In anticipation for the 2014 ICSC RECon Show and the deals that will be made at the event, landlords need to be wary of restrictions, termination and co-tenancy rights, and unexpected landlord obligations that can be hidden in commercial leases.
These provisions, like buried landmines can kill deals, prevent operation and development, and cause lost rent and damages. The good news is that with the help of experienced counsel, landlords can avoid many of these lease landmines.
The 5 Most Dangerous Lease Landmines
1. Use Restrictions
Many tenants request exclusive use restrictions that prohibit other tenants from selling certain types of products/services. Without clear examples of what each tenant will sell problems can and will arise. If landlords agree to allow broad and undefined use and restriction clauses, how will you determine exactly what uses will be allowed? Convincing other tenants to agree to be bound and limited by broad and undefined restrictions can be difficult and may prevent you from closing new deals. Clearly defined use restrictions are vital since courts can hold both landlords and their tenants responsible for violations.
2. Building Restrictions
Like use restrictions, there are many types of building restrictions. One common restriction prohibits all changes at a property, adjacent properties and expansions, including the prohibition of all construction, development and repairs. Others may prohibit changes within certain designated areas, or in excess of certain limits, such as parking ratios, while others may prohibit changes from being conducted during certain times of the year, such as holidays.
Landlords may seek to avoid or limit and define such restrictions by showing specific “no build” areas on a site plan. Limits can also be placed by defining restrictions and permitted exceptions.
3. Termination Rights
Tenants may seek broad termination rights allowing them to vacate for any or no reason at one or more times during the term of their lease. Commonly requested termination rights can include failures to achieve a certain level of gross sales during a certain period(s) or defaults by landlord.
One way landlords can seek to avoid or limit termination is by conditioning the tenant’s termination rights tied to gross sales upon the tenant’s continuous operation for their location’s permitted use, not opening a competing store that would reduce gross sales, and reimbursing landlord for certain costs, such as unamortized construction and brokerage costs.
4. Co-tenancy Rights
Tenants may also seek rights if certain other co-tenants close or fail to open. But such rights can cause multiple closings and create a domino effect giving rights to multiple tenants. If you must grant such co-tenancy rights, you can seek to limit such rights. For example, you can seek to exclude certain closings, such as temporary closings, or closings due to holidays, alterations, casualty, condemnation, assignments and bankruptcies. You can also seek to avoid or limit tenant remedies, including rights to close, terminate, or pay reduced rent, and require that all remedies cease after a certain period of time, or when landlord relets all or a portion of the space to any other tenant or tenants.
5. Unexpected Landlord Obligations
Landlord obligations, including obligations and costs for construction, repairs, maintenance, and compliance, may be hidden, or arise as a result of ambiguous language. Landlords may seek to avoid such obligations and costs. For example, you can seek to clearly define and limit the landlord’s obligations and expressly state that the tenant is solely responsible at tenant’s sole cost and expense for all obligations and costs other than landlord’s obligations. Additionally, you can seek to include all language needed to clarify that the lease is a triple net lease (if that is the case). And you can seek to add all language needed to clarify that the lease was the product of negotiation by both parties and that any ambiguity will not be interpreted against either party. It is important to avoid ambiguities since where doubt exists courts can favor tenants rather than landlords.
Obtain Outside Counsel to Avoid Lease Landmines
These are just a few lease landmines to avoid either when negotiating at the 2013 ICSC RECon show or any other day. Evaluating these issues requires careful review on an individual basis. It behooves landlords to speak with experienced counsel prior to negotiating or drafting leases and other documents. As they say, an ounce of prevention, goes a long way. Having an attorney familiar with these issues and how they will be enforced is critical in ensuring certainty. The attorneys in Stark & Stark’s Commercial and Industrial Real Estate Group can provide you the insight you need to address these and other questions for your commercial real estate needs.