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Welcome

“Primer” programPlease 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

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Topics Covered

Basic Concepts and TerminologyBrokerage AgreementsLetters of Intent (LOI) / Term Sheets / Memoranda of

Understanding (MOU)Delivery of Premises and Initial OccupancyLease ProvisionsSubleasesMiscellaneous

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How many commercial leaseshave you reviewed?

• 0• 1• 2-5• More than 5

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Do you review and negotiate leases yourselfor do you use outside counsel?

• The buck stops here, I negotiate the leases• I have a budget! I consult outside counsel

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What role is your company typically in?

• Landlord• Tenant• Sublandlord• Subtenant

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What kind of space does your company need?

• Office• Retail• Light or heavy industrial• Mixed Use (e.g. office and light industrial)

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Basic Concepts

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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)

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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

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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.

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Gross NNN Modified Gross Ground

Base Rent Tenant Tenant Tenant Tenant

Operating Expenses:

Landlord Tenant Landlord or Tenant

Tenant

RE Taxes Landlord Tenant Landlord or Tenant

Tenant

Insurance Landlord Tenant Landlord or Tenant

Tenant

Utilities Landlord Tenant Typically Tenant

Tenant

Building Maintenance

Landlord Tenant Typically Tenant

Tenant

Comparison Chart of Lease TypesWho Pays What

Note: Common Area Maintenance (CAM) expenses usually includes insurance and maintenance. CAM may or may not include taxes and utilities.

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Brokerage Agreements

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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?

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Letter of Intent (LOI) aka Term Sheet

aka Memorandum of Understanding (MOU)

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LOI/Term Sheet/MOUOften formal letter countersigned by Landlord and TenantSometimes only signed by Tenant or just email exchange of

major business termsSometimes 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 statementNo final deal until lease is executed and delivered by both

parties“No offer” statement in transmittal

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“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

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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

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Delivery of Premises and Initial Occupancy

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Delivery ConditionAs-isTurnkeyLandlord Work; remaining work by TenantOften a Work Letter or other exhibit that deals with

all of the initial build-out provisionsRepresentations about condition of space

• Building systems in good order and condition• Compliance with ADA

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Landlord Performs Work (and hires contractor)

Landlord’s Architectprepares plans

Tenant’s Architectprepares plans

Tenant Performs Work(and hires contractor)

Landlord’s Architectprepares plans

Tenant’s Architectprepares plans

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Landlord Performs Work

Scope of WorkTenant plan approvals or Landlord’s building standard“Substantial Completion”- definition clear; certificate

of occupancy, punch list, walk-through or inspectionTenant Delay- if Tenant delays Landlord Work then

completion is deemed to have occurred when it would have occurred absent delay

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Landlord Performs Work (cont.)

Remedies for late delivery- delay of rent commencement, rent credit, termination

Consider current occupancy timing to avoid holdoverCoordination of Tenant installation of furniture,

fixtures and equipment, telecommunications equipment & wiring

Often Tenant needs early access

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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?

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Tenant Performs Work (cont.)

Build-out period with no rent duePlan 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 riskLabor Harmony- usually Tenant responsibility to ensure

harmony between contractors in Building (union/non-union)

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Hi-tech startup Tenant set up this area in the building lobby. Who will remove it after the Tenant moves out?

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Lease Provisions

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What Form of Lease?

GrossNNN (Triple Net)Modified Gross

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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)

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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

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• 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

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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

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• 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

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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

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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

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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

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Other Considerations (cont’d)

• Security– Provided by Landlord– Provided by Tenant

Locks, special access devices

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Assignment and Subletting

• Landlord Consent Required– Standard for consent

• Landlord Consent Not Required– Permitted Transfers

• Landlord’s Recapture Right

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Subleases

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Comparison of Subleases and AssignmentsAn 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)?

-Privity is between Tenant and Landlord. -Subtenant cannot take direct action against -Landlord to enforce Landlord’s obligations and must rely on the Tenant.

-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.

Is Tenant still responsible for Subtenant/Assignee defaults?

-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.

-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.

Is Landlord consent required?

Generally yes and typically conditioned upon obtaining the written consent of Landlord (not to be unreasonably withheld).

Same as for sublease.

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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

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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

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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

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Miscellaneous

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Writing Requiremento Statute of frauds requires a lease to be WRITTEN if the

lease is for more than 1 yearo 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

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Other documentso Corporate resolutionso Bank approvals may be required by financing covenants

Formso AIA (American Institute of Architects)-see www.aia.org

(subscription)o Landlord forms (most common, especially for office leases)o Tenant forms (mostly if large retail tenant with multiple

sites – e.g. Home Depot, fast food, grocery stores)

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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 19th 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

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Questions?