Welcome. Primer program Please review the additional materials It has a LOT of additional detail, samples and links to other materials
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1 Welcome Primer program Please review the additional materials It has a LOT of additional detail, samples and links to other materials There are many kinds of leases Single and multi-tenant office Single and multi-tenant industrial Commercial/retail Raw land Focus mostly on office leases 1
2 Topics Covered Basic Concepts and Terminology Brokerage Agreements Letters of Intent (LOI) / Term Sheets / Memoranda of Understanding (MOU) Delivery of Premises and Initial Occupancy Lease Provisions Subleases Miscellaneous 2
3 How many commercial leases have you reviewed? More than 5 3
4 Do you review and negotiate leases yourself or do you use outside counsel? The buck stops here, I negotiate the leases I have a budget! I consult outside counsel 4
5 What role is your company typically in? Landlord Tenant Sublandlord Subtenant 5
6 What kind of space does your company need? Office Retail Light or heavy industrial Mixed Use (e.g. office and light industrial) 6
7 Basic Concepts 7
8 Lease Parties to typical office lease are Landlord and Tenant; should match signature blocks Landlord is the fee owner of the real property Tenant is the entity occupying the Premises Premises may be described in several ways, including street address, approximate square footage, and floor plan (exhibit to lease) 8
9 Customary Types of Leases Gross Lease: Tenant pays Base Rent to Landlord and is not required to pay Additional Rent for real estate taxes, insurance and operating expenses, which are factored into the base rent Triple Net ( NNN ) Lease: Tenant typically pays Base Rent, and, as Additional Rent, its proportionate share of real estate taxes, insurance, and operating expenses Most commonly used when Tenant leases an entire commercial building Modified Gross Lease: (Gross+NNN hybrid) Tenant pays Base Rent and some additional expenses such as utilities or certain maintenance costs. Other operating expenses are included in the Base Rent. Tenant may pay operating expenses over a Base Year. Note: Gross and Modified Gross Leases are also sometimes called Full Service Leases 9
10 Customary Lease Types (cont.) Ground Lease: Typically a long-term lease of unimproved land or previously developed property where Tenant constructs new improvements Lease terms customarily are from 30 to 100 years Tenant pays all expenses attributable to the property similar to NNN lease Tenant owns improvements during ground lease term Sublease: Tenant subleases all or part of the Premises to a third party Subtenant and remains responsible for all lease obligations even if the Subtenant causes a default. 10
11 Gross NNN Modified Gross Ground Base Rent Tenant Tenant Tenant Tenant Operating Expenses: Landlord Tenant Landlord or Tenant RE Taxes Landlord Tenant Landlord or Tenant Insurance Landlord Tenant Landlord or Tenant Utilities Landlord Tenant Typically Tenant Building Maintenance Comparison Chart of Lease Types Who Pays What Landlord Tenant Typically Tenant Tenant Tenant Tenant Tenant Tenant Note: Common Area Maintenance (CAM) expenses usually includes insurance and maintenance. CAM may or may not include taxes and utilities. 11
12 Brokerage Agreements 12
13 Brokerage Agreements Real Estate is LOCAL so the exact form of the Brokerage Agreement will vary. Brokers always want to be the exclusive representative Brokers want the period of representation to be as long as possible. Choose a period of time that works best for your organization. Commissions are typically paid by the Landlord (but not always) read your Agreement carefully Dual-agency Tail What happens after the Agreement expires and you lease a property originally shown to you by your former Broker? 13
14 Letter of Intent (LOI) aka Term Sheet aka Memorandum of Understanding (MOU) 14
15 LOI/Term Sheet/MOU Often formal letter countersigned by Landlord and Tenant Sometimes only signed by Tenant or just exchange of major business terms Sometimes LOI is incomplete and parties just move to lease phase once the terms are mostly agreed Letter of Intent is non-binding; often an express statement No final deal until lease is executed and delivered by both parties No offer statement in transmittal 15
16 Must Have Major Business Terms Premises size and location Term/ Commencement Date (estimated) Rent and Escalations Free Rent Escalation Charges (Taxes, Operating Expenses); Base Year Options (Extension, Expansion, Termination) Tenant Improvement Allowance Condition of Space/Landlord Work Brokers 16
17 Other Business Terms Landlord and Tenant entities Contingencies/prior tenants Parking (if in downtown urban area) Security often TBD in LOI Utilities/Cleaning Building Amenities Assignment/Subletting 17
18 Delivery of Premises and Initial Occupancy 18
19 Delivery Condition As-is Turnkey Landlord Work; remaining work by Tenant Often a Work Letter or other exhibit that deals with all of the initial build-out provisions Representations about condition of space Building systems in good order and condition Compliance with ADA 19
20 Landlord Performs Work (and hires contractor) Landlord s Architect prepares plans Tenant s Architect prepares plans Tenant Performs Work (and hires contractor) Landlord s Architect prepares plans Tenant s Architect prepares plans 20
21 Landlord Performs Work Scope of Work Tenant plan approvals or Landlord s building standard Substantial Completion - definition clear; certificate of occupancy, punch list, walk-through or inspection Tenant Delay- if Tenant delays Landlord Work then completion is deemed to have occurred when it would have occurred absent delay 21
22 Landlord Performs Work (cont.) Remedies for late delivery- delay of rent commencement, rent credit, termination Consider current occupancy timing to avoid holdover Coordination of Tenant installation of furniture, fixtures and equipment, telecommunications equipment & wiring Often Tenant needs early access 22
23 Tenant Performs Work Tenant Improvement Allowance (TIA) Amount What does it cover? hard costs, soft costs, furniture, fixtures and equipment, telecom, moving When is it paid- periodically or all at the end of work? Does it expire? When? Excess as rent credit? 23
24 Tenant Performs Work (cont.) Build-out period with no rent due Plan approval process Content &scope- what must Tenant provide Landlord? Timing for Landlord response Deemed approval of plans? Landlord costs; construction management fee Tenant takes timing risk Labor Harmony- usually Tenant responsibility to ensure harmony between contractors in Building (union/nonunion) 24
25 Hi-tech startup Tenant set up this area in the building lobby. Who will remove it after the Tenant moves out? 25
26 Lease Provisions 26
27 What Form of Lease? Gross NNN (Triple Net) Modified Gross 27
28 Basic Lease Terms Parties be sure to use legal names and include state of formation Premises define exactly what is being leased (square footage, location). There are different ways to measure the Premises be consistent. Use Permitted Use Prohibited Activities Exclusives Special Uses (e.g., cafeteria, trading floor, call center, R&D, light industrial, switch/collocation) 28
29 Term Number of Months/Years Commencement Date/Commencement Date Letter Expiration Date Rent Base Rent Rent Commencement Date (same as Commencement Date or different?) Rent Chart (if possible) Adjustment percentage or fixed dollar amount Late Fees and Interest Free Rent/Rent Abatement Security Deposit/Guaranty 29
30 Additional Rent: Generally, any payment by Tenant other than Base Rent Included in most office leases Includes Tenant's obligation to pay its proportionate share of certain Landlord expenses (based on increases over a Base Year) such as operating expenses, real estate taxes, utilities, and charges for additional services (e.g., janitorial, HVAC equipment maintenance, and building security) Base Year calculation for Operating Expenses and RE Taxes (applicable to Gross and Modified Gross Leases) CAM (Common Area Maintenance) Charges (applicable to NNN and Modified Gross Leases) Operating Expense Exclusions Capital Expenditures Audit Rights Gross-up Provision 30
31 Taxes, Utilities, and Insurance Real Estate Taxes Tenant pays all taxes (NNN Leases- usually where Tenant rents the entire commercial building) Tenant pays Proportionate Share (Modified Gross Leases) Tenant pays increase above Base Year (Gross and Modified Gross Leases) Utilities Interruption in provision of services 31
32 Insurance Landlord s Insurance Requirements Insures the Building in commercially reasonable amounts No obligation to insure any Tenant Improvements or Tenant s personalty Tenant s Insurance Requirements Usually provides for the types and dollar amounts of coverage Requires Landlord and other named individuals/entities to be covered as Additional Insureds May limit deductible permitted to be carried May require 30 days prior notice of cancellation Insurance Certificates 32
33 Building Services Basic building services (e.g., elevator, water, janitorial, cleaning and trash removal in common areas, HVAC during normal building hours) Additional services (after-hours HVAC, special cleaning requests may be available at an additional cost) Interruption in provision of services Repairs and Maintenance By Landlord Generally the structural components of the Building and common areas By Tenant generally the Premises Alterations Landlord consent required; carve-outs Cosmetic/decorative Removal at end of Term 33
34 Options Renewal Options Expansion Options Right of First Refusal/Right of First Offer (ROFR/ROFO) Termination Options (e.g., government contracts) Default and Remedies Tenant Default Landlord s Remedies for Tenant Default Landlord Default Tenant s Remedies for Landlord Default 34
35 Other Considerations Signage (Building, Monument, Suite) Parking (Reserved, Unreserved, Paid, Unpaid) Surrender/Holdover Indemnification and Consequential Damages Estoppel Certificates and Subordination, Non-Disturbance and Attornment Agreements (SNDAs) Usually required to return with a specified period May be an Event of Default if not returned timely Memorandum of Lease 35
36 Other Considerations (cont d) Security Provided by Landlord Provided by Tenant Locks, special access devices 36
37 Assignment and Subletting Landlord Consent Required Standard for consent Landlord Consent Not Required Permitted Transfers Landlord s Recapture Right 37
38 Subleases 38
39 Comparison of Subleases and Assignments An assignment is a transfer of all of the rights and obligations under a lease for the remainder of the term. A sublease is a right to lease all or a portion of the premises for some portion of the remainder of the term and does not affect the original lease. ISSUE SUBLEASE ASSIGNMENT Portion of Premises All or part of the Premises subleased to Subtenant All of Premises Who can enforce lease obligations and rights (privity of contract)? Is Tenant still responsible for Subtenant/Assignee defaults? Is Landlord consent required? -Privity is between Tenant and Landlord. -Subtenant cannot take direct action against - Landlord to enforce Landlord s obligations and must rely on the Tenant. -Yes (no shifting of legal risk). -Tenant remains responsible for all lease obligations even if the Subtenant causes a default. -Tenant should obtain an indemnification from Subtenant. Generally yes and typically conditioned upon obtaining the written consent of Landlord (not to be unreasonably withheld). -Privity between Assignee and Landlord. -Assignee obtains all of Tenants rights and interests under the lease and assumes all of Tenant s obligations. -Assignee and Landlord can each proceed against the other for breaches. -Yes (almost always). -Tenant should obtain an indemnification from Assignee in the Assignment; in limited circumstances Assignor may be able to obtain a release from Landlord. Same as for sublease. 39
40 Sublease Considerations Tenant (Sublandlord) Perspective Perform certain due diligence actions Review prime lease provisions governing subleasing Determine which lease provisions should be expressly deleted or modified by the sublease Obtain and review Subtenant documents to determine its financial viability Verify proposed use of subleased Premises is consistent with permitted uses in prime lease Confirm Subtenant will take the subleased space as is Assess leverage of each party 40
41 Tenant (Sublandlord) Perspective (cont.) Condition and subordinate Subtenant s rights to provisions of prime lease Example: if Landlord is obligated to provide HVAC services (including necessary maintenance and repair) under prime lease, Sublandlord should ensure sublease does not obligate it to provide HVAC services Example: Subtenant signage Example: Alterations Require Subtenant to communicate with Tenant (and not Landlord); if not feasible in certain circumstances, Subtenant must notify Tenant of Subtenant s communications with Landlord Indemnification provisions should be robust Mechanics liens and other encumbrances 41
42 Subtenant s Perspective Negotiate a letter of intent Verify prime lease allows intended use of subleased Premises Negotiate discount to business terms Tenant has under prime lease Accept flow down of prime lease clauses to the extent applicable Landlord s recourse for any breach should be solely vis-à-vis Tenant Early termination Right of First Offer or Refusal Negotiate Sublandlord s obligation to use reasonable efforts to obtain Landlord approval of requests originating from Subtenant (e.g., alterations) Sublandlord should timely inform Subtenant of communications from Landlord or other developments affecting the subleased Premises 42
43 Miscellaneous 43
44 Writing Requirement o Statute of frauds requires a lease to be WRITTEN if the lease is for more than 1 year o Amendments should also be written Local Laws Overall principles the same but laws vary by state e.g. remedies, if constructing: mechanics liens, minimum wage requirements, union requirements Could have additional county and/or city requirements 44
45 Other documents o Corporate resolutions o Bank approvals may be required by financing covenants Forms o o o AIA (American Institute of Architects)-see (subscription) Landlord forms (most common, especially for office leases) Tenant forms (mostly if large retail tenant with multiple sites e.g. Home Depot, fast food, grocery stores) 45
46 International Different customs Different terminology English is not American is not Australian, etc. Civil law countries (EU except UK) vs. common law countries (UK, US, Australia, New Zealand) Civil law: most rights/obligations set forth in statutes (often based on ancient Roman law and the Code Napoleon from early 19 th Century France) Common law: combination of statutes and court-made laws Former European colonies often follow the colonizer s system (civil/common) Islamic countries have varying combinations of Sharia law and civil or common laws Length (25 page lease in the US could be 8 pages in the UK) Dual language Controlling language (country may require local language be controlling) Choice of law-usually location of property 46
47 Questions? 47
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