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A guide to tenant's rights in a leaseBy STAN MUUINVice President, Grubb & Ellis

In this article we have taken four topics, com-mon to commercial real estate leases and brieflydescribed either a) rights that a tenant typically hasin relation to the landlord or b) suggestions youmay wish to make on behalf of your tenant client

.Because this synopsis cannot address the intricaciesof your specific transaction and lease law variesbetween states, we recommend that you consultwith legal counsel before making a binding com-mitment

Offset Rights - If a landlord does not performhis obligations in the agreement, can the tenant per-form the obligations and if credit any cost incurredagainst rent due under the lease? Can the tenantcancel the lease? The ability, perceived or real, for,the tenant to utilize its richts to "self beln" in this

circumstance is one of the greatest threats to a land-lord. Even if the tenant does not have the contractu-al rights to self help, he will often have a difficulttask of convincing a judge of his case against thetenant if the landlord has not complied with hisobligations.

Unlike contract law, which usually states thatone party does not have to perform under theagreement if the other party does not perform, moststates have said that the parties must abide by theterms outlined in the lease.

In most area of the U.S. where residential ten-ants have been provided self help rights, thoserights have not been extended to commercial leas-es. If commercial tenants are not provided withthese rights, what can they do if their landlord doesnot fulfill his obligations? In some states, the courtshave said that if the landlord is not meeting hiscommitments, that he has effectively evicted the

tenant. This allows the tenant to be relieved fromthe lease and move elSewhere. If the tenant stays inpossession, he must pay rent. This does not helpmuch for those tenants that would incur greatexpense in a relocation or just do not wish to move.

Some states have allowed "self help" provisions;If you want the tenant to have greater recourse inthis type of circumstance, clearly state in the leasethat the tenant has the right to fulfill the landlord'sobligations if they are not met within an agreedupon time frame in according in an acceptablemanner. We suggest that the lease specifically statethat the tenant's obligation to pay rent is a covenantdependent (among other things) upon the land-lord's permitting the tenant quaint enjoyment of thepremises.

Capital Expenditures - On occasion, near the,end of the lease term, the landlord may notify thetenant that he plans to make modifications to the

property as is allowed in the agreement 'The lease will often allow, or even require, that

the landlord maintain the roof, building exterior,parking lot and common areas. What is stated to beroutine maintenance is often a' thinly veiled excuseto renovate the property, at the tenant's expense, sothat the building is attractive to prospective tenantsafter the existing term expires.

Landlords that have re-roofed, re-painted thebuilding, re-surfaced the parking lot, or renovated ,the landscaping and subsequently billed the depart-ing tenant for the cost, have motivated ihe revisionof many leases around the country during the lastfew years. A tenant's advisor can help 'mitigate thisdilenuna by including language that spreads out the ,obligation to pay for these expenses over-theexpected useful life of each upgrade. ' .-

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What ifthe capital expenditure is governmentmandated? If they are due to a specific use of the ten-ant, typically the entire cost is borne by the tenant(you can always attempt to have the landlord pay forthe share of the cost that is equal to the percentage ofthe improvement that is likely to have reversionaryvalue to the landlord).

Usually these requirements are not due to a spe-cific use, but instead are for items such as compli-ance with the ADA (i.e, elevator installation), naturalhazard mitigation (i.e. seismic modifications), energyefficiency, etc. Rather than attempting to place theentire cost on the landlord, sharing the cost burden inthe same fashion as in the paragraph above is a goodalternative. . -

If these mandated upgrades are near the end of the .term, the landlord should have the right to terminate .the agreement if the cost is too burdensome and thetenant should have the right to a) terminate the leaseif the landlorddoes not pay his share or b) pay forlandlord's share and offset that cost against rent due.A similar approach can be used with other cost shar-ing issues such as the remediation of environmentalcontamination that is not caused by either party ordamage due to natural hazards (i.e. ice storms, earth-quakes, wind, etc.) ..

Right of 1st Refusal - Typically tenants willwant a right to either acquire the property or takeadditional space during the term: _

As a rule, the first right is entirely in the tenant'sfavor as it limits the landlord's ability to sell or relo-cate tenant's with the property. Often, itwill take aconcession of this type to secure the tenant and so theprovision is given. The most critical item is that thelanguage be precisely constructed to mitigate misun-derstanding. The tenant should attempt to obtain an"ongoing" right of first refusal which will provide thealternative throughout the term. .., If the right is "one.time" the tenant may face an

opportunity to purchase or expand early in the termwhen he or she is still getting established in the prop-erty and may not have the need to grow or the capac-ity to buy. If the tenant is limited to the one occasion,.it defeats the intended purpose of the right. AS firstright provisions typically require the tenant to pay afair market rate or price, the landlord is not clearlyharmed (constrained yes) by providing the rightthroughout the term.

In addition, be clear as to the party that has thefirst right. It may be that the tenant is on the lease, thetenant is the logical party to want the expansionright, but it is the principals in the company thatoften would elect to buy the property and to be ontitle, not the tenant's business. As an owner of abusi-ness obtaining a first right, address before the leasehow the rights would be effected if your partnershipdissolved and the company remained, there was adivorce, etc. .

In rights to purchase, landlords typically must ful-

ly negotiate the terms to a sale, then provide notice ofthe terms to the tenant, provide a period for the ten-ant to match those terms (typically 1-3 weeks) and ifthe tenant does not respond within the allotted peri-od, the landlord may proceed with the initial sale.

With expansion, the landlord should notify thetenant at least 30 days in advance of the pendingavailability. I

SNDAs - Tenants on occasion request andreceive a Subordination, Non Disturbance andAttornment agreement from the landlbrd's lender, inthe hope that the tenant's lease will not be voided in

_the event of foreclosure on the property. Each state.differs in its handling of this issu'e, but Californiauses a "race notice" system which establishes priori-ties between interests in real estate. Typically, theparty which attaches first in time takes priority overlater attaching interests (so long as the later attachinginterests have notice of the prior interest).

In this system, the foreclosure of a senior deed oftrust can terminate junior interests (i.e. a lease agree-merit) in the property.

Is a lease automatically extinguished when a) the. lease is executed after the deed of trust was placedagainst the property (which is typical with propertyencumbered with a loan), even though the tenant wassuccessful in obtaining an attornment provision and

. b) the deed of trust was subsequently foreclosedupon by the property's lender? Can the lender in thatcircumstance void the lease even if the tenant is infull compliance of all terms with his or her agree-ment?

In California, a 1997 decision in the case ofMiscione v. Barton Development Company held thatthe lease was not extinguished. Because a) theattornment provision was in the agreement and b)following the foreclosure, the foreclosure purchaseraccepted rent from the tenant, the court held that theattornment provision overrode the priority of thedeed of trust. The Court held that the Attornmentprovision had the same effect as a subordinationclause.

While obtaining a SNDA from the propertylender as a part of your lease agreement may be timeconsuming and is often difficult, the existence of aSNDAin your contract can provide a good degree ofcomfort to the tenant that he or she may be able toretain quiet enjoyment of the property for the dura-tion of the term, so long as the tenant complies withthe obligations of the lease, regardless of a change ofownership.

(Remember that a change in title may result in achange in the assessed value of the property and thecorresponding property tax obligation, in somestates. )

Please contact the author if you would like sug-gestedlanguage to address some of the topicsaddressed in this article.

Stan Mullin is a Senior Vice President in theNewport Beach, California office of Grubb & Elliswith afocus on corporate real estate.