending largely on the business and marketplace contexts. The making of definitive one-size-fits-all recommendations would thus be inconsistent with reality in the world of leasing. Nevertheless, it simplifies and streamlines the presentation.
This checklist considers lease negotiations from the tenant’s perspective. It’s a tenant’s checklist. The authors and the subcommittee members do not necessarily believe that landlords should accept a tenant’s position regarding any issue suggested in this checklist. Though the authors of the checklist and the subcommittee members will be honored and pleased if anyone reads this checklist and mentions it in lease negotiations, this checklist does not estop any author or subcommittee member from taking any position in any lease negotiation.
The Silent Lease Issues Subcommittee is co-chaired by S.H. Spencer Compton and Joshua Stein, who were also the primary authors of the Tenant’s Checklist of Silent Lease Issues. The tenant’s checklist was conceived, initiated, and edited by Joshua Stein. Members of the Tenant’s Silent Lease Issues Subcommittee included David Badain, Joel Binstok, Bob Bring, Phil Brody, Steven Cohen, Sam Gilbert, Barry Goldberg, Gary Goodman, James Grossman, Andrew Herz, Jonathan Hoffman, Gary Kahn, Huck Qavanaugh, Rob Reichman, Karen Sherman, Barry Shimkin, David Tell, and Allen Wieder.
Suggestions Are Welcome
Changes, additions, and other improvements to this checklist are welcome. They will be taken into account as appropriate if and when the authors publish a revised version of this checklist.
The Silent Lease Issues Subcommittee is developing a separate “Silent Lease Issues” Checklist for commercial space landlords, which will focus on landlords’ concerns that standard lease forms commonly neglect and, in particular, new concerns for landlords based on trends in law and practice since about 1980. At the time of writing, the landlord’s checklist has achieved approximately 50 percent completion and, in the opinion of the authors, will be of a scope and value similar to the tenant’s checklist, even though the landlord’s list is more amorphous.
If you have suggestions for the tenant’s checklist or would like to reprint it, or would like to participate in preparing or reviewing the landlord’s checklist, please send e-mail to email@example.com or firstname.lastname@example.org.
Table of Contents
1. Access to Premises (for Landlord)
3. Alterations (Initial Occupancy)
4. Assignment and Subletting
5. Bills and Notices
6. Building Security
8. Defaults and Remedies
9. Destruction, Fire, and Other Casualty
12. Eminent Domain
13. End of Term
14. Escalations (Generally)
15. Estoppel Certificates
16. Failure To Give Possession
17. Fees and Expenses
18. Heating, Ventilation, Air Conditioning
20. Inability to Perform
22. Leasehold Mortgages
23. Maintenance and Cleaning
24. Operating Expenses—Calculation and Auditing
25. Operating Expenses—Exclusions
28. Percentage Rent
29. Quiet Enjoyment
30. Real Estate Tax Escalations
31. Representations and Warranties
32. Requirements of Law
33. Restrictions Affecting Other Premises
34. Rules and Regulations
35. Sale of Property
36. Security Deposit
37. Services Provided by Landlord
38. Signage and Identification
39. Subordination and Landlord’s Estate
40. Tenant’s Remedies Against Landlord
42. Utilities, Generally
44. Due Diligence
45. Preliminary Arrangements and Considerations
46. Lease-Related Closing Documents
Tenant’s Checklist Of Silent Lease Issues
- 1. Access to Premises (for Landlord)
- 1.1. Prior Notice. How much and what type of prior notice should the landlord give?
- 1.2. Purpose of Access. Limit the landlord’s access to certain defined purposes (e.g., repairs, inspection, or to show premises to prospective future tenants).
- 1.3. Frequency. Limit how often the landlord can enter the premises.
- 1.4. Sensitive Areas. Should the lease prohibit or restrict the landlord from entering “special spaces” (bank vault, securities vault, narcotics, network control rooms, and the like)? If the tenant regards its entire operation as proprietary and “top secret,” then perhaps the lease should not allow the landlord access at all.
- 1.5. Time of Access. Should access be limited to certain hours (business hours, after hours)?
- 1.6. Authorized Personnel. Precisely who among the landlord’s employees, agents, and contractors should have access?
- 1.7. Presence of Tenant’s Representative. The tenant may want its representative to be present whenever the landlord is on the tenant’s premises. This is particularly important if the tenant has sensitive, dangerous, or expensive personal property.
- 1.8. Disruption and Security. The landlord should minimize interference with the tenant’s business and comply with the tenant’s reasonable instructions and security requirements.
- 1.9. Placement of Pipes and Conduits. If the landlord wants to reserve the right to install pipes and conduits, the tenant may want to limit exactly where—such as only within existing walls or above ceilings. Should the landlord be required to minimize any damage associated with their installation or maintenance?
- 1.10. Storage of Materials. If the landlord stores materials in the premises for making repairs, limit to those necessary for repairs within the premises. This can be particularly problematic if the premises includes a terrace, a tempting storage area for long-term exterior projects. In any case, materials should be stored only for short periods.
- 1.11. Repair Work Outside Business Hours. If the landlord’s work in or affecting the premises will cause inconvenience, noise, odors, or the like, the landlord should work only outside business hours.
- 1.12. Hazardous Materials. If the landlord will use hazardous materials for any work in or affecting the premises, the landlord should agree to notify the tenant in advance and provide “material safety data sheet” disclosures.
- 2. Alterations
- 2.1. Acceptable Contractors. Attach as an appendix a list of pre-approved contractors, architects, and so forth, if the landlord has approval rights.
- 2.2. Consent Requirements. The landlord should agree to be reasonable about any tenant alterations.
- 2.3. When Consent Not Required. Set a threshold for work that doesn’t require the landlord’s consent—such as decorative or minor (less than a stated amount) alterations or partition walls. Changes in the economy and work structures mean that many tenants will need more flexibility than in the past to relocate partitions almost at will. If the tenant regards its space arrangements as proprietary information, the tenant may want the landlord to allow the tenant to make any alterations permitted by law, with no need to deliver plans to the landlord or obtain the landlord’s consent.
- 2.4. Flexibility. How much flexibility should the tenant have in choosing its architects, engineers, other consultants, and contractors? The tenant will not want to be limited to the landlord’s approved list.
- 2.5. Multiple Floors. A multi-floor tenant may want the right to construct internal stairs, and drill through floors for cabling.
- 2.6. Risers, Etc. The tenant may want to use riser spaces, shafts, chambers, and chases to run ducts, pipes, wires, and cables. Although the concept of limiting each tenant to its proportionate share of this space has a ring of fairness to it, will this meet the tenant’s needs? Not if the landlord’s building is inadequate (as a whole) to meet the needs of modern tenants.
- 2.7. Limitation on Fees. If the tenant agrees to reimburse the landlord for the fees of its architects, engineers, or other consultants in connection with the landlord’s approval of any alterations, the tenant will want to limit or negotiate those fees.
- 2.8. Time to Remove Liens. If the tenant’s work produces liens, the tenant will want enough time to remove them, after taking into account procedural requirements of applicable law, and related delays. The landlord should agree not to pay any lien that the tenant has bonded.
- 2.9. Use of Sidewalk. A ground floor tenant may want the right to install awnings, canopies, and crowd control measures on the sidewalk.
- 3. Alterations (Initial Occupancy)
- 3.1. Landlord’s Space Preparation. The lease should define how the landlord will prepare the space for the tenant, including asbestos abatement or removal, demolition, refireproofing, leveling of floors if raw space, and closing of floor penetrations.
- 3.2. Consent to Tenant’s Initial Work. The landlord should consent to the tenant’s initial work in advance.
- 3.3. Existing Violations. The landlord should agree to cure any existing violations that may interfere with the tenant’s alterations.
- 3.4. Credit Issues. Is the landlord creditworthy? If the landlord fails to build out or contribute to the tenant’s work, what are the tenant’s remedies? Most leases say that the landlord has no liability beyond its interest in the premises in any case. At a minimum, the tenant will want a right to offset against rent for any landlord contribution or work not delivered.
- 3.5. Building Systems. Are the existing building systems adequate? Should the landlord agree to complete any upgrades? When?
- 3.6. Staging or Storage Area. The lease should define any staging area or storage area the tenant will need for its construction activities and move-in program.
- 4. Assignment and Subletting
- 4.1. Necessity for Landlord’s Consent. Ideally, the landlord’s consent should not be required for assignments or subleases, or at least it should not be unreasonably withheld. Try to provide that the landlord’s consent will be automatically given when specified criteria (e.g., net worth, reputation, no felony convictions, experience, and proposed use) are met. Rent shouldn’t be a factor for subleases. (The tenant must keep paying rent no matter what.)
- 4.2. Simple Approval Procedure. Make the approval procedure should be as simple as possible. Instead of requiring fully executed assignment or subletting documents, try to go to the landlord with only a term sheet, or even merely an anticipated price per square foot (before any marketing begins). This is particularly important if the lease gives the landlord any recapture rights. No financial information should be required if the tenant will remain obligated on the lease.
- 4.3. Consent Form. Attach as an exhibit the required form for the landlord’s consent to any transfer. Goal: prevent the landlord from adding new conditions and restrictions (which may be inconsistent with the lease, but the tenant may not be paying enough attention at the time) when the landlord consents to transactions.
- 4.4. Assignor Protections. Try to provide for release of the assignor from further liability. (If not, any transaction may ultimately need to be structured as a sublease.) As a backup, agree that the landlord must give any unreleased assignor notice of default and the right to regain possession if the assignee defaults and the landlord wants the assignor to cure (the assignor’s liability terminates if the landlord doesn’t give the notice). The unreleased assignor might also want a right to obtain a “new lease” if the landlord terminates the lease and the unreleased assignor later performs the tenant’s obligations.
- 4.5. Stock Transfer. If a stock transfer is deemed an assignment for consent purposes, it should not be for assumption of liability purposes. The purchaser of shares need not assume the lease. (This is a common drafting flaw in landlords’ forms.)
- 4.6. Assignment of Security Deposit. A tenant wants the right to assign the security deposit to an assignee of the lease. If the security is a letter of credit, the landlord should cooperate regarding substitution of one L/C for another if the lease is assigned.
- 4.7. Carve-Out for Affiliates. Expressly permit any assignments and sublets to affiliates, successors, or in connection with the sale of the tenant’s business, particularly if the tenant operates multiple locations. Define “affiliate” to include charities, trusts, estates, and foundations in which the tenant or its officers are involved.
- 4.8. Suppliers, Vendors, Customers, and Others. The lease should allow the tenant to sublet to the tenant’s suppliers, vendors, or customers, for the tenant’s business convenience. Will the tenant form joint ventures or other new businesses (e.g., small new Internet companies started by the tenant’s principals) that should be able to share the tenant’s space without need to obtain the landlord’s permission?
- 4.9. Licensees. The tenant should not need the landlord’s consent for concessionaires or licensees.
- 4.10. Confidentiality. The landlord should agree to keep confidential any financial information regarding a possible assignee or subtenant. The landlord should agree to sign a standard confidentiality agreement if required by a (prospective) assignee or subtenant. Similar requirements should apply for final sublease documents delivered to the landlord.
- 4.11. Splitting the Lease. The tenant may want the right to sever a large lease into two or more separate and independent leases, to facilitate assignment in pieces (a more flexible exit strategy).
- 4.12. Nondisturbance for Subtenants. The landlord should be required to give specified subtenants nondisturbance protection.
- 4.13. Recapture Right. If the landlord has a recapture right, then when the tenant proposes an assignment or sublease, the tenant may want to reserve the right to withdraw the request if the landlord exercises the recapture right.
- 4.14. Participation in “Profits.” If the landlord will participate in any “profits” the tenant realizes from assignment or subletting, define the tenant’s costs as broadly and inclusively as possible, including brokerage commissions, professional fees, build-out, free rent, costs of carrying the space vacant during a reasonable marketing period, transfer taxes, and the unamortized balance of the tenant’s original improvements to the space.
- 5. Bills and Notices
- 5.1. Waiver of Escalations. Escalations should be deemed waived if not billed within a certain period.
- 5.2. Attorneys. Attorneys should be allowed to give notices on behalf of their clients.
- 5.3. Delivery of Copies. A copy of any notice should go to the tenant’s central leasing personnel, and perhaps other specified recipients (counsel and the like).
- 5.4. Delivery. The landlord should deliver bills and notices by personal service or nationally recognized overnight courier. State when notices become effective.
- 6. Building Security
- 6.1. Description of Program. Describe the landlord’s security program (including package scanning and messenger interception; operating hours). Seek the right to approve subsequent changes.
- 6.2. Tenant’s Security. The tenant should have the right to establish its own security system and connect that system to the landlord’s.
- 6.3. New Measures. The landlord should be required to obtain the tenant’s consent for any new security measures (e.g., messenger interception).
- 7. Consents
- 7.1. Quick Exercise. The landlord should be required to exercise any consent right quickly. Silence should be deemed consent after a stated period. (As a compromise, the tenant might agree to provide a reminder notice if the landlord has not responded within a certain time.) Any failure to consent must specify all grounds for that failure. Those grounds must be reasonable.
- 7.2. Use of Name. The landlord should consent to the tenant’s use of the name and likeness of the building in the tenant’s promotional and publicity materials.
- 7.3. Site Plan. The tenant should have the right to consent to the site plan (including particularly the configuration of all parking) and any amendments.
- 7.4. Press Releases. Press releases, tombstones, and announcements for the lease should require the tenant’s approval and may not disclose any terms of the lease without the tenant’s consent.
- 8. Defaults and Remedies
- 8.1. Notice and Opportunity To Cure. The tenant wants notice of, and the opportunity to cure, any monetary or other default.
- 8.2. Default Triggered by Bankruptcy. Although “ipso facto” clauses are typically unenforceable against a debtor-tenant, beware of any event of default triggered by someone else’s bankruptcy. Why should the risk of lease termination arise for every possible default?
- 8.3. Limitation on Landlord’s Remedies. The lease should limit the landlord’s remedies (to exclude lease termination or eviction) for defaults or disputes below a threshold level of materiality. Why should the risk of lease termination arise for every possible lease default?
- 8.4. Nonmonetary Defaults. The tenant might want to eliminate all “nonmonetary” defaults. Instead, require the landlord to convert any “nonmonetary” default into a monetary default by curing it and sending the tenant a bill for reimbursement (a common provision in old Woolworth’s leases). Or, provide that so long as the tenant remains current in its monetary obligations, the landlord cannot exercise certain remedies (e.g., lease termination) for a nonmonetary default until the landlord has obtained a court order.
- 8.5. No Lien on Fixtures or Personalty. Require the landlord—as well as its mortgagee—to waive any statutory or other lien on fixtures, equipment, and other personal property of the tenant, either in all cases or if requested by the tenant’s asset-based lender.
- 8.6. Holdover Rent for Partial Months. Prorate holdover rent on a per diem basis for partial months.
- 8.7. Mitigation of Damages. The landlord must seek to mitigate damages. (New York still imposes no such requirement on commercial landlords.) For example, the landlord must try to relet the premises.
- 8.8. Waiver of Self-Help. Have the landlord waive its right of self-help (to retake possession) and any right to lock out the tenant.
- 8.9. Acceleration of Rent. If the landlord has the right to accelerate all rent as liquidated damages, first try to eliminate this remedy. If you can’t, seek the following: (1) the tenant gets credit for fair and reasonable rental value; and (2) a discount rate as high as possible (for example, prime rate rather than four percent).
- 8.10. Default by Subtenant. If a subtenant causes any nonmonetary default under the lease, extend the cure period to give the tenant time to enforce the sublease and (if necessary) obtain possession of the subleased premises.
- 9. Destruction, Fire, and Other Casualty
- 9.1. Right To Terminate. Allow the tenant to terminate the lease upon a material casualty not repaired within a specified time period, or occurring during the last two or three years of the lease term.
- 9.2. Change in Zoning. The tenant should have the right to terminate or abate rent if restoration from a casualty causes any material change in zoning (e.g., loss of nonconforming use status), access, parking, or visibility of the premises.
- 9.3. Extent of Restoration. The landlord must restore to the extent of available insurance proceeds.
- 9.4. Abatement During Restoration. Abate rent during all restoration—both landlord’s and tenant’s—especially if major fixtures need to be restored. Such an abatement will often be a “win-win” for both parties, because the loss of rents can often be insured more easily by the landlord on a property-wide basis than by each tenant individually.
- 9.5. Other Premises. If a casualty affects other premises, the landlord cannot terminate the lease for the unaffected premises unless: (1) the landlord makes the tenant whole, and (2) the landlord terminates the leases of all other similarly situated tenants.
- 9.6. Landlord’s Waiver of Right To Sue. Even without a waiver of subrogation, the landlord should agree not to sue the tenant if the tenant negligently caused a casualty that would have been covered by a typical casualty insurance policy.
- 10. Electricity
- 10.1. Totalized Submeter Readings. The readings from multiple submeters should be totalized, using a third-party service and appropriate security controls regarding access to submetering equipment and computers.
- 10.2. Usage Survey. Allow either party, not just the landlord, to initiate a usage survey.
- 10.3. Rate for Submetered Electricity. The tenant should pay for submetered electricity using the same tariff under which the landlord purchases electricity.
- 10.4. Sufficient Wattage. The landlord should assure the tenant that the existing electrical system provides enough power for the tenant’s present and near-term anticipated operations.
- 10.5. Additional Electrical Capacity. The tenant should be able to obtain more electrical capacity if needed, quickly, at a defined or ascertainable cost.
- 11. Elevators
- 11.1. Freight Elevators for Moving. The tenant should be able to use the freight elevators without charge to move in and move out. The tenant should have the use of all elevators at night for the same purposes. Ideally, all this elevator usage should be free.
- 11.2. Night Service. The lease should provide that “night service” for elevators (some cabs out of service) cannot begin before a specified time.
- 11.3. Changing Elevator Banks. The landlord should be prohibited from reconfiguring elevator banks. If the tenant’s space is the first stop, it should remain so.
- 11.4. Exclusive Service. The tenant may want exclusive elevator service.
- 11.5. Routine Repairs. The landlord should be required to perform routine elevator repairs and maintenance outside business hours.
- 11.6. Waiting Time. Specify the maximum average waiting time for elevators.
- 11.7. Security Measures. The tenant should have approval rights over the institution and modification of elevator security measures, including 24-hour keycards. Does the tenant want to require any such measures?
- 12. Eminent Domain
- 12.1. Restoration. Require the landlord to restore the premises to the extent of the available condemnation award.
- 12.2. Separate Claim. A tenant wants to be able to submit a separate claim to the condemning authority for: (1) the value of the leasehold estate (rarely acceptable to the landlord or its lender); and (2) moving expenses, trade fixtures, goodwill, and damages for interruption of business.
- 12.3. Physical Impairments. The tenant may want a right to terminate or abate rent for impairment of parking, access, or visibility (or other adverse effects) if, for example, any road is realigned, widened, or otherwise changed (e.g., loss of curb cuts).
- 13. End of Term
- 13.1. Duty To Restore. The tenant will want to disclaim any obligation to restore (i.e., remove the tenant’s alterations). As a compromise measure, the tenant might be willing to restore if the tenant’s improvements are unusual, particularly difficult to remove, or improperly made, or if the landlord reasonably (but what’s reasonable?) required restoration as a condition to the landlord’s consent to the tenant’s work.
- 13.2. Restoration. If the tenant must restore, (1) the tenant should have the right to enter the premises after the end of the lease term as needed; and (2) the tenant should not be deemed a holdover (equitable per diem payment, at most).
- 13.3. Condition of Returned Premises. The tenant should have no duty to return the premises in any particular condition. For example, it should have no obligation to replace a worn-out compressor in the last year of the term.
- 13.4. Removal of Personal Property. Allow the tenant to enter the premises for a short time after the lease expires in order to remove the tenant’s personal property.
- 13.5. Demolition Clause. The landlord should not be able to terminate under a demolition clause unless the landlord: (1) provides reasonable notice; (2) acts in good faith; and (3) terminates the leases of all other tenants.
- 13.6. “For Rent” Signs. The landlord should not post “for rent” signs until the term has actually ended.
- 13.7. New Location Sign. For a reasonable time after the lease has terminated, the tenant may want to be able to install a sign directing customers to the tenant’s new location.
- 13.8. Prepaid Rent. Upon any termination, the landlord must promptly refund prepaid rent and other payments.
- 14. Escalations (Generally)
- 14.1. Proportionate Share Computation. In computing the tenant’s proportionate share, if the rentable square footage (the numerator) includes the tenant’s share of the common areas, confirm that the denominator also includes the common areas.
- 14.2. Overreimbursement. Do all of the tenants’ percentages add up to 100 per cent, or is the landlord being over-reimbursed for escalations? Are the anchor tenants paying their share, or is that share being shifted to the other tenants? In a mixed-use building (including office with retail on the ground floor), are all tenant types being treated the same way? Should they be?
- 14.3. Occupiable Space. The lease should allocate escalations based on occupiable space (as the denominator), not occupied space.
- 14.4. Multiple Escalations. The lease should not allow multiple escalations that give the landlord more than mere protection against inflation.
- 14.5. “Base Year.” Any “base year” should fully include all expenses. Were any expenses not yet being fully incurred? Did any exclusions apply?
- 14.6. Cap on Escalations. The tenant might try to negotiate a limit on escalations.
- 14.7. Free Rent Period. Does the “free rent” period apply to escalations or just base rent?
- 14.8. “Porter’s Wage” Escalation. For “porter’s wage” escalation, the lease should exclude fringe benefits and the value of “time off.” Try to limit the measure to reflect only base hourly rate. If fringe benefits cannot be excluded, try to define how they are calculated.
- 14.9. Consumer Price Index Adjustment. For a consumer price index (“CPI”) adjustment, the lease should measure any increase consistently from the starting year of the lease, rather than from the preceding year’s CPI. The adjustment clause should specify exactly which CPI index is being used and what happens if that index stops being issued.
- 14.10. Escalations Below Base. If an escalation amount goes below the original base, seek a credit against fixed rent.
- 15. Estoppel Certificates
- 15.1. By Whom. Both the landlord and the tenant should agree to furnish estoppel certificates. (How often?)
- 15.2. Form. Attach the form of estoppel certificate as an exhibit to prevent subsequent issues.
- 15.3. Legal Fees. Should the landlord reimburse the tenant for its legal fees in researching and preparing future estoppel certificates?
- 15.4. “To Its Knowledge.” Qualify any estoppel certificate to apply only to the tenant’s knowledge, especially for issues involving additional rent claims. Alternatively, the tenant should reserve its rights on these claims. A typical 10-day requirement to deliver an estoppel certificate is too short for the tenant to conduct adequate due diligence to knowingly surrender claims involving complicated and potentially debatable billing of operating expenses and utility charges.
- 15.5. Conflict of Terms. If the estoppel certificate and lease conflict, the lease should govern. The delivery of an estoppel certificate should not waive any rights or remedies of the signer.
- 15.6. Caveat: Courts do take estoppel certificates seriously. The tenant should not lightly “sign and return.”
- 16. Failure To Give Possession
- 16.1. Remedies. The tenant should be allowed to terminate or abate rent if the landlord does not deliver possession by a date certain (also try to get day for day—or better—rent credit for the delay).
- 16.2. Lender’s Approval. If the lease is conditioned on a lender’s (or any other) approval, the tenant should have the right to terminate if the approval is not provided by a certain date. Ideally, the landlord should deliver the approval when the landlord signs the lease.
- 16.3. Refund of Deposit. If the tenant terminates the lease as a result of the landlord’s failure to give possession, the landlord should refund all payments made on lease signing.
- 16.4. Late Delivery of Premises. If the landlord delivers the space late, push back all rent abatements and adjustments.
- 16.5. Seasonal Businesses. For seasonal businesses, the tenant may not want to be obligated to initially open for business during its slow season.
- 17. Fees and Expenses
- 17.1. Reasonableness. Limit fees and expenses to those which are reasonable, actual, and out-of-pocket.
- 17.2. Legal Fees and Expenses. Exclude legal fees and expenses relating to a claimed default if no default exists or the landlord otherwise does not prevail.
- 17.3. Reimbursement to Prevailing Party. Make the obligation to reimburse attorneys’ fees run both ways. Whoever prevails should recover its attorneys’ fees, including the value of in-house counsel’s time.
- 18. Heating, Ventilation, Air Conditioning
- 18.1. Specifications. Specify required HVAC service, with variations by day of week and season, both during and outside business hours.
- 18.2. Rates. The lease should state the rates (and the basis of rates) for overtime HVAC. Squeeze out any profit component. If the landlord later charges any other tenant a lower rate, your tenant should get the benefit of that lower rate.
- 18.3. Allocation of Charges. Allocate overtime HVAC charges among multiple simultaneous users.
- 18.4. Discount. The tenant should get a discount on overtime HVAC if the tenant commits in advance to specified levels of usage.
- 18.5. Miscellaneous Issues. Should the tenant have the right to install supplemental HVAC? How much condenser water must the landlord provide? Chilled water? Who owns the equipment? Who pays costs? Duty to repair/restore? Should the tenant be able to reconfigure building standard HVAC as needed for supplemental service? Will the tenant need access to fresh air louvers? Where?
- 19. Improvements
- 19.1. Term of Lease. The term of the lease should be long enough to recover the tenant’s investment in improvements.
- 19.2. Ownership of Improvements. The tenant should own the improvements and have the right to depreciate them.
- 20. Inability to Perform
- 20.1. Force Majeure. Give force majeure protections to the tenant, not just the landlord.
- 20.2. Right To Cure. The tenant should have the right to cure the landlord’s failure to perform—even if caused by “force majeure”—where feasible.
- 20.3. Right To Offset. The tenant should have the right to offset rent for the landlord’s failure to perform.
- 21. Insurance
- 21.1. Common Standard. The tenant should have no obligation to provide more insurance than similar tenants customarily maintain in similar buildings.
- 21.2. Type of Insurance. The tenant should have the right to carry blanket insurance, self-insure, or use a “captive” carrier.
- 21.3. Waiver of Subrogation. Insurance policies should have a waiver of subrogation clause.
- 21.4. Property and Liability Insurance. The landlord should carry property and liability insurance, and provide evidence of such insurance on the tenant’s request.
- 21.5. Effect of Sublease. To the extent premises are subleased to others, a subtenant’s insurance coverage and insurance certificates (if otherwise in compliance with the lease) will fulfill the tenant’s insurance obligations.
- 22. Leasehold Mortgages
- 22.1. Landlord’s Consent. The landlord should consent to the tenant’s grant of leasehold mortgage(s). The leasehold mortgagee should have the rights to: (1) receive notice of default from the landlord, (2) cure, and (3) enter into a new lease with the landlord if the original lease is terminated because of a tenant default. (For the lease to be truly “mortgageable,” it needs much more than this. See Joshua Stein, “Model Leasehold Mortgagee Protections,” American College of Real Estate Lawyers Papers, October 1999.)
- 22.2. Covenant To Amend. The landlord should agree to amend the lease as requested by leasehold mortgagees, within limits.
- 22.3. Pledgee of Tenant’s Equity. If the tenant’s owners pledge their equity as collateral for a loan, the pledgee may want protections under the lease like those of a leasehold mortgagee.
- 23. Maintenance and Cleaning
- 23.1. Structural Repairs and Cleaning. The landlord should make structural repairs (including roof, foundation, other structural elements) and maintain and repair building systems, common areas, and sidewalks.
- 23.2. Building and Systems Maintenance. The landlord should maintain structural elements and electrical, plumbing, sewage, and HVAC systems, at least to the point of entry into the premises.
- 23.3. Standard for Maintenance. The landlord should maintain the building and common areas (including any empty shop spaces, and all common areas on any multi-tenant floor, whether or not fully occupied) in an attractive and first class manner.
- 23.4. Cleaning Standards. Specify standards for the landlord’s cleaning services, and limit the scope of possible “extras.” Cleaning standards are an economic issue. Review and negotiate them accordingly. If the cleaning standards say the landlord doesn’t need to clean any “computer areas,” how much space will this exclude for a modern office? If the landlord wants to disclaim any responsibility for cleaning of certain areas (food preparation, etc.), obtain a credit for the value per square foot of the “building standard” cleaning not provided. As an alternative, give the tenant an allowance in that amount with the tenant paying only for any cleaning that is above standard (considered for the space as a whole).
- 23.5. Cleaning Hours. Specify the earliest time at which cleaning may commence.
- 23.6. Right To Terminate. The tenant may want to be able to terminate the landlord’s cleaning services and take over cleaning, with a rent credit.
- 23.7. Garbage Removal. Define the location, access, timing, and other arrangements for garbage removal.
- 23.8. Repairs Covered By Insurance. Require the landlord to make repairs—even if otherwise the tenant’s obligation—where the need arises from an event covered by insurance that the landlord carried or should have carried.
- 24. Operating Expenses—Calculation and Auditing
- 24.1. Statement by Professional. An independent managing agent or (better) certified public accountant should prepare the statement of operating expenses. Attach as a lease exhibit the last few years of operating expense statements. Ask the landlord to confirm that: (a) these were the statements actually used for pass-throughs to existing tenants; and (b) future operating expenses will be calculated the same way.
- 24.2. Time for Revision. The landlord should not be allowed to revise operating expense figures after a certain period.
- 24.3. Gross-Up. In any year the building is not fully occupied, operating expenses are often “grossed up” as if the building had been fully or nearly fully occupied during the entire year. Confirm that the base year and adjustment year are treated consistently.
- 24.4. Timing of Operating Expense Statement. The landlord should provide the annual operating expense statement within a reasonable time (90-180 days) after year-end, especially when the tenant pays monthly operating expense escalation estimates on account.
- 24.5. Lease Termination During Calendar Year. Apportion operating expense contributions if the lease terminates during a calendar year. (Otherwise, the landlord could argue that annual calculation procedures obligate the tenant to contribute to an entire year’s operating expenses.)
- 24.6. New Expense Items. If the landlord later incurs new categories or items of expense that were not being incurred when the lease was signed (e.g., a new earthquake insurance program), the landlord should “gross up” the base year to reflect what this expense would have been if the landlord had already been incurring it.
- 24.7. Right To Review and Challenge. The lease should give the tenant meaningful rights to examine and question the landlord’s operating expense calculations. Those rights should survive termination of the lease. The lease should give the tenant reasonable time to: (1) notify the landlord it wants to audit expenses; (2) conduct and complete the audit; and (3) specify if, and how, it contests the landlord’s calculations. If the tenant discovers egregious errors, the tenant will want the right to reexamine operating expenses from earlier years.
- 24.8. Books and Records. The landlord must keep books and records, for a specified number of years, in a single place under a unified system.
- 24.9. Base Year. The audit right should include the base year, expiring no earlier than the expiration date for the right to audit the first operating year. The tenant may wish to audit the base year at the same time the tenant audits the first operating year.
- 24.10. Landlord’s Responsibility for Audit Cost. The landlord should pay the cost of audit (credited against next month’s rent) if the audit discloses an overcharge of more than a specified percentage.
- 24.11. Landlord’s Discovery of Error. If any other tenant’s audit discloses a discrepancy, the landlord should automatically give your tenant the benefit of any resulting adjustment to operating expenses—even if your tenant doesn’t ask. If the landlord forgets to do so, the landlord must pay interest at a high rate.
- 24.12. Choice of Auditing Firm. The lease should not limit the tenant’s right to engage a firm of its own choosing (e.g., a contingent fee lease auditor) to examine the landlord’s books and records.
- 24.13. Landlord Covenant. The landlord should agree that there will be no duplication of charges included in operating expenses or elsewhere (such as treating the marketing director’s salary as an operating expense and also as a charge to the marketing fund).
- 24.14. Mixed-Use Buildings. If the building contains, for example, a hotel component, this can make the allocation of operating expenses much harder to understand and much more subjective (i.e., it creates much more room for abuse, and makes the abuse that much harder to find). If possible, the tenant would prefer to contribute only to operating expenses of the particular single-use project component the tenant will actually occupy.
- 25. Operating Expenses—Exclusions. The tenant may desire to exclude from operating expenses the following:
- 25.1. Initial Construction. The cost to correct initial construction defects;
- 25.2. Negligence. The cost of repairs resulting from the landlord’s negligence;
- 25.3. Executive Salaries. Salaries for officers higher than the building manager;
- 25.4. Advertising. Advertising expenses;
- 25.5. Professional Fees. Brokerage fees and commissions; legal fees and expenses to negotiate and enforce leases; accounting fees.
- 25.6. Collateral Source. Any cost reimbursed by insurance proceeds or condemnation award;
- 25.7. Excessive Management Fees. Management fees in excess of those charged in comparable first class buildings;
- 25.8. Payments to Affiliates. Expenses paid to the landlord’s affiliates unless at market rates (But what’s market and how do you know? The tenant may want preapproval rights.);
- 25.9. Development-Related Payments to Government. Exactions paid to governmental bodies, including infrastructure, traffic improvements, curb cuts, roadway improvements, transit, “impact,” and so on;
- 25.10. Holidays. Any holiday decorations or gifts;
- 25.11. Capital. Costs that under generally accepted accounting principles consistently applied would be considered capital or are otherwise outside normal costs and expenses in connection with the operation, cleaning, management, security, maintenance, and repair of similar buildings; or as an alternative perhaps allow capital expenditures if (1) the tenant approves any expenditure above a certain level or (2) an expenditure is justified by the cost of repairs or undertaken to reduce operating expenses, and then only to the extent that the landlord demonstrates actual reduction;
- 25.12. Art. The purchase or maintenance of any artwork or sculpture;
- 25.13. Contributions. Charitable or political contributions;
- 25.14. Ownership-Related Costs. Ground rent; mortgage interest, principal and transaction costs; build-out of tenant space; clean-up of the landlord’s construction projects of any kind; and general and administrative expenses (overhead);
- 25.15. Specific Tenant-Related. Any costs for a service not provided to all tenants (for example, the incremental cost of a higher level of service provided to office or retail tenants); reimbursed or reimbursable by specific tenants other than through pro rata rent escalations (e.g., fees for excessive use of utilities); or caused by the acts or omissions of particular other tenants;
- 25.16. Fines. Fines and penalties;
- 25.17. Above-Standard Cleaning. Costs of cleaning portions of the building that have cleaning requirements higher than the tenant’s (e.g., office space when negotiating a retail lease);
- 25.18. Breach of Lease. Costs incurred from any matter constituting a breach of a covenant, representation, or warranty by the landlord or any tenant under any lease;
- 25.19. Environmental. Costs of testing for, handling, remediating, or abating asbestos and other hazardous materials or electromagnetic fields, or to remove chloro-flouro carbons (“CFCs”) or accomplish other future retrofitting driven by as-yet-unknown future environmental concerns, or to purchase environmental insurance;
- 25.20. ADA. Americans with Disabilities Act (“ADA”) compliance costs, particularly when triggered by the operations of other tenants; and
- 25.21. Other. Next year’s newest area of legal concern (for inspiration, check the latest new and improved carveouts from “nonrecourse” treatment in mortgage finance transactions).
- 26. Options
- 26.1. Additional Space. Tenant may want an option, right of first refusal or right of first offer for additional space.
- 26.2. Sublet Excess Space. As a fallback, consider negotiating a wide-open right to sublet excess space until needed (if this works as a business matter).
- 26.3. First Refusal Mechanics. For a right of first refusal, seek a “second bite at the apple” if the landlord later decides to market the space in smaller pieces than originally contemplated.
- 26.4. Anti-Assignment Clauses. To facilitate future expansion through transactions with other tenants in the building, ask the landlord to waive (at least for the benefit of your tenant) any prohibitions in other leases against assignment or subletting to other tenants in this building, and against any discussions or negotiations contemplating such a transaction.
- 26.5. Excess Space Notices. Whether or not the tenant has pre-emptive rights to extra space, the landlord should agree to advise the tenant regularly of any space expected to become available.
- 26.6. Early Termination Options. The tenant may want early termination options, either complete or partial (“shed rights”).
- 26.7. Option To Renew Term. The tenant will often seek a right to renew the term, in which case the tenant must scrutinize and confirm it can live with whatever conditions, requirements, and procedures the landlord tries to attach to the renewal option—particularly the proposition that rent can never go down during the renewal term.
- 26.8. Appraisal. If rent during the option term depends on an appraisal, the tenant should have the right to terminate if the tenant disapproves of the new rent as finally determined. Does the definition of fair market rental value make sense?
- 26.9. Purchase Option. The tenant may want the right to purchase the building if the landlord intends to sell it or if the equity owners of the landlord intend to sell a substantial portion of their equity.
- 26.10. Reminder Notices. The landlord should send reminder notices of any upcoming option exercise deadline, but not more than a specified number of days before the deadline. Extend the deadline if the landlord delays sending notice.
- 27. Parking
- 27.1. Specific Requirements. Location, number, and pricing (or assurance of no fee) for parking spaces (reserved and unreserved). Attach a parking diagram as an exhibit.
- 27.2. Bicycles and Motorcycles. The landlord should provide parking for bicycles and motorcycles.
- 27.3. Building Expansion. If the landlord expands the building, the parking ratio shouldn’t worsen.
- 27.4. High Parking Uses. The tenant may wish to prohibit nearby high parking uses (e.g., movie theater, trade school, restaurant), although some of these uses are now regarded as less objectionable than in the past.
- 27.5. Location/Quantity of Employee Parking. The landlord must enforce employee parking restrictions against other tenants.
- 27.6. Snow. The landlord must clear snow from, and otherwise maintain, the parking area.
- 27.7. Lighting. Set standards for lighting of common areas and parking areas (especially important to a 24-hour operation).
- 27.8. Patterns. The landlord may not interfere with or change traffic patterns in the parking lot areas.
- 27.9. Fencing. The tenant should have the right to require the landlord to install a fence to segregate the parking areas from adjacent heavy-usage facilities.
- 28. Percentage Rent
- 28.1. Rent Abatements. Rent abatements or other rent reductions should not reduce percentage rent breakpoints (to avoid an anomaly where the breakpoint drops because of negotiated rent abatements, resulting in increased percentage rent payments equal to such abatements).
- 28.2. First-Year Gross Sales. First-year gross sales should be annualized with a seasonal adjustment, to prevent excessive percentage rent if the tenant opens in its peak season.
- 28.3. No Partnership. The lease should affirmatively state that the parties don’t intend to establish a partnership or joint venture.
- 28.4. Exclusions from “Gross Sales.” Depending on the type of business, the lease should exclude or subtract certain items from “gross sales” (e.g., sales made by concessionaires, sales not in the ordinary course of business, refunds, returns, custom tailoring, and monogramming). The tenant will want to avoid any suggestion that the landlord can collect percentage rent on any sales made through catalogs or the Internet.
- 28.5. Time Limits. The lease should impose time limits on the landlord’s right to audit.
- 28.6. Revenue Maximization. The tenant should avoid any obligation to operate or to “maximize” revenues. As a fallback, consider “maximizing profits in Tenant’s reasonable commercial judgment.” The tenant should not make any representation concerning the volume of its business.
- 28.7. Confidentiality. The landlord should agree to preserve the confidentiality of sales information and other sensitive information provided by the tenant.
- 28.8. Special Categories. The tenant may wish to negotiate a lower percentage rate for particular low-margin activities or categories of sales.
- 28.9. Free Rent Covers Percentage Rent. Any free rent period should cover percentage rent, too.
- 29. Quiet Enjoyment
- 29.1. No Default. Beware of “quiet enjoyment” conditioned on no default. The tenant would prefer to condition quiet enjoyment only on the landlord’s not having terminated the lease because of the tenant’s default.
- 29.2. Sidewalk Sheds. The tenant may want the right to abate the rent if a sidewalk shed servicing a landlord’s or another tenant’s construction project impairs access or visibility. Try to limit these sidewalk sheds (duration, minimum clearance, frequency, purpose). And seek the right to install signs (at the landlord’s expense) on the visible face of the sidewalk shed. Require the landlord to remove promptly all unauthorized postings or graffiti on any sidewalk shed or similar temporary fences.
- 29.3. Remedies. If the landlord breaches the covenant of quiet enjoyment, the tenant cannot easily prove the amount of the injury or damages. Consider providing for liquidated damages or some other mechanism to quantity damages.
- 30. Real Estate Tax Escalations
- 30.1. Exclusions. Real estate tax escalations should exclude: penalties or interest; excise taxes on the landlord’s gross or net rentals or other income; income, franchise, transfer, gift, estate, succession, inheritance, and capital stock taxes; taxes on land held for future development (“outparcels”); increases in real estate taxes resulting from construction during the lease term if not done for the benefit of tenants generally or if it does not create additional proportionate rentable area; termination of interim assessment; loss or phase-out (whether or not scheduled) of abatement or exemption; corrections of underpayments in previous periods; and, if possible, sale of the property.
- 30.2. Substitute or Additional Taxes. The definition of “substitute or additional taxes” that become taxes requires especially close attention. Confirm they are truly appropriate for pass-through to the tenant.
- 30.3. Landlord’s Tax Protest. For the base year, review any landlord tax protest filing to understand the landlord’s theories for low value. Will those theories inevitably vanish next year, producing built-in increases?
- 30.4. Artificially Low Assessments. If, under local assessment rules, the first year’s free rent produces an artificially low assessment that year, the assessment may automatically rise by the same amount in future years. The tenant may then over the years pay extra tax escalation payments far beyond the value of the free rent. This depends very much on local tax assessment procedures.
- 30.5. Installment Payments. The landlord should be required to pay in installments as taxes are due.
- 30.6. Interaction with Operating Expenses. Exclude all “taxes” from operating expense escalations, and vice versa.
- 30.7. Special Assessments. The landlord should pay special assessments in installments and treat them as taxes only to the extent they fall within the lease term.
- 30.8. Right To Contest. The tenant should have the right to require the landlord to contest, or if the landlord does not, the right to contest the taxes in the landlord’s name or the tenant’s, as necessary. Check statutory and case law requirements on who may contest taxes. For example, in New York a tenant that leases only part of a building lacks standing to contest taxes. Whether the tenant leases only part of the building or the whole thing, any tax contest will still require cooperation, and delivery of necessary information and signatures, by the landlord.
- 30.9. Abatement or Deferral Program. If any tax abatement or deferral program might be available, the landlord should agree to apply for it.
- 30.10. Tax Refunds. The landlord must promptly pay the tenant its share of tax refunds even after the lease expires, and must notify the tenant of any such refunds promptly when received. If the landlord fails to do so, or must be reminded, then the landlord must pay a high interest rate or some multiple of the amount due the tenant. (Landlords have been known to forget about the need to give former tenants their share of any subsequent refunds of taxes they paid. This can produce a nontrivial profit center for the landlord, and an issue in negotiating a subsequent purchase and sale of the building.)
- 30.11. Tax Protest Costs. Any contingent fees paid to real estate tax counsel should be arm’s length and commercially reasonable. The landlord should not collect a separate “management fee” for its services in contesting real estate taxes.
- 31. Representations and Warranties. The tenant may wish to ask the landlord to provide representations and warranties, including the following:
- 31.1. Utilities. Utility locations and capacity available at the premises;
- 31.2. Submetering. Equipment is in place and in good working order for any submetering of utilities contemplated by the lease;
- 31.3. Asbestos and Hazardous Materials. The premises are free of asbestos and other hazardous materials. The landlord should provide any document required to confirm this, for purposes of building permit applications (such as a New York City ACP-5 form showing that tenant’s work will be a non-asbestos job);
- 31.4. Certificate of Occupancy. Attach a true and correct copy of the certificate of occupancy as an exhibit. The landlord should represent that the tenant’s use as permitted by the lease won’t violate the certificate of occupancy, applicable law, or other leases or agreements of the landlord;
- 31.5. Americans with Disabilities Act. The premises and the building comply with the ADA;
- 31.6. Impact and Hookup Fees. The landlord has paid or will pay all impact fees, hookup charges, and other exactions;
- 31.7. Zoning. The property is properly zoned and the tenant’s permitted use under the lease is legal;
- 31.8. No Violation. The premises are not subject to any outstanding violations of any code, regulation, ordinance, or law;
- 31.9. Commissions and Brokerage Fees. The Landlord has paid all brokerage fees and commissions for the lease. (If the tenant cares about its relationship with the broker, the tenant may want the right to offset rent and pay the broker if the landlord does not);
- 31.10. Rights of Third Parties. The landlord’s entry into the lease doesn’t violate any rights of third parties (such as the prior tenant that was evicted from the space; other tenants in the building); and
- 31.11. Validity of Lease. Each party represents and warrants to the other that the lease is duly authorized, executed and delivered, valid and binding.
- 32. Requirements of Law
- 32.1. Responsibility for Compliance. The landlord should be responsible for compliance if the compliance applies generically to the property (e.g., “mere office use”).
- 32.2. New Requirements. The landlord should comply with any new legal requirement if the potential noncompliance didn’t result from the tenant’s actions, and failure to comply will impair the tenant’s alterations or use in the manner contemplated by the lease.
- 32.3. Permits. The landlord should cooperate in obtaining permits, such as by signing applications and providing necessary information.
- 33. Restrictions Affecting Other Premises
- 33.1. Radius Clause. Try not to agree to a radius clause unless percentage rent will be a very substantial part of the landlord’s cash flow from the lease. Try to limit its physical scope—ideally, only a mile or two, depending on the site and the tenant’s plans. Carve out: (a) relocation of existing stores within any retail property where the tenant is already doing business; (b) the tenant’s future acquisitions of any pre-existing business; and (c) any stores operated by any possible future acquiror of tenant’s business. Try to terminate the restriction at a certain date or if the tenant has achieved a certain level of percentage rent.
- 33.2. Against Landlord. Consider imposing radius restrictions against the landlord, particularly where the landlord operates its properties under an identifiable brand name (a new trend).
- 33.3. Use of Building. Prohibit the landlord from changing the use of the overall building—such as turning a regional mall into a call center. Restrict the type of retail tenancies or other uses in the building. Consider issues of density, traffic, parking, demographics, compatibility, likelihood of picketing or controversy, and other potential problems affecting building use. The tenant may want exclusive rights for certain uses.
- 33.4. Prohibited Uses. Prohibit flea markets, carnivals, petting zoos, clothing drop-off boxes, kiosks, drive-up booths, and the like, elsewhere on the landlord’s property, including common areas.
- 33.5. Additional Construction. Limit the location and type of any additional construction by the landlord (e.g., on “outparcels”).
- 33.6. Minimum Operating Hours. Establish minimum operating hours for the property as a whole or for specific other tenants.
- 33.7. Landlord’s Activities and Kiosks. Limit the landlord’s activities and installations (e.g., kiosks) on the sidewalk (or common area of a mall) within a specified area near the premises.
- 33.8. Scope of Restrictions. To the extent that the lease restricts the landlord’s activities, consider how broadly those restrictions should apply. Ideally, they should affect both the existing structure and any future expansion in which the landlord has any interest (or for which the landlord or an affiliate presently controls the site). Try to have the landlord agree not to enter into a reciprocal easement agreement or otherwise facilitate any nearby construction by others unless the counterparty agrees to honor the same restrictions.
- 33.9. Public Areas. Does the tenant want approval rights for future changes in the lobby, elevators, or other public areas? The right to require future upgrades?
- 34. Rules and Regulations
- 34.1. Nondiscriminatory Enforcement. Require the landlord to enforce its rules and regulations in a nondiscriminatory way. If the tenant so requests, the landlord should enforce those rules and regulations against other tenants.
- 34.2. New Rules. New rules should be reasonable and of the type customarily imposed for similar buildings. New rules should require the tenant’s approval. If the landlord wants to give the tenant a short period to object to any new rules, insist that the landlord give the tenant formal notice of any new rule, accompanied by a reminder of the short period in which the tenant may object.
- 35. Sale of Property
- 35.1. Assumption of Obligations. The purchaser should assume all obligations of the landlord, including the obligation to return the tenant’s security deposit and refund any previous rent overcharges. Some landlord’s lease forms say the old landlord is not responsible, but neither is the new one.
- 35.2. Transfer of Security Deposit. The lease should require the landlord to transfer the security deposit to a purchaser of the property, with the purchaser providing a written confirmation of receipt to the tenant. The tenant should have the right to offset against the rent if the landlord doesn’t comply with these requirements.
- 35.3. Right of First Refusal or First Offer. The tenant may want a right of first refusal or right of first offer if the landlord sells the property.
- 36. Security Deposit
- 36.1. Interest. The tenant should receive any interest earned on the security deposit.
- 36.2. Letter of Credit. The tenant should have the right to substitute a letter of credit or other alternative form of security. If the tenant thereafter fails to maintain the letter of credit, the landlord should be free to draw, but such failure should not constitute a lease default.
- 36.3. Return. The landlord should promptly return the security deposit after the lease expires.
- 36.4. Reduction. The tenant should be allowed to reduce the security deposit over time, at least if the tenant is not in default. If the tenant has any concern about the landlord’s creditworthiness, such reductions are particularly desirable in the last year or two of the lease term.
- 37. Services Provided by Landlord
- 37.1. Existing Systems. The tenant should have the right to use existing cabling and other systems. The landlord should agree not to damage or remove such systems.
- 37.2. Performance Standards. Set performance standards or criteria for any landlord services (e.g., comparable to those provided in a basket of other buildings).
- 37.3. Management Company Replacement. The tenant may want a right to require the landlord to replace the management company or the leasing broker if specified standards are not being met.
- 37.4. Windows. The tenant should have the right to abate rent if windows are bricked up or covered over for any reason. The landlord should install sunscreen film on windows if needed. Prohibit the landlord from installing billboards or other signs outside the windows, even if such billboards or other signs are allegedly transparent from the interior of the building.
- 37.5. Promotional Fund. Should the landlord agree to operate any promotional association, fund, or other similar activities? Should the lease require that all other tenants participate?
- 37.6. Non-Occupancy Credits. If the tenant is not in occupancy, the tenant should receive credit for variable costs saved by the landlord (e.g., cleaning). (Such a provision appears in some government leases but rarely if ever in commercial leases.)
- 37.7. Receipt of Deliveries. Specify the location, arrangements, timing, and fees (none) for the tenant’s receipt of deliveries.
- 37.8. Contact Person. Require the landlord to designate a single contact person for all questions, problems, and issues regarding the premises, together with a 24-hour emergency telephone number for problems outside business hours.
- 38. Signage and Identification
- 38.1. Signage Requirements. Describe the signage requirements (lobby, floor lobbies, elevators, exterior entry area, rooftop, common areas, other exterior) for the tenant and any subtenant. The tenant should have the right to make future changes in its signage. Make the tenant’s signage rights as transferable as any other rights under the lease.
- 38.2. Other Parties’ Signage. Establish requirements for, and otherwise control, other tenants’ signage and the landlord’s overall signage program (including future changes).
- 38.3. Signage Position. Does the tenant want the top position on any pylon sign? Second from top? Largest position on any other sign?
- 38.4. Name of Building. Prohibit the landlord from naming the building after another tenant or a competitor of the tenant. Does the tenant want affirmative naming rights?
- 38.5. Directory Entries. The landlord should be obligated to provide building directory entries for the tenant and any subtenant or assignee. If the landlord tries to limit those entries, do those limitations make sense? Does the tenant contemplate needing directory entries for parties other than the tenant and its subtenants or assignees, such as joint ventures or other new entities?
- 39. Subordination and Landlord’s Estate
- 39.1. Proof of Fee Estate. The landlord should represent that it owns the fee estate. Perhaps attach a copy of the landlord’s deed as an exhibit.
- 39.2. Nondisturbance Agreement from Mortgagees and Ground Lessors. The landlord should provide a nondisturbance agreement from mortgagees and ground lessors. Beware of allowing the landlord to deliver such an agreement after the lease has been signed, with a right for the tenant to terminate if it is not timely delivered. In practice, such a right will rarely be exercised (which may say something about the practical importance of these agreements).
- 39.3. Conditions for Subordination. If the lease is “subordinate,” subordination should be conditioned on the landlord’s having delivered specified nondisturbance protections from holders of senior estates (e.g., in the form attached to the lease). Limit the number or type of mortgages. The tenant cannot be obligated to “subordinate” to any mortgage if such mortgage is subordinate to any mortgage or any other lien that has not provided the tenant with nondisturbance protections. (Foreclosure on that latter, more senior, mortgage could wipe out both the more junior mortgage and the tenant.)
- 39.4. Debt Service Won’t Exceed Rent. When the tenant leases all or most of the space or an entire building, the tenant may want the landlord to agree that the debt service payable under any fee mortgage will not exceed the rent under the lease.
- 39.5. Negotiations of Nondisturbance Agreements. The landlord should reimburse the tenant for legal fees for any subsequent negotiations with mortgagees. Remember that future lease amendments (and any negotiated termination) will require mortgagees’ consent.
- 39.6. Compliance with Mortgages. Avoid any covenant to be bound by (and do nothing to violate) any present or future mortgages. Such a provision may amount in part to an “end run” around negotiated nondisturbance rights and priorities.
- 40. Tenant’s Remedies Against Landlord
- 40.1. Set-Off and Termination. The tenant may cure the landlord’s defaults (after notice), set-off the cost of cure (with interest) against rent, and terminate the lease. The tenant can set off against rent for claims against the landlord or any judgment against the landlord that is returned unsatisfied (or, if the landlord is in bankruptcy, then based upon mere filing of a claim in the bankruptcy). The tenant may want similar remedies if any representation or warranty by the landlord is wrong.
- 40.2. Abatement. The tenant may want the right to abate the rent if essential building services are disrupted for longer than a specified period, and the right to terminate the lease if any rent abatement continues more than a certain number of days.
- 40.3. Self-Help. The tenant may want emergency self-help rights if a water leak, power failure, or communications failure imperils the tenant’s computer systems, communications systems, or other mission-critical equipment or operations.
- 40.4. Payment of Rent Not a Waiver. The tenant’s payment of rent with knowledge of a landlord default should not waive the default.
- 40.5. “Exculpation” Clause. Where an “exculpation” clause limits the landlord’s liability to the value of the landlord’s interest in the property, try to exclude insurance proceeds, escrow funds, condemnation awards, and sales and refinancing proceeds. For certain major landlord obligations—completion of build-out, return of a security deposit—consider whether “exculpation” makes sense or whether, to the contrary, the tenant should insist on some level of creditworthy assurances from someone beyond a single-asset landlord.
- 41. Use
- 41.1. Any Lawful Use. Try to allow “any lawful use” or at least “any lawful retail/office use.”
- 41.2. Permitted Uses. Describe permitted uses generically to avoid restricting future use by a subtenant or assignee (e.g., “medical or other health practitioner’s offices” or “executive offices” rather than “podiatrist’s offices” or “main headquarters of XYZ Corp.”).
- 41.3. Future Change of Use. Build in flexibility for future change of use, if any possibility exists of a change in circumstances (e.g., likely technological obsolescence of the tenant’s business). If the tenant anticipates making unusual uses of the space (e.g., an Internet company with basketball courts, pets, bicycles hanging from the ceiling, sleeping facilities, etc.), make sure the lease and applicable law will not interfere.
- 41.4. Incidental Uses. Allow incidental uses, such as ATM machines, food, training, duplicating, ancillary retail, gym, day care, other amenities, network control center.
- 41.5. Duty To Operate; Recapture. The tenant would prefer to have no duty to open or operate. If the landlord counters with a request for a recapture right if the tenant goes dark for a specified period, carve out permitted closures (e.g., force majeure, alterations, inventory-taking, other short closings). Limit the landlord’s decision period on any recapture. When recapturing, the landlord should reimburse the tenant’s unamortized cost of furniture, furnishings, equipment, and improvements. Any recapture notice by the landlord must be accompanied by mortgagee consent to be effective.
- 41.6. Satellite Dishes and Antennas. The landlord should allow the tenant to install satellite dishes and antennas on the roof, either at no charge or for a defined or ascertainable charge. The tenant should have the right to relocate this equipment if necessary to improve performance. The landlord should agree that future rooftop users will be obligated not to interfere with the tenant’s use.
- 41.7. Rooftop, Generally. The tenant may also want the right to install its own backup generators, supplemental air conditioning, and other equipment on the roof. If this will require structural reinforcement, the landlord should consent to it. For any rooftop equipment, the tenant will also want the landlord’s consent, without charge, to running any wires, cables, connections, and lines between the premises and the tenant’s rooftop equipment. The tenant would prefer not to be obligated to remove any rooftop equipment at the end of the term.
- 41.8. Use of Sidewalks and Exterior Areas. Will the tenant need to use the sidewalk or the exterior of the building for special events, temporary installations, or other purposes? Exterior loudspeakers? Exterior laser or light displays?
- 41.9. Conflict with Other Leases. The lease should not say that tenant’s use will not conflict with other leases or mortgages—unless this lease defines exactly what those other leases or mortgages prohibit.
- 41.10. Common Facilities. The tenant should have the right to use building common facilities, such as cafeteria or health clubs, and common lavatories if the premises does not include lavatories. The lease should state the minimum operating hours and standards for common facilities.
- 41.11. Exclusive Use. The lease should give the tenant the exclusive use of terraces or other identified outdoor space or facilities adjacent to the tenant’s premises. The landlord should maintain and clean these areas according to specified standards.
- 41.12. 24/365 Access. The tenant should obtain 24-hour access, 365 days a year, via elevator or (if the elevator is broken) stairway.
- 41.13. Use of Fire Stairways. The tenant should be allowed to use fire stairways for access between floors.
- 41.14. Reception, Security, Other Facilities. Will the tenant want to install any reception, security, package handling, or other facilities in the lobby, basement, or ground floor of the building?
- 41.15. Storage Areas. In addition to the premises, the tenant may want to lease storage area available in the building.
- 42. Utilities, Generally
- 42.1. Entry Point. The landlord should bring all utilities to a defined entry point on the perimeter of the premises.
- 42.2. Emergency Generator. The tenant should be allowed to install an emergency generator and fuel tank. Allocate ownership, responsibilities, and costs of these facilities between the landlord and the tenant. The tenant should have no duty to remove them at the end of the term.
- 42.3. Backup Electrical Operation. The landlord should give the tenant prior notice before any scheduled electrical shutdown or testing of the landlord’s emergency generators. Limit the frequency of such shutdowns and the periods when the landlord can test its emergency generators. (These generators, when running, can produce background noise about as subtle as jet engines.)
- 42.4. Special Requirements. The tenant or its service providers should be allowed to install T-1 lines, multiple points of entry, and other special telecommunications facilities, including cabling and connections from service providers to the premises.
- 42.5. Free Choice of Carrier. Allow the tenant to use any carriers or utilities it wishes for telecommunications and other services. The landlord should confirm that no company has an “exclusive” for the building. The landlord must, without charge, cooperate as needed, such as by signing papers, providing closet space in the basement, and providing information.
- 42.6. Interruption of Service. If certain utilities are interrupted for more than a minimal period, the tenant should be allowed to abate rent and at some point eventually terminate the lease.
- 43. Miscellaneous
- 43.1. Right To Re-Measure. The lease should give the tenant the right to re-measure the square footage upon completion of the landlord’s work (at least for a new building).
- 43.2. Rent Commencement. The tenant should not pay rent until particular anchor tenants are open for business; the landlord has finished specified construction, including common areas; and the landlord has paid the tenant the agreed construction cost reimbursement.
- 43.3. Limited Liability. Limit the tenant’s liability and the liability of tenant’s general partners to their interest in the lease.
- 43.4. Confidentiality. If the lease requires the tenant to give the landlord any financial, sales-related, or other sensitive information about the tenant, the landlord should keep it confidential.
- 43.5. Adjacent Work. If a third party will pay compensation for inconvenience caused by work on an adjacent or nearby site, who receives it?
- 43.6. Initial Criteria and Specifications. State the criteria and specifications for the landlord’s initial construction of building, common areas, parking lot, and so forth.
- 43.7. Cost of Capital Improvements. If the estimated cost of any capital improvement or replacement for which the tenant is responsible exceeds a specified amount (perhaps varying based on the remaining term of the lease), then the tenant may terminate the lease or require the landlord to contribute to the cost based on the expected useful life of the improvement or replacement vs. the remaining term of the lease.
- 43.8. Other Business Relationships. Do the landlord and the tenant have any other relationship (e.g., purchase and sale of a business) that might give rise to tenant claims against the landlord, for which the tenant should be entitled to offset against rent?
- 43.9. Allocation of Free Rent. For both parties, it may make business sense to distribute the “free rent” periods throughout the lease term rather than schedule all free rent at the beginning as would be more typical.
- 43.10. Change in Zoning. The tenant should have the right to terminate if a change in zoning or other law (or inability to obtain or maintain necessary permits) prevents or impairs the tenant from operating its business, in whole or in part.
- 43.11. Other Tenants’ Closure. The tenant may want the right to terminate (or pay only percentage rent) if specified other retail tenants shut down.
- 43.12. Strike. If a strike occurs, the landlord should establish a separate gate for the striking union to minimize any interference with the tenant. If the landlord or any other tenant uses a labor force that causes disharmony with the tenant’s labor force, the landlord should be obligated to remove the former labor force from the building. (Most leases express only the converse proposition.)
- 44. Due Diligence. As noted above, this Checklist should not be regarded as exhaustive or complete. This is particularly true as it applies to the following list of “due diligence” that the tenant’s counsel may wish to perform.
- 44.1. Existing Condition of Premises. Is the existing condition of the premises satisfactory? What personal property is included? Should the landlord be required to remove—or be required to leave in place—any existing improvements?
- 44.2. Title Search. Perform a title search and review, or an on-line search to confirm ownership of the fee (easily available in many areas). Check for any use or other restrictions.
- 44.3. Square Footage. Calculate the actual square footage and scope of the premises, particularly for a full floor tenant. Do all of the landlord’s exclusions of space from the premises make sense? For example, should the elevator lobby be part of the premises?
- 44.4. Written Authority for Agent. If the landlord’s agent signs the lease (or any future amendment or estoppel certificate), require a copy of written authority to sign.
- 44.5. Additional Consents. Does the landlord need any consents or approvals? This is especially important where the landlord is a governmental entity or charity. Approvals could be internal or require cooperation from lenders, ground lessors, or other third parties.
- 44.6. Special Permits. Do any unusual uses require special measures for permits (e.g., liquor licenses, sidewalk cafes)? How long will that process take, and what will it require? What other permits might the tenant need, such as public assembly?
- 44.7. Ventilation. Does the space provide adequate ventilation, or adequate pathways for the tenant to install new ventilation?
- 44.8. Escalations. Due diligence issues regarding escalations:
- (a) Capital Projects. What capital projects are underway or contemplated today? Does the tenant agree with how the landlord plans to treat them?
- (b) Historical Operating Expenses. Historical amounts for operating expenses and taxes, including review of underlying financial information and documents.
- (c) Pre-Programmed Increases in Tax Assessment. Investigate any built-in future increases in the tax assessment (e.g., termination of interim assessment, upcoming loss or phase-out of existing abatement or exemption). Is the building fully assessed?
- 44.9. Telecommunications Capacity. Available capacity and pathways for telecommunications and other utilities?
- 44.10. Technological Requirements. Check the tenant’s network and other technological requirements.
- 44.11. Rooftop. Check lines of sight for a rooftop satellite dish or antenna. Can the roof support any heavy equipment the tenant will install?
- 44.12. Present Occupancy. What is the present occupancy of the premises to be leased? What is the practical likelihood of delays in possession?
- 44.13. Disposition of Present Premises. What are the tenant’s plans for disposing of the premises it now occupies? Does the tenant understand any uncertainties and risks in that process?
- 44.14. Engineering. The tenant’s engineers should consider a range of issues, including the adequacy, directness, and feasibility of pathways serving the premises.
- 44.15. Security. Is the landlord’s security program consistent with the tenant’s desires?
- 45. Preliminary Arrangements and Considerations
- 45.1. Brokerage. Is the brokerage agreement in place and are the commission negotiations completed?
- 45.2. Term Sheets and Letters of Intent. Attorneys should deal with term sheets and letters of intent early in the lease negotiation process to raise and resolve major issues while it is relatively easy (and inexpensive) to do so.
- 45.3. Tax Incentives. Can the tenant qualify for any tax incentives, abatements, deferrals, rebates, subsidies, or other governmental benefits? Check the timing requirements and pitfalls for any application (e.g., must sometimes apply before “committed” to the new location).
- 45.4. Premises Off-Market. During the lease negotiations, ask the landlord to agree to remove the space from the market and not negotiate with other parties for a specified period. Should the parties agree to a break-up fee? A reimbursement of expenses if the deal dies?
- 45.5. Tenant’s Professionals. Select, coordinate, and negotiate the contracts of the tenant’s other professionals: architect, broker, engineer, facilities consultant, signage designer, space planner, and so forth.
- 45.6. Tenant’s Procedures. Understand the tenant’s internal approval procedures, including any documentation requirements and likelihood for delay.
- 45.7. Backup Lease Negotiations. Consider negotiating multiple leases at the same time (though perhaps at various stages of negotiations), to be able to recover quickly if the lease negotiations for a particular premises break down or the landlord decides to lease to some other tenant.
- 46. Lease-Related Closing Documents. At closing, your transaction may require a number of documents other than the lease itself. Counsel should resolve these documents as part of the process of negotiating the lease. They might include:
- 46.1. Memorandum of Lease. Mention any “exclusive use” rights and other lease provisions that restrict the landlord’s activities on other premises. Record the memorandum against all affected real property (e.g., outparcels).
- 46.2. Nondisturbance Agreement. See the “lender’s form” nondisturbance agreement as soon as possible, so it can be negotiated and signed along with the lease. Attach it as an exhibit as the standard for future nondisturbance agreements.
- 46.3. Recognition Agreement and Estoppel from Ground Lessor.
- 46.4. Opinion of Landlord’s Counsel.
- 46.5. Allocation of Transfer Taxes. The calculation and allocation of transfer taxes, if any, on the creation of the lease (including the treatment of any transfer of personal property) should be embodied in a closing document.
- 46.6. Title Insurance. Consider obtaining a policy of leasehold title insurance.
- 46.7. Unusual Security Arrangements. Unusual security arrangements—letters of credit, delivery of marketable securities, and the like—should be structured and documented. The landlord’s lender and conceivably other third parties may also need to get involved in these discussions.
- 46.8. Leasehold Insurance. Consider separate insurance coverage for a valuable leasehold.
- 46.9. Landlord’s Approval. The landlord’s approval of plans and specifications for initial work (if not attached as an exhibit to the lease).
- 46.10. Diagram of Premises. The lease should have an exhibit consisting of a precise diagram of the premises. Confirm that the tenant, the broker, and other advisers reviewed and approved the diagram.
- 46.11. Guaranty. Any guaranty of a lease will raise its own issues, which are outside the scope of this outline.
- 46.12. Internal Approvals. Any documents necessary to evidence the tenant’s internal approval of the contemplated lease (resolutions, consents, or the like).
S.H. Spencer Compton is counsel at Duval & Stachenfeld LLP in New York City.
Joshua Stein is a real estate and finance partner in the New York City office of Latham & Watkins, a member of the American College of Real Estate Lawyers, and chair of Practising Law Institute’s annual two-day seminar on commercial real estate finance. He has published about 50 articles on real estate law and practice. Some will soon be republished by ALI-ABA as a book. Copyright © 2000 New York State Bar Association.
Reprinted from The Practical Real Estate Lawyer
Volume 16, Number 3, May 2000