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Real Estate Best Practices

No Go Lease Terms: Tenant Edition

By April 4, 2017 2 Comments

No Go Lease Terms: Tenant Edition

As a former practicing lawyer, I pride myself on providing my clients with thorough lease comments.  I also work hard to help my clients understand when proposed lease language is not detrimental to their rights and therefore acceptable.  That said, there are seven “no go: don’t even ask” terms that I will fight hard to ensure don’t make it into the final lease document.  In no particular order:

  • Replacements as an operating expense.  Operating expenses should include repairs of things like the roof, parking lot, etc.  Replacements, on the other hand, are a cost of ownership.  They should not be passed through to the tenant.
  • Lack of a clear standard for measuring space.  The only entity this benefits is the landlord who is then at liberty to “remeasure” the building at whim and change the tenant’s rental obligation.  The parties should either stipulate to a square footage at lease execution or agree on a measurement standard such as BOMA.
  • Reserves as an operating expense. I rarely see this but when I do, I am baffled.  How can a landlord expect a tenant to agree to put money aside for repairs that may not occur until some date in the future when that tenant no longer occupies space in a building?  No.  Just No.
  • Landlord’s right to withhold consent (e.g. to signage, to a potential subtenant, etc.) in Landlord’s sole and absolute discretion.  If I am going to push for a tenant right, I am going to ensure that it is exercisable.  Sole and absolute discretion as a standard essentially negates the tenant’s right.  I believe that commercially reasonable discretion is a fair compromise.
  • Landlord’s right to collect attorneys’ fees from tenant when it is not qualified by the requirement that the landlord be the prevailing party in litigation.  Without the prevailing party requirement, the landlord could, for instance, lose the tenant’s rent check, hire an attorney to write a demand letter for the rent, find the check and still bill the tenant for the attorney’s time.  Ideally, this would not happen but the landlord would have the right pursuant to this language.
  • Declaring the landlord to be the tenant’s attorney in fact if the tenant does not return an estoppel in a timely manner.  I prefer that failure to return an estoppel be declared a tenant default rather than it resulting in the landlord being declared the attorney in fact.  Here’s the scenario:  Usually, an estoppel is requested when a building is being sold.  The new buyer wants to understand whether all leases are in good standing and if not, what issues exist.  If a tenant does not return the estoppel in a timely manner (usually within a 10-day period) because they are trying to work out an issue with the existing owner (for instance, a dispute over monies owed), the landlord could declare themselves the tenant’s attorney in fact, sign the estoppel stating that there are no events of landlord default existing at that time, and the tenant will be estopped from ever raising that issue with a new owner.
  • Renewal rights without a dispute resolution mechanism.  When tenants are granted renewal rights at “fair market value” to be determined at the time of renewal, the lease must include a mechanism for resolving disputes as to the rate.  There are numerous alternatives such as appraisal or arbitration.  These mechanisms serve to keep both parties honest when it comes time to negotiate the rate as both parties will usually try to avoid the time and money wasted resolving a dispute.  On the other hand, it the lease states that the landlord determines what fair market value is, the tenant will be at the landlord’s mercy.  This can make a renewal right somewhat meaningless.

All of the landlord positions or terms detailed above are extremes.  Thankfully, I usually see only one or two of these in most initial landlord lease drafts.  And reasonable landlords always seem to be able to draft a compromise that eliminates the tenant’s biggest concerns.   If I see several of these terms or cannot reasonably resolve them with the landlord, it can be a red flag worth heeding about the pending landlord-tenant relationship.

In the interest of “equal time”, next week we will look at No Go Lease Terms: Landlord Edition.

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