Leasing and Lease Form. Leasing and Lease Forms. Title Issues [p. 751] Ground Lease

Transcription

1 Leasing and Lease Forms Residential: negotiation from standard form lease (provided by L) is nonexistent Commercial: No standard lease (term variation) In some cases, T may control form Market conditions drive term negotiation Leasing and Lease Form Benefits of standardized form Control of form provides some built-in advantage in negotiation dance Operational benefits to consistent terms (e.g., Additional Rent ) Title Issues [p. 751] Tenant must be focused on title issues, including: Building could be ground leased Other tenants could have exclusive rights that could impact tenant s planned use Relationship with L s mortgage lender Ground Lease O leases undeveloped land to L for 60-year term L then builds an office building, in which L leases the space to Ts for next 60 years (recouping investment in building from rents) At end of 60-year term, O owns land and building 1

2 Suppose T has lease with L on a groundleased building If L fails to make rent payment on ground lease, O can terminate ground lease Termination of ground lease terminates T s lease! In this case, T will want to negotiate some protection from this risk. How? T wants to avoid risk that it might lose benefit of a favorable lease (1) T might bargain w/o for right to notice of/cure of L s default (2) T might bargain w/o for nondisturbance agreement (even if ground lease terminated, O won t evict T as long as T performs its lease obligations) Lease v. Mortgage: Hypo 2008: L (owner of office building) grants mortgage to New York Life 2011: L enters into 10-year lease with Jones Law Firm 2012: L defaults on its mortgage, New York Life forecloses Mortgage foreclosure sale passes title as it existed on the date that the mortgage being foreclosed on was granted Interests that arose after mortgage was granted are extinguished by foreclosure sale Interests that arose before mortgage was granted are unaffected by the sale As a result, if New York Life forecloses its mortgage, the foreclosure sale buyer could terminate T s lease and evict T (even if T was current on rent payments)! 2

3 Tenant in this position will typically want to negotiate with New York Life (mortgage lender) for a nondisturbance agreement I.e., if New York Life had to foreclose mortgage, buyer would agree to allow T to remain in possession, as long as T paid rent and performed all of the other obligations under its lease Transferred to T1 End of Lease Term Retained by T Sublease T transfers to T1 for less than the remaining term of T s lease; T has reversion following sublease End of Lease Term Transferred to T1 Assignment T transfers to T1 for the remaining term of T s lease; T has no reversionary interest T s leasehold estate is a property interest (presumed to be freely alienable); if lease does not specify otherwise, T may transfer by assignment or sublease Many leases, however, prohibit or restrict T s ability to assign/sublet Why would it be in L s interest to prohibit T from assigning or subleasing its leasehold? Landlord Concerns Creditworthiness of T1 (transferee) Suitability of T1 s proposed use If rents have increased, T may be assigning/subleasing at a profit If L has other space for lease, L has to compete with T for tenants 3

4 Hypo for Discussion Tenant Concerns T s needs may change during lease term (relocation, resizing, failure) As long as L receives agreed-upon rent, T should get benefit of its bargain (and be able to use the space by making it available to others) Jones is 65-year old lawyer Jones is negotiating to renew 10-year lease on her existing office space In 5 years, she expects to turn over her law practice to her daughter and retire Implications for L, Jones in negotiation and drafting of assignment/subleasing provision of the lease? Lessee shall not assign or sublease the Premises without the prior written consent of Lessor, which may be withheld in Lessor s absolute discretion. Will this provision limit T from turning over practice to daughter? Who is Tenant under the lease? If Tenant is Mary Jones, transfer of possession to daughter = assignment or sublease If Tenant is Jones Law Firm, Mary could transfer ownership of the firm to her daughter, but Tenant is still the same (no transfer of leasehold) 4

5 Concern for Landlord Jones Law Firm owned by Mary (experienced lawyer) Jones Law Firm owned by daughter (new, inexperienced) Tenant could now be at higher risk of default (comparable risks as w/assignment or sublease) For this reason, L may wish to treat this situation as de facto assignment/sublease For purposes of this Section, a transfer of an interest in Tenant by which an aggregate of more than 25% of the beneficial interest in Tenant shall be vested in a party or parties who are not holders of such interests as of the date hereof shall be deemed an assignment of this Lease. Demised Premises Usable vs. rentable space Rent calculated based on rentable space, on per square foot basis Lease often expresses rent obligation in gross, however Avoids claim for overpayment if premises are smaller than expected The Demised Premises and Calculation of Rent (Office Lease) Base rent is comprised of three components (not typically broken out separately) 1) Amount needed to cover T s pro rata share of L s debt service (mortgage payment) 2) Amount needed to cover T s pro rata share of L s base year (current) operating expenses 3) L s profit (return on investment) Increases in operating expenses during term are passed through, pro rata, as Additional Rent 5

6 Demised Premises: Office Suppose T leases 10,000 square foot office Building has 100,000 SF of rentable space and 10,000 SF of common areas Building s load factor = 10% What this means: T s base rent is calculated as if T was renting 11,000 square feet, not just 10,000 rentable feet Rent (Retail Lease) Base rent is comprised of two components (not typically broken out separately) 1) Amount needed to cover pro rata share of Landlord s debt service (mortgage payment) 2) Landlord s profit Landlord s annual operating expenses (taxes, insurance, maintenance, etc.) are passed through, pro rata, as Additional Rent Demised Premises: Key Issues Space needs to be fit for Tenant s needs, so negotiation of lease often involves negotiation of TI (tenant improvement) allowance. Issues: Approval of plans Responsibility for doing work (L or T) Cost allocation/sharing Ownership of TIs at end of lease term Default rule: TIs that are part of the building become L s property at end of lease term, unless they are trade fixtures At common law, T could remove trade fixtures at/prior to end of lease term But: lease should specify, precisely, the extent to which T owns/may remove any tenant improvements 6

7 Demised Premises: Key Issues T signs 5 year lease in a building with a surface parking lot After lease commences, T discovers that there aren t sufficient spaces for its employees, who have to pay to park in a nearby garage Does T have any recourse? Parking rights generally are mere license or, at most, a nonexclusive easement (shared w/other tenants and their guests), unless lease provides otherwise Parking is not part of demised premises (so as to give T exclusive rights) unless explicitly so defined If so defined, then T can treat interference w/ parking rights as tantamount to eviction; if not, T may have no remedy Commencement of Term Residential leases: L and T are typically certain of date premises will be ready Commercial leases: less certainty Leases for new development are often preconstruction leases (necessary for L to get construction financing and permanent financing) Even for existing space, L may have to renovate or retrofit space for T s occupancy Commencement of Term Options for commencement of lease term 1) Date certain : lease term commences on a specific future date In this case, Lease should (but may not) discuss the consequences of construction/approval delays 2) Flexible : lease term commences on undetermined future date tied to readiness of premises (e.g., substantial completion ) 7

8 T signed 5-year lease, to commence 1/1/2011 Due to construction delays, building completion was delayed until 1/1/2012 By then, T had signed 5-year lease for other space 1/1/2012: when building is complete, L demands that T begin paying rent Can T argue that the lease was terminated based on the delay? 8