chapter 19 drafting and negotiating...

Chapter 19

DRAFTING AND NEGOTIATINGCOMMERCIAL LEASE

Synopsis

PART A: TRANSACTIONAL CONTEXT

§ 19.01 Transactional Context—Drafting and Negotiating Commer-cial Lease

PART B: DRAFTING AND NEGOTIATING VARIOUS FORMS OFCOMMERCIAL LEASE

§ 19.02 Checklist for Drafting and Negotiating Various Forms ofCommercial Lease

§ 19.03 Negotiating Office Lease

§ 19.04 Considering Store Lease Provisions

§ 19.05 Advising About Shopping Center Lease

[1] Considering Mix of Shopping Center Tenants[2] Negotiating Initial Occupancy or Continued Occupancy

Rates[3] Using Reciprocal Easement Agreement Instead of Shop-

ping Center Lease Upstate

§ 19.06 Considering Commercial Loft and Industrial LeaseProvisions

§ 19.07 Establishing Obligations Under Net Leases

§ 19.08 Negotiating Ground Lease Insurance and AppraisalProvisions

[1] Defining Ground Lease and Obtaining InsuranceCoverage

[2] Negotiating Appraisal Provisions in Ground Lease

§ 19.09 Providing Purchase Options and Rights of First Refusal

[1] Drafting Option to Purchase Large Structures DemandsAttention to Detail

[2] Drafting First Refusal or First Privilege Options

PART C: DRAFTING AND NEGOTIATING TERM AND PAY-MENT PROVISIONS IN COMMERCIAL LEASE

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§ 19.10 Checklist for Drafting and Negotiating Term and PaymentProvisions in Commercial Lease

§ 19.11 Describing Demised Premises

§ 19.12 Determining Lease Term

§ 19.13 Negotiating Lease Term Commencement

§ 19.14 Providing for Renewals and Options to Renew

§ 19.15 Establishing Base Rent in Commercial Lease Negotiations

[1] Negotiating Rent Clauses, Percentage Arrangements,Escalation Clauses

[2] Tendering Rent Checks for Less Than Full Amount[3] Considering Tax Impacts of Periodic Rent Payments

§ 19.16 Negotiating Percentage Rent Lease Clauses

[1] Determining Formula for Setting Guaranteed MinimumRent

[2] Specifying Time of Percentage Rent Payment and Avail-ability of Financial Records

[3] Adding Additional Restrictions and Exceptions

§ 19.17 Determining Structure of Escalation Clauses

[1] Defining Operating Expenses in Escalation Clause[2] Requiring Statement for Calculating Operating Expenses[3] Selecting Mechanism for Rent Increases Under Escala-

tion Clause[4] Negotiating Pay Now, Fight Later Clauses

§ 19.18 Structuring Security Deposit Clauses

§ 19.19 Establishing Guarantor Obligations

PART D: DRAFTING AND NEGOTIATING RESTRICTION, AL-TERATION, AND REPAIR PROVISIONS IN COMMER-CIAL LEASE

§ 19.20 Checklist for Drafting and Negotiating Restriction, Alter-ation, and Repair Provisions in Commercial Lease

§ 19.21 Negotiating Use Restrictions

[1] Considering Landlord and Tenant Use Needs[2] Ensuring Tenant’s Intended Use Is Permissible[3] Negotiating Sign Requirements

§ 19.22 Drafting Non-Competition and Radius Restrictions on Ten-ant’s Business

§ 19.23 Defining Operating Covenants Governing Tenant’s Business

19–2NEW YORK REAL PROPERTY



[1] Negotiating Operating Covenants in Shopping Centers[2] Using Reciprocal Easement Agreements

§ 19.24 Prohibiting Businesses Competing with Retail or ShoppingCenter Tenant

§ 19.25 Allocating Costs of Complying with State and Federal Laws

[1] Defining Conditions Under Which Each Party Is Re-sponsible for Work

[2] Bearing Compliance Cost in Net Leases of EntireBuildings

[3] Subjecting Parties to ADA Compliance Costs

§ 19.26 Providing for Alteration and Improvement Rights

[1] Establishing Parameters of Tenant’s Right to MakeAlterations

[2] Reviewing and Negotiating Work Letters[3] Providing for Inspections and Punch List Items[4] Considering Tax Treatment for Tenant Alterations

§ 19.27 Determining Repair and Maintenance Obligations

[1] Defining Structural Elements and What ConstitutesPremises

[2] Negotiating Repair Obligations Under Long Term andNet Leases

[3] Specifying Responsibility for Maintaining Premises

§ 19.28 Incorporating Mechanics’ Lien Provisions into Repair, Al-teration, or Compliance Clauses

PART E: DRAFTING AND NEGOTIATING ANCILLARY SER-VICE, TAX, AND INSURANCE PROVISIONS IN COM-MERCIAL LEASE

§ 19.29 Checklist for Drafting and Negotiating Ancillary Service,Tax, and Insurance Provisions in Commercial Lease

§ 19.30 Maintaining and Altering Common Area and Parking Space

§ 19.31 Offering Utilities and Energy to Tenant

[1] Purchasing Electricity[2] Allocating Electricity Costs[3] Charging for Water Usage and Being Aware of Client’s

Technological Needs

§ 19.32 Providing Heating, Ventilation, Air Conditioning, and OtherServices

§ 19.33 Negotiating Real Property Tax Payment Responsibility

DRAFTING AND NEGOTIATING COMMERCIAL LEASE19–3



§ 19.34 Structuring Insurance Provisions

[1] Defining Nature and Amount of Property Insurance[2] Determining Insurance Cost and Cost Increases[3] Drafting Indemnification Clauses

PART F: DRAFTING AND NEGOTIATING COMMERCIAL LEASEPROVISIONS CONCERNING CONTINUED OCCU-PANCY AND DEFAULT

§ 19.35 Checklist for Drafting and Negotiating Commercial LeaseProvisions Concerning Continued Occupancy and Default

§ 19.36 Delineating Rights in Event of Condemnation

§ 19.37 Establishing Obligations and Recovery for Destruction ofPremises

§ 19.38 Negotiating Subletting and Assignment Rights

§ 19.39 Prescribing Arbitration and Appraisal Remedies If DisputesOccur

§ 19.40 Defining Default Responsibilities and Notice Requirements

[1] Requesting Notice and Remedies[2] Calculating Holdover Cost and Selecting Arbitration over

Litigation[3] Preserving Purchase and Renewal Rights Through Yel-

lowstone Injunction[4] Requiring Specific Performance and Attorneys’ Fees

§ 19.41 Requesting Documents in Sale or Mortgage of Landlord’sInterest

[1] Requesting Estoppel Certificates from Tenant[2] Executing SNDA Agreements with Mortgage of Land-

lord’s Interest

§ 19.42 Permitting Mortgage of Long-Term Leasehold

PART G: DRAFTING AND NEGOTIATING OTHER COMMER-CIAL LEASE PROVISIONS

§ 19.43 Checklist for Drafting and Negotiating Other CommercialLease Provisions

§ 19.44 Identifying Tenant’s Broker

§ 19.45 Determining Landlord’s Access to Premises, Representa-tions, Warranties, and Waiver

[1] Defining Landlord’s Right to Enter Premises

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[2] Setting Forth Prior Oral or Written Understandings[3] Failing to Insist on Strict Performance Not Waiver

§ 19.46 Dealing with Bankruptcy, Fees, Expenses, and Waiver ofJury Trial

§ 19.47 Coping with Failure to Give Possession and Inability toPerform

§ 19.48 Enforcing Rules and Regulations

§ 19.49 Relocating Tenants

§ 19.50 Understanding Execution, Recording, and Priority of Lease

DRAFTING AND NEGOTIATING COMMERCIAL LEASE19–5



PART A: TRANSACTIONAL CONTEXT

§ 19.01 Transactional Context—Drafting andNegotiating Commercial Lease

Chapter 19 focuses on the issues faced by attorneys who draftand negotiate commercial leases when representing landlords andtenants in commercial real estate leasing situations.

Though there are many common characteristics, each of thevarious types of commercial property, including office, store,shopping center, commercial loft, and industrial, requires a special-ized lease. Net leases and ground leases have special provisionsof which counsel must be aware. Purchase options and rights offirst refusal are often included as clauses in a commercial lease.Set forth is a section-by-section analysis of many of the provisionscommon in most commercial leases and how attorneys can dealwith the issues those provisions raise.

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PART B: DRAFTING AND NEGOTIATINGVARIOUS FORMS OF COMMERCIAL LEASE

§ 19.02 Checklist for Drafting and NegotiatingVarious Forms of Commercial Lease

M Negotiate office lease. See § 19.03 below.

Inform client that typical office lease provides fullrange of services to tenant, including heat, air condi-tioning, cleaning, elevators, and water for ordinarylavatory purposes.

Explain that, as incentive to signing lease, landlordsusually offer:

Work letter describing amount of standard alter-ations landlord will provide;

Procedure for preparing and approving plans andspecifications for improvements; and

Pricing and payment details for above standardimprovements desired by tenant.

Negotiate rent escalation provisions relating tofuture increases in operating expenses, electricity,and real property taxes.

Establish prior approval and consent requirementsfor alterations, assignment, and subletting ofpremises.

M Address issues involved with store lease. See § 19.04below.

Inform client that typical store lease provides limitedservices by landlord, including heat and water forordinary lavatory purposes, water meter installation,and delivery of bare shell of space.

Ensure that clients know tenant is responsible to im-prove space at its expense, clean and air condition itsspace, erect and maintain signs and exteriors, extermi-nate vermin, replace damaged plate and other glass, andinstall any required sprinklers.

§ 19.02DRAFTING AND NEGOTIATING COMMERCIAL LEASE19–7



Advise that store leases often provide guaranteed mini-mum rent plus percentage of tenant’s income, withcontrols on manner of business operation, proper re-cord-keeping, and radius restrictions under which ten-ant will not be allowed to compete with itself.

Determine whether landlord will be permitted to leaseto competing businesses.

Discuss possibility of larger retailers seeking long-termlease and requesting right to freely assign or subleasewithout landlord unreasonably withholding consent.

M Advise concerning issues involved with shopping centerlease. See § 19.05 below.

Determine and negotiate restrictions on type of businesstenant can conduct on premises and within specifieddistance from premises. See § 19.05 [1] below.

Review and negotiate shopping center lease and, anyattached agreements including work letters and recipro-cal easement agreements as to use, maintenance, andrepair of common areas. See § 19.05 [1] below.

Determine whether shopping center lease will containclause conditioning tenant’s initial or continued occu-pancy on continued occupancy of key tenant or occu-pancy of specified percentage of space. See § 19.05[2] below.

Negotiate issues involved with requiring membershipin merchant’s association, including membership beingcontingent upon certain percentage of stores joiningassociation. See § 19.05 [2] below.

Decide whether reciprocal easement agreement shouldbe used rather than traditional shopping center lease(primarily used in upstate New York). See § 19.05 [3]below.

M Address issues involved with commercial loft and industrialleases. See § 19.06 below.

Inform client that typical commercial loft lease pro-vides various services, including passenger elevator,




freight elevator, heat, and water for ordinary lavatorypurposes.

Ensure that clients know tenant is responsible to cleanand air condition its space, pay for water usage basedon meter, replace damaged plate and other glass, andinstall any required sprinklers.

Determine whether large-scale industrial use and leaseof entire building is involved to anticipate tenant’ssubstantial responsibility for repairs, maintenance, andextensive alterations.

Investigate environmental and zoning issues oftenpresent in large-scale industrial uses and negotiatelegal compliance clauses accordingly.

Negotiate utilities provisions, particularly in multi-tenant buildings.

M Establish obligations of parties under net lease. See § 19.07below.

Define net lease factors including assumption of opera-tion costs, risk of loss in case of fire or casualty, andrepairs.

Explain to client difference between net net and triplenet leases where tenant assumes all costs except debtservice, and pure net lease, where tenant can also paydebt service requirements.

Request right to audit landlord’s books if tenant payinglandlord’s expenses under net lease.

Specify obligations of parties since disputes often arisebecause net, net net, and triple net leases do not haveuniversal meaning.

M Negotiate ground lease insurance and appraisal provisions.See § 19.08 below.

Advise client that ground leases apply to unimprovedland, vary from 50 to 99 years or longer (under 50 yearsin upstate New York), and are generally structured asnet leases. See § 19.08 [1] below.




Inform client that tenant is usually given broad useclause, liberal right to sublease, and right to erect, alter,use, and demolish structures. See § 19.08 [1] below.

Determine whether demolition and construction arecontemplated and ensure that tenant provides casualtyand liability coverage once building is complete. See§ 19.08 [1] below.

Explain that appraisal determines fair market rentalvalue of land and periodic adjustment of rent in groundlease. See § 19.08 [2] below.

Negotiate provision describing standard to be appliedby appraiser as that standard is crucial. See § 19.08[2] below.

M Discuss purchase options and rights of first refusal. See§ 19.09 below.

Ensure that time is of essence for exercise of optionor right of first refusal. See § 19.09 [1] below.

Emphasize and carefully monitor financing details,insurance, waiver of subrogation, impact on othertenants, and operative options inherent in purchaseoption negotiations. See § 19.09 [1] below.

Draft purchase option with same attention to detail ascontract of sale. See § 19.09 [1] below.

Ensure client understands that first refusal or firstprivilege options grant qualified right to purchaseexercisable only if landlord decides to sell at specifiedprice or price agreed to by bona fide third party. See§ 19.09 [2] below.

Ensure any deal agreeable to third party is availableto tenant possessing right of first refusal. See § 19.09[2] below.

M Search Advisor:

Real & Personal Property Law > Landlord & Tenant> Commercial Leases

Real & Personal Property Law > Sales, Exchanges &Remedies > Options




M Investigate Parties on lexis.com®. See § Intro.09 above.

§ 19.03 Negotiating Office Lease

A typical office lease provides a full range of services to thetenant, including heat, air conditioning, cleaning, elevators, andwater for ordinary lavatory purposes. The landlord usually offersa work letter describing the amount of standard alterations that thelandlord will provide as an incentive to sign the lease, a procedurefor preparing and approving plans and specifications for theimprovements, and pricing and payment for above standard im-provements desired by the tenant.

t Warning: The lease usually includes a rent escalationprovision with respect to future increases in operatingexpenses, electricity, and real property taxes. Conse-quently, tenant’s attorney should carefully review allescalation provisions.

Landlords insist on prior approval of alterations to the premisesand to assignments and subletting of the premises. Some smallbusinesses choose to rent a larger suite (which may cost somewhatless per square foot) and then defray the cost by subleasing portionsof the premises to others. For these tenants, the right to subleasemay be of major importance.

z Strategic Point: Tenant’s counsel, particularly whenelecting to rent a larger suite, should negotiate with thelandlord to not unreasonably withhold consent to assign-ments and subletting.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property Ch. 81 (Leasingof Property: Assignments and Subleases).

● Warren’s Weed: New York Real Property § 82.14 (tenant’sright to make alterations).




● New York Practice Guide: Real Estate § 25.05 [2][b][ii](PG: offices), § 25.03 [3][a] (escalation clauses), § 25.03[4] (alterations of premises), § 25.06 [2][d] (escalationclauses), § 25.06 [8] (utilities and energy), § 25.07 [1](Form No. 25-1: Office Lease), § 28.01 (assignments andsubleases), § 28.02 (commercial leases: assignments andsubleases), § 28.04 (Checklist: Drafting Assignment orSublease Clause; Commercial Leases and ResidentialLeases Not Covered by RPL § 226-b).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 209 (Office Lease).

§ 19.04 Considering Store Lease Provisions

A typical store lease will provide for limited services by thelandlord, including heat and water for ordinary lavatory purposes.A water meter will usually be installed, with the tenant directlypaying for water usage. The tenant under a store lease is responsibleto perform the following:

1. Clean and air condition space;

2. Erect and maintain signs and exterior (including sidewalks);

3. Exterminate vermin; and

4. Replace damaged plate and other glass.

The landlord will usually provide a bare shell of space that thetenant must improve at its expense, with plans subject to landlordapproval. The tenant will likely be responsible for installation ofany required sprinklers.

Many store leases provide a guaranteed minimum rent plus apercentage of the tenant’s income, which represents an incentivefor landlords to be concerned with the manner of operating thebusiness (hours, etc.) and expect proper record-keeping to establishthe rent amount on a reliable basis. The landlord may be interestedin radius restrictions where the tenant will not be allowed tocompete with itself in a manner possibly reducing the percentagerent yield. On the other hand, tenants may want to ask the landlordnot to lease to competing businesses.




Larger retail tenants will seek long-term leases and demand theright to freely assign or sublease. The leasehold may be one ofthe most important assets involved in a proposed business sale. Thelandlord will want to maintain as much control over assignmentor subletting as possible, but should not unreasonably withhold itsconsent.

z Strategic Point: It is good practice for tenant’s attorneyto write into a store lease objective standards for determin-ing when a landlord must act reasonably with respect toa request for assignment, for example, net worth valuesof the tenant before and after assignment.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property Ch. 56 (Fixtures).


● New York Practice Guide: Real Estate § 25.05 [2][b][iii](PG: shopping centers and stores), § 25.03 [a] (percentagelease), § 25.03 [4] (alterations of premises), § 25.03 [8](use of leased premises), § 25.06 [2][c] (percentage rents),§ 25.06 [3] (alterations and improvements), § 25.06 [10](use of leased premises), § 25.07 [2] (Form No. 25-2: StoreLease), § 25.08 [2][b] (percentage lease).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 201 (Retail Store Lease), FormNo. 223 (Rent), Form No. 224 (Rent), Form No. 244 – FormNo. 256 (uses and operations), Form No. 260–Form No.273.1 (repair and alterations), Form No. 294 – Form No.295.3 (assignment and subletting).

● Partnership Law § 11 (gross receipt sharing notpartnership).




§ 19.05 Advising About Shopping Center Lease

[1] Considering Mix of Shopping Center Tenants

A shopping center is unique in that the stores depend upon eachother. For example, a small boutique may rely upon an anchortenant (usually branch of department store chain).

z Strategic Point: Both the landlord and tenant areparticularly concerned with the tenant mix at the shoppingcenter. Accordingly, tenant’s counsel should negotiate torestrict the landlord’s ability to lease to the tenant’scompetitors, and landlord’s counsel should negotiate forrestrictions on the type of business the tenant can conductboth on the premises and within a specified distance fromthe shopping center (radius restrictions).

In addition to very specialized leases, shopping centers oftenhave other agreements, including work letters describing thelandlord’s finished work and reciprocal easement agreements asto use of the shopping center’s common areas.

[2] Negotiating Initial Occupancy or ContinuedOccupancy Rates

Tenants are also concerned with the viability of the shoppingcenter as a whole. Business for each tenant in a fully-rentedshopping center (which attracts large number of buyers) is likelyto be more profitable than when many of the stores are empty. Thus,a tenant may ask for clauses conditioning the initial occupancy,or continuance of occupancy, upon the continued occupancy of aparticular tenant or the continued occupancy by other tenants ofa specified percentage of the shopping center space.

z Strategic Point: If the landlord proposes mandatorymembership in a merchants’ association, often requiringthat tenant’s participate in and pay for certain shopping

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center promotional activities, tenant’s counsel should nego-tiate for membership being contingent upon a certainpercentage of stores joining, and for reasonable, fairlyenforced, rules.

[3] Using Reciprocal Easement Agreement Instead ofShopping Center Lease Upstate

In upstate New York, it is common for a Reciprocal EasementAgreement (REA) to take the place of a shopping center lease. TheREA covers many of the same business points addressed in ashopping center lease. Reciprocal Easement Agreements involvethe developer and large, anchor stores as owners with the developerthen leasing its space to small tenants. The REA provides forreciprocal easements over the property of each owner for thefollowing:

1. Ring roads;

2. Ingress, egress, and access;

3. Parking;

4. Repair of parking lots (including right of self help); and

5. Maintenance, repair, replacement, and related matters.

The REA usually contains operating covenants whereby eachowner agrees to operate a retail store for a certain number of years,sometimes specifying the store name. The REA is superior inpriority to the lien of construction and superior in priority topermanent loans on the property of each owner, and is thereby notcut off by foreclosure of any one or more of those loans.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property Ch. 56 (Fixtures).

● Warren’s Weed: New York Real Property § 82.14 (tenant’sright to make alterations), § 84.07 (shopping center leaseprovisions).

● New York Practice Guide: Real Estate § 25.05 [2][b][iii](PG: shopping centers and stores), § 25.03 [3][a] (percent-age lease), § 25.03 [4] (alterations of premises), § 25.03

§ 19.05[3]DRAFTING AND NEGOTIATING COMMERCIAL LEASE19–15



[8] (use of leased premises), § 25.06 [2][c] (percentagerents), § 25.06 [3] (alterations and improvements), § 25.06[6] (common areas and parking), § 25.06 [10] (use of leasedpremises), § 25.08 [2][b] (percentage lease), § 25.08 [6](common area clause for shopping center).

● Real Estate Financing: Text, Forms, Tax Analysis § 14.06(leasing shopping center: financing issues).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Ch. 3B (Shopping Center LeaseChecklist).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.14 (Lease to Anchor or KeyTenant: Shopping Center to be Built), Form No. 200.15(Landlord-Oriented Shopping Center Lease), Form No.200.16 (Tenant-Oriented Shopping Center Lease), Form No.223 (Rent Based on Net Profits), Form No. 224 (PercentageRent Rate Based on Gross Sales), Form No. 244 – FormNo. 256 (uses and operations).

§ 19.06 Considering Commercial Loft and IndustrialLease Provisions

Commercial loft leases will often provide for a range of services,including passenger elevator, freight elevator, heat, and water forordinary lavatory purposes. A water meter will usually be installed,with the tenant paying directly for its water usage. The tenant isalso responsible for cleaning and air conditioning its space, replac-ing damaged plate and other glass, and installing any requiredsprinklers. Depending on the market, standard tenant improvementsmay be offered by the landlord.

Large-scale industrial uses may involve the leasing of entirebuildings. In such cases, the lease usually requires the tenant toassume substantial responsibility for repairs and maintenance.Extensive tenant alterations are usually involved.

t Warning: Legal compliance clauses relating to utilitiesare important elements in industrial park or multi-tenanted




single building lease negotiations since large-scale indus-trial uses tend to raise environmental and zoning concerns.For example, where one tenant uses a particularly largesupply of electric current, both the landlord and othertenants will expect the tenant to pay a fair share of costs.

PRACTICE RESOURCES:


● New York Practice Guide: Real Estate § 25.05 [2][b][iv](PG: industrial leases), § 25.03 [4] (alterations of premises),§ 25.03 [5] (obligation to repair premises), § 25.06 [3](alterations and improvements), § 25.06 [4][d] (commercialleases, repairs and maintenance), § 25.06 [8] (utilities andenergy).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 205 (Loft Lease), Form No. 260– Form No. 273.1 (repair and alterations).

§ 19.07 Establishing Obligations Under Net Leases

Generally, under a net lease, the landlord is guaranteed aspecified return and the tenant assumes full operation cost and riskof loss in case of fire or other casualty. The net lease tenant isresponsible for all repairs, in some instances including those repairsdeemed structural (roof, exterior walls, etc.). In net net or triplenet leases, the tenant assumes all costs except debt service. In purenet leases, the tenant may even pay the debt service requirementson the mortgage. Since a net lease involves the tenant’s paymentof landlord’s expenses, tenant’s attorney should request the rightto audit the landlord’s books.

z Strategic Point: The terms net lease, net net lease, andtriple net lease do not have universal meaning and conse-quently counsel must be precise in establishing the respec-tive obligations of each party to avoid disputes.




PRACTICE RESOURCES:


● New York Practice Guide: Real Estate§ 25.05 [2][b][v](PG: net leases), 25.03 [5][a][i] (common law repair obliga-tions), § 25.06 [3] (alterations and improvements), § 25.06[13] (destruction of or damage to premises by fire or othercasualty), § 25.08 [3][c] (Form No. 25-24: Agreement byLessee to Alter Building), § 25.08 [4][d] (Form No. 25-28:Tenant’s Obligation to Repair Premises: Landlord’s Righton Tenant’s Default), § 25.08 [12][b] (Form No. 25-66:Destruction or Damage: Full Risk of Loss Upon Tenant).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 218 – Form No. 233 (Rent),Form No. 252, Form No. 252.1, Form No. 252.2 (legalcompliance), Form No. 298.1 – Form No. 299.2 (liabilityallocation), Form No. 260 – Form No. 273.1 (repair andalterations), Form No. 291, Form No. 292, Form No. 293(insurance).

§ 19.08 Negotiating Ground Lease Insurance andAppraisal Provisions

[1] Defining Ground Lease and Obtaining InsuranceCoverage

A ground lease, defined broadly, is any lease for rental ofunimproved land. Ground leases downstate vary in term from 50to 99 years or longer and are generally structured as net leases.In upstate New York, the term of a ground lease is usually lessthan 50 years, often 20 to 30 years, depending upon the type ofleasehold financing available.

Ground lease tenants are generally given a substantial amountof control over the property through a broad use clause; liberal rightto sublease; and right to erect, alter, use, and demolish structures.

t Warning: Landlord’s attorney in a ground lease should




ensure that the tenant procure insurance coverage wheredemolition and construction are contemplated.

During construction, the tenant is generally required to maintainliability, workers’ compensation, and builder’s risk coverage. Oncethe building is complete, the tenant should be required to providecasualty and liability coverage, with coverage periodically adjustedto reflect the current property value.

[2] Negotiating Appraisal Provisions in Ground Lease

z Strategic Point: Ground leases characteristically pro-vide for periodic adjustment of rent, based on the fairmarket rental value of the land. The value is usuallydetermined by appraisal. Consequently, it is crucial thatcounsel carefully negotiate lease provisions detailing thestandard to be applied by the appraiser.

A properly drawn appraisal provision should state the following:

1. Whether land is to be valued for highest and best use,regardless of use then made of property;

2. Whether land should be valued as unencumbered by then-existing improvements; and

3. Whether land should be valued without regard to then-existing subleases.

To the extent the land is valued without regard to the then-existing improvements and leases, the tenant assumes the risk ofobsolescence of use and risk of improvements and subleases thatlower the property value due to below-market rents. The appraisalclause usually provides for an arbitration procedure, with each partyappointing an appraiser, and a mechanism for resolving the inevita-ble difference between appraisals.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 84.14, § 84.15(term of ground lease and general provisions).




● New York Practice Guide: Real Estate § 25.05 [2][b][vi](PG: ground leases), § 3.26 [10][c][iii] (mortgaging of fee),§ 25.08 [4][d] (Form No. 25-28: Tenant’s Obligation toRepair Premises: Landlord’s Right on Tenant’s Default),§ 25.08 [12][b] (Form No. 25-66: Destruction or Damage;Full Risk of Loss Upon Tenant), § 28.04 (Checklist-Drafting Assignment or Sublease Clause; CommercialLeases and Residential Leases Not Covered by RPL§ 226-b).

● Real Estate Financing: Text, Forms, Tax Analysis § 7.05(important ground lease provisions).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 202 (99 Year Lease), Form No.260 (Covenant by Lessee to Make Repairs), Form No. 267(Lessee to Alter Building and Assume All Costs), Form No.270.2 (Lessee to Furnish Bond to Secure Lessor AgainstMechanics’ Liens).

● LexisNexis AnswerGuide New York Civil Disclosure § 2.16(obtaining insurance policy contents).

● IRC § 162, § 178, § 469 (tenant tax deductions, tenant’swriting-off acquisition cost, portfolio income).

§ 19.09 Providing Purchase Options and Rights ofFirst Refusal

[1] Drafting Option to Purchase Large StructuresDemands Attention to Detail

s Timing: Landlord’s attorney should make time of theessence for exercise of any option or right of first refusal.

For large shopping centers, high-rise office buildings, and otherlarge structures, an option to purchase demands that attorneysdevote particular attention to the following:

1. Financing;

2. Insurance;




3. Waiver of subrogation;

4. Rules and regulations;

5. Impact upon other tenants; and

6. Myriad problems that may arise if option becomesoperative.

z Strategic Point: Drafting an option to purchase de-mands as much attention to detail and minutiae as acontract of sale and should be approached by counsel withthe same level of precision.

Issues of price and other terms are sometimes left for laternegotiation with the provision that if the parties are unable to agree,the dispute will be resolved by arbitration or appraisal.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property §§ 32.145 –32.154 (options), §§ 101.11 – 101.16 (options contained inleases).

● New York Practice Guide: Real Estate § 29.02 (purchaseoptions), § 29.06 (Checklist for Option to Purchase),§ 29.09 [1] (Form No. 29-7: Lease Clause Providing forTenant’s Option to Purchase with Contract of Sale At-tached), § 29.09 [2] (Form No. 29-8: Tenant’s Option toPurchase), § 29.09 [3] (Form No. 29-9: Tenant’s Optionto Purchase: Nature of Title to be Transferred), § 29.09 [4](Form No. 29-10: Subtenant’s Option to Purchase Sublan-dlord’s Interest in Ground Lease), § 29.09 [7] (Form No.29-13: Option to Purchase at Appraisal Price).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 277 (Tenant’s Option to Pur-chase (first refusal), Form No. 277.1 (Option to Purchaseat Stated Price), Form No. 277.2 (Option to Purchase atStated Price with Reduction for Damage), Form No. 278(Purchase Price Subject to Increase by Index), Form No.




278.1 (Option to Purchase After Lessor’s Election to CancelLease on Bona Fide Sale), Form No. 340 (Notice of Electionto Purchase Leased Premises).

● GOL § 5-703, § 5-1103 (statute of frauds, modificationsnot invalid for lack of consideration).

[2] Drafting First Refusal or First Privilege Options

First refusal or first privilege options to buy are valid, but granta qualified right to purchase exercisable only if the landlord decidesto sell at either a specified price or one agreed to by a third party,and the lessor cannot be compelled to sell. With large buildingsand developments leased to numerous tenants, price may be onlyone of a number of vital factors considered.

Any deal agreeable to a third party must be made available toa tenant who has a right of first refusal, unless provision to thecontrary is specifically included in the option clause. The offer ofthe third party must be bona fide, which may be difficult toascertain and give rise to possible litigation. The landlord shouldexclude transactions with its affiliates. Proper safeguards insertedinto the option agreement can narrow possible areas of controversy.

An option or right of first refusal may run afoul of the RuleAgainst Perpetuities if it may be exercised beyond lives in beingplus 21 years.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property §§ 32.145 –32.154 (options), §§ 101.11 – 101.16 (options contained inleases).

● New York Practice Guide: Real Estate § 29.02 (purchaseoptions), § 29.02 [4] (first refusal options), § 29.07(Checklist for Exercise of Right of First Refusal), § 29.09[5] (Form No. 29-11: Tenant’s Right of First Refusal),§ 29.09 [6] (Form No. 29-12: Tenant’s Right of FirstRefusal to Purchase at Stated Price), § 29.09 [7] (Form No.29-13: Option to Purchase at Appraisal Price).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 277 (Tenant’s Option to




Purchase: First Refusal), Form No. 277.1 (Option to Pur-chase at Stated Price), Form No. 277.2 (Option to Purchaseat Stated Price with Reduction for Damage), Form No. 340(Notice of Election to Purchase Leased Premises).

● GOL § 5-703, § 5-1103 (statute of frauds, modificationsnot invalid for lack of consideration).




PART C: DRAFTING AND NEGOTIATINGTERM AND PAYMENT PROVISIONS IN

COMMERCIAL LEASE

§ 19.10 Checklist for Drafting and Negotiating Termand Payment Provisions in Commercial Lease

M Ensure that demised premises is adequately described. See§ 19.11 below.

Advise client that amount of square feet in demisedpremises should not be relied upon if representedbecause rentable square feet is artificial amount greaterthan usable area.

Ensure that base rent is stated as flat amount insteadof amount based on square footage.

Expect that office space in New York City will berented based on rentable square feet.

Counsel that tenant should and often does ask landlordfor loss factor.

M Establish length of lease term. See § 19.12 below.

Negotiate length of lease term in conjunction withprovisions governing commencement. In absence offormal agreement, certain legal rules may control com-mencement or length of term.

M Prepare client for commencement of term. See § 19.13below.

Caution client that obligation to pay rent usually coin-cides with commencement of lease term, even if tenantdoes not take possession at that time.

Consider conditioning commencement of shoppingcenter lease term on commencement of operations ofanchor tenants or other stores.

Define terms specifically where lease commencementdate is dependent upon substantial completion ofconstruction.




Negotiate remedies for late commencement, includingrent abatement, cancellation rights, liquidated damages,and term extensions.

M Anticipate issues involved with renewals and options torenew. See § 19.14 below.

Ensure client is aware that renewal or extension canbe provided for in original lease, may be on same ordifferent terms, and, along with options and rights offirst refusal, can be conditioned on tenant not being indefault.

Determine whether renewal clause takes form of rightof first refusal, thus obligating landlord to renew withtenant upon terms third party accepts.

Inform client that, barring express or implied agreementto contrary, lease lacking renewal clause becomesmonth-to-month tenancy at end of term where tenantremains in possession.

M Negotiate base rent provisions. See § 19.15 below.

Ensure that base rent clause clearly states annual rentand amount due per installment, along with specificgrace period. See § 19.15 [1] below.

Negotiate for grace periods of 15 days for paymentdefaults (5–10 days upstate) and 30 days for otherdefaults. See § 19.15 [1] below.

Negotiate possibility of free rent period allowing timeto prepare space and as inducement to renting. See§ 19.15 [1] below.

Determine whether lease will include accelerationclause allowing landlord to accelerate rent due date andsue for future rents. See § 19.15 [1] below.

Establish that payments due from tenant to landlordother than base rent be recited as additional rent. See§ 19.15 [1] below.

Specify whether payment by tenant of lesser amountthan amount stipulated will impair landlord’s right tocollect additional amounts due, and whether landlord




can deposit tenant’s check without prejudice to land-lord’s rights. See § 19.15 [2] below.

Consider and inform clients concerning tax impacts ofperiodic rent payments. See § 19.15 [3] below.

M Define percentage rents under percentage rent lease. See§ 19.16 below.

Ensure that percentage rent lease contains carefullydrawn and detailed procedures to avoid disputes as todefinition of terms. See § 19.16 [1] below.

Explain that percentage rent lease provides that all orpart of rent will be based upon percentage of tenant’sgross or net income from its business, and usuallycarries guaranteed minimum. See § 19.16 [1] below.

Determine appropriate formula to use in calculatingguaranteed minimum rent. See § 19.16 [1] below.

Define types of sales included and excluded fromcalculation of gross sales. See § 19.16 [1] below.

Specify time when percentage rent payment will bedue. See § 19.16 [2] below.

Inform client of need under percentage rent lease tokeep regular and accurate records of gross sales, copiesof income and sales tax returns, and financial state-ments. See § 19.16 [2] below.

M Draft escalation clauses and define related matters, includ-ing audits and exclusions from cost. See § 19.17 below.

Negotiate terms of escalation clauses designed to coverincreasing costs of owning and operating building,including pass-throughs of increases in actual operatingcosts. See § 19.17 [1] below.

Specify allowable exclusions from cost. See § 19.17[1] below.

Determine rights of tenant to audit operating costs andestablish level of increase required before tenant canaudit. See § 19.17 [2] below.

Determine whether statements of operating costs willbe prepared by independent managing agent or CPA




and if tenant has right to audit operating costs. See§ 19.17 [2] below.

Consider alternative escalation clauses that includeescalating rent by same percentage as increases incomponents of expenses, including union wages orpegging escalation to inflation index. See § 19.17 [3]below.

Ascertain need for pay now, fight later clause inanticipating escalation clause disputes. See § 19.17 [4]below.

M Establish form and features of security deposits. See§ 19.18 below.

Inform client that commercial leases are not coveredby all tenant-protection provisions of law governingsecurity deposits, including interest paymentrequirement.

Determine form of security deposit, which can includedeposited cash, irrevocable letters of credit, marketablesecurities, and security interests in tenant’s movabletrade fixtures.

Ensure receipt of notice for any sale of property andwritten evidence that purchaser has assumed obligationto return security deposit.

Negotiate whether deposit will burn down after periodof satisfactory performance.

M Consider and negotiate various types of guarantees. See§ 19.19 below.

Seek absolute and unconditional guarantee of paymentas this is preferable to guarantee of collection.

Caution that absolute and unconditional guaranteeof payment, unlike guarantee of collection, willprevent guarantor from invoking tenant defenses.

Consider Good Guy Guarantee as compromise andexplain that it continues only until tenant physi-cally and legally surrenders premises vacant, in




satisfactory condition, and free of occupancyrights.

Draft guarantee to cover lease modifications orextensions.

Counsel client that guarantee may induce landlordto rent to start-up business.

M Search Advisor:


Real & Personal Property Law > Sales, Exchanges &Remedies > Options

§ 19.11 Describing Demised Premises

The demised premises should be carefully described in the lease,to avoid later disputes. A lease of land should use a metes andbounds description, or a reference to a lot on a filed map. A leaseof space, for example, an office or store lease, will usually referto a space by number or to an attached floor plan.

Since the method of measuring square footage of the premisesis not always clear, most landlords are reluctant to represent inwriting that the premises contain a particular number of square feet,even though the base rent and escalation provisions are commonlybased on the landlord’s square footage calculation.

t Warning: Rentable square feet is an artificial measure-ment used to calculate the rent per square foot. The tenantshould not order carpeting based on the rentable squarefeet.

Office space has customarily been rented in New York Citybased on rentable square feet, an artificial measurement based onthe size of the space, but also containing various additions for ashare of space devoted to air conditioning and other factors. Somelandlords simply declare that the square footage figure is how theycalculate the rent on a take it or leave it basis, and average tenants




generally do not win arguments with landlords about this issue.The mathematical result of increasing the square footage above theactual footprint of the space is to lower the dollars per square footof rent charged.

z Strategic Point: Landlords should be careful to statebase rent as a flat amount, not an amount based on squarefootage, to avoid controversy about the measurement.Tenants can compare space in different buildings by askingeach landlord what the loss factor is between rentable andusable square footage.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 84.02 (rent andrelated obligations).

● New York Practice Guide: Real Estate § 25.05 [2][b][i][G](quantity of space leased), § 25.07 [1] (Form No. 25-1:Office Lease, Witnesseth Clause), § 25.07 [2] (Form No.25-2: Store Lease, Witnesseth Clause).

§ 19.12 Determining Lease Term

s Timing: Under the statute of frauds, a lease exceedingone year cannot be created without an agreement inwriting.

The length of the lease, though basic, often must be negotiatedin conjunction with provisions governing commencement, whichcan be complicated when the premises are not ready for occupation.In absence of a formal agreement, certain legal rules control.

s Timing: An agreement for occupation of real estatein New York City that does not specify duration of theoccupation will be deemed to continue until the October




1st following the time possession commences under theagreement.

A periodic tenancy (month-to-month, quarter-to-quarter, or year-to-year) can be created by design and intent, or entry under aninvalid lease. An entry by a tenant under an invalid oral lease, voidunder the statute of frauds, was held in one case to create a tenancy-at-will, which was converted to a periodic tenancy as a result ofparties actions. Where a tenant whose term is longer than onemonth holds over after expiration of the term, unless the partiesagree otherwise, a month-to-month tenancy will be created by thetenant’s payment and landlord’s acceptance of rent after leaseexpiration.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 80.11 (statuteof frauds), § 80.12, § 80.13, § 80.14, § 80.15 (short-termor indefinite tenancies), § 80.24, § 80.25, § 80.26 (cove-nant to deliver possession).

● New York Practice Guide: Real Estate § 25.01 [2] (statuteof frauds), § 25.03 [2][a][ii] (effect of rule against restraintson alienation), § 25.06 [1] (lease commencement), § 25.07[1] (Form No. 25-1: Office Lease ¶ 24), § 25.07 [2] (FormNo. 25-2: Store Lease ¶ 21, ¶ 23), § 25.08 [1] (commence-ment of term).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.14 (Lease to Anchor or KeyTenant: Shopping Center to be Built, Article 2), Form No.200.15 (Landlord-Oriented Shopping Center Lease, Article3), Form No. 200.16 (Tenant-Oriented Shopping CenterLease, Articles 3 and 8), Form No. 201 (Retail Store Lease,Article II), Form No. 205 (Loft Lease, Witnesseth Clause),Form No. 209 (Office Lease, Article 2).

● EPTL § 6-1.1(5) (tenancies from period to period).

● RPL § 223-a (implied covenant to deliver possession atbeginning of term).




● RPL § 232 (termless leases continue until next October 1stin New York City).

● RPL § 232-c (month-to-month tenancy implied afterholdover).

§ 19.13 Negotiating Lease Term Commencement

The obligation to pay rent usually coincides with commencementof the term, whether or not the tenant takes possession at that time.

s Timing: In shopping centers, tenants may want tocondition lease commencement on commencement ofoperations of anchor tenants or other stores.

When the lease commencement date depends upon substantialcompletion of construction, it is important to define the terms. Thetime of commencement may be keyed to procurement of a tempo-rary or permanent certificate of occupancy, or other factors morespecifically related to the tenant’s business. A central factor iswhether it is the landlord or tenant who will be doing construction.

Where the existing premises are currently occupied by a priortenant whose lease will soon expire, provision should be made tocover delays, especially where summary proceedings are required.

Leases include a variety of remedies for late commencement,including the following:

1. Rent abatements;

2. Cancellation rights;

3. Liquidated damages; and

4. Term extensions.

RPL § 223-a provides that, unless otherwise agreed, there isimplied in every lease a covenant that the landlord will deliverpossession at the beginning of the term. Landlords not wanting tobe bound by this section will ask for a recitation that the leaseprovision agreed upon is an express provision contrary to RPL§ 223-a.




PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 80.24, § 80.25,§ 80.26 (covenant to deliver possession).

● New York Practice Guide: Real Estate § 25.06 [1] (PG:lease commencement), § 25.07 [1] (Form No. 25-1: OfficeLease, Witnesseth and ¶ 24), § 25.07 [2] (Form No. 25-2:Store Lease, Witnesseth and ¶ 23), § 25.08 (commencementof term clauses), § 25.08 [1][b] (Form No. 25-4: Deliveryof Possession, Alternative Remedy Provisions), § 25.08[1][c] (Form No. 25-5: Failure to Give Possession, Abate-ment with no Landlord Liability).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.14 (Lease to Anchor or KeyTenant: Shopping Center to be Built, Articles 2 and 8), FormNo. 200.15 (Landlord-Oriented Shopping Center Lease,Article 3), Form No. 200.16 (Tenant-Oriented ShoppingCenter Lease, Articles 3 and 8), Form No. 201 (Retail StoreLease, Articles II and III), Form No. 205 (Loft Lease,Witnesseth and ¶ 24), Form No. 209 (Office Lease, Articles2 and 4), Form No. 317 (No Liability Upon Lessor’s Failureto Deliver Prompt Possession).

● EPTL § 9-1.1 (rule against perpetuities: leases need ascer-tainable beginnings).

● RPL § 223 (rescission right for failure to deliver).

● RPL § 223-a (implied covenant to deliver possession atbeginning of term).

§ 19.14 Providing for Renewals and Options toRenew

There is no right to renew or extend a commercial lease exceptby agreement of landlord and tenant. Renewal or extension maybe provided for in the original lease and may be based on the sameor different terms (for example, different rate of rent). Somelandlords condition renewal, option, and right of first refusal rightson the tenant not being in default.




Automatic renewal clauses ordinarily provide that the lease isrenewed for the same period or a specified number of years onthe same terms, unless the tenant gives notice of intention not torenew within a certain period prior to expiration. Automaticrenewal clauses have fallen from favor because of GOL § 5-905.

s Timing: GOL § 5-905 requires landlords to notifytenants, in writing, of an automatic renewal provision notmore than 30 days nor less than 15 days prior to thedeadline for tenant’s notification of intent not to renew.If the landlord fails to notify the tenant, a renewal cannotbe claimed by the landlord, but the tenant does not losethe right to renew.

Renewal clauses sometimes take the form of a right of firstrefusal. Such a qualified, contingent option may or may not containterms applying in the event the contemplated contingency occurs.In some instances, this right of first refusal merely grants a privilegeto negotiate for renewal, with an implied obligation of the landlordto renew with the tenant upon terms that a third party accepts. Suchprivilege to negotiate arrangements should be avoided due to theirinherent uncertainty and enforcement difficulties.

s Timing: All leases having no renewal clause, auto-matic or otherwise, become month-to-month tenanciesupon expiration of the term if the tenant remains inpossession, unless there is an express or implied agreementto the contrary.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 101.16 (optionto lease property; renewals).

● New York Practice Guide: Real Estate § 29.01 (renewals),§ 29.04 (Checklist for Lease Renewal Clause), § 29.06(Checklist for Option to Purchase), § 29.08 [1] (Form No.




29-1: Lease Clause Providing for Agreement to Renew forStated Period), § 29.08 [2] (Form No. 29-2: Rent to beAgreed Upon by Parties), § 29.08 [3] (Form No. 29-3: RentSet by Consumer Price Index), § 29.08 [4] (Form No. 29-4:Rent to be Set by Appraisal), § 29.10 (Form of Arbitration).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.14 (Lease to Anchor or KeyTenant: Shopping Center to be Built, Article 5), Form No.200.15 (Landlord-Oriented Shopping Center Lease, Article4), Form No. 200.16 (Tenant-Oriented Shopping CenterLease, Article 4), Form No. 209 (Office Lease, Article 46),Form No. 274, Form No. 275, Form No. 276.1 (renewalprovisions), Form No. 323 (Lease Option Agreement).

● GOL § 5-905 (automatic renewal clauses).


§ 19.15 Establishing Base Rent in Commercial LeaseNegotiations

[1] Negotiating Rent Clauses, Percentage Arrangements,Escalation Clauses

Recently, it has become more common for the base rent to bemerely one of many factors considered in commercial lease negoti-ations. A variety of percentage arrangements and escalation clauseshave been added, including percentage leases with a minimum baserent, and fixed lease rentals that additionally require tenants to payall or part of tax and insurance costs, or often all or a proportionof increases in maintenance cost.

z Strategic Point: Landlord’s counsel should require thatall payments due from the tenant other than base rent berecited as additional rent so that summary proceedings canbe instituted where the tenant is in default on any of thefinancial obligations under the lease terms.




The rent clause should clearly state the annual rent and amountdue per installment (usually monthly). If the lease is to begin andend during the middle of a month, a provision can be inserted forproration of partial months. The lease should provide a due datefor installments and usually includes a specified grace period, afterwhich late charges apply.

s Timing: The tenant should ask for grace periods of 15days for payment defaults and 30 days for other defaults.Upstate, grace periods of 5 to 10 days for payment defaultsand 30 days for other defaults are common.

The lease should also include an acceleration clause, allowingthe landlord to accelerate the due date of all rent payments andsue for future rents. Most leases grant a period of free rent at thebeginning of the lease (sometimes at later times) to allow the tenanttime to prepare the space or as a general inducement to sign thelease at the agreed rent.

z Strategic Point: Where the tenant asks for a long leaseor an extension of an existing lease, the landlord may askfor prepayment of rent. Before agreeing, tenant’s attorneyshould perform a title search to ascertain whether thelandlord’s mortgage requires the mortgagee’s consent toany prepaid rent provision.

[2] Tendering Rent Checks for Less Than Full Amount

If there is a dispute or the tenant is having cash flow problems,the tenant may tender rent checks for less than the full amount.Regardless of the reason, the landlord will want to deposit tenant’scheck without waiving its right to collect the balance. To do so,the landlord should insert a clause in the lease stating that nopayment by the tenant or receipt by the landlord of a lesser amountthan the amount stipulated shall impair the landlord’s right tocollect any additional amounts due, and the landlord can depositthe tenant’s check without prejudice to the landlord’s rights.




[3] Considering Tax Impacts of Periodic Rent Payments

Periodic rent payments are gross income to the landlord. Ad-vance payments of rent are treated differently. For example, if atenant pays a lump sum to the landlord for a lease renewal,extension, or modification, the amount paid is not fully deductibleby the tenant in the payment year, but must be amortized over theterm of the extended or renewal lease. The landlord, however, maybe required to report receipt of the full amount in the year ofpayment or accrual.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 82.01, § 82.02,§ 82.03 (rent and related obligations).

● New York Practice Guide: Real Estate § 25.06 [2][a] (PG:base rent), § 25.03 [3] (rent), § 25.07 [1] (Form 25-1:Office Lease, Witnesseth Clause and ¶ 1, ¶ 19, ¶ 25),§ 25.07 [2] (Form No. 25-2: Store Lease, WitnessethClause and ¶ 1, ¶ 19, ¶ 24).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.14 (Lease to Anchor or KeyTenant: Shopping Center to be Built, Article 3), Form No.200.15 (Landlord-Oriented Shopping Center Lease, Article5), Form No. 200.16 (Tenant-Oriented Shopping CenterLease, Article 5(A)), Form No. 201 (Retail Store Lease,Article IV), Form No. 205 (Loft Lease, Witnesseth Clauseand ¶ 25), Form No. 209 (Office Lease, Article 3), FormNo. 218 (Method of Rental Payments), Form No. 219 (RentPayment Clauses), Form No. 220 (Installments with Provi-sion for Acceleration on Default), Form No. 226 (Clauseon Effect of Rent Payment Different than Required UnderLease).

● IRC § 61(a) (rent payments are gross income).

● RPL § 235-c (unconscionability).




§ 19.16 Negotiating Percentage Rent Lease Clauses

[1] Determining Formula for Setting GuaranteedMinimum Rent

In a business or commercial context, a percentage rent leaseprovides that all or part of rent will be based upon a percentageof the tenant’s gross or net income from its business, usually witha guaranteed minimum. Percentage rent leases require carefullydrawn and detailed procedures to avoid disputes concerning thedefinition of the terms gross income or net income and requiredetailed procedures regarding methods and periods for applyingthe percentages to these amounts. Percentage rent leases commonlycontain language indicating that no partnership has been createdbetween the landlord and tenant.

Nearly all sales-based percentage leases contain a guaranteedminimum rent. A number of formulas can be used, including:

1. Straight percentage of tenant’s gross sales;

2. Percentage of gross sales in excess of specified dollaramount; or

3. Gross sales multiplied by specified percentage, less fixedrent.

Regardless of the formula used, gross sales must be carefullydefined and should include, for example, credit sales; receipts fromleases; layaway sales; orders taken on premises but filled else-where; and mail, telephone, and Internet orders. The tenant willinsist on appropriate deductions from gross sales for itemsincluding:

1. Bad debts;

2. Returns and allowances;

3. Sales tax;

4. Employee discount sales or fringe benefits;

5. Bulk sales;

6. Costs of mail order sales; and

7. Credit sales.




The landlord should exclude returns of items bought through acatalog or the Internet.

[2] Specifying Time of Percentage Rent Payment andAvailability of Financial Records

The time of percentage rent payment must be specified, usuallyat a particular time following tenant’s calendar year or fiscal year.If percentage rent is paid quarterly, provision must be made foradjustment at year’s end. The tenant should be required to keepregular and accurate records of gross sales along with copies ofincome and sales tax returns. Many leases require financial state-ments, certified by officers of the tenant’s entity.

z Strategic Point: Although landlord’s counsel will wantthe lease to provide for an audit of financial statementsand records by a certified public accountant designated bythe landlord, tenants attorney should negotiate to avoidsuch a clause since this can be very expensive.

Some percentage rent leases require that tenant pay the cost ofan audit if it turns out the tenant has understated gross sales bya specified percentage or dollar amount. Tenant’s attorney shouldattempt to make this amount as high as possible during leasenegotiation. Some leases provide that the landlord has a right tocancel if the tenant fails to achieve an agreed volume of sales withina stipulated time. It is standard practice in percentage leases torequire the tenant to submit income tax returns for review by thelandlord. The tenant should add a requirement that:

1. Landlord keep tenant’s financial information confidential;

2. Tenant may keep business records at cental location ratherthan at store; and

3. Days and times that financial records must be available forinspection will be limited.

Landlord’s counsel should attempt to include a right to terminate(kick out right) if the percentage rent has not reached an agreed




level by a certain date. Some leases provide for arbitration ofdisputes on percentage rent.

z Strategic Point: Since the minimum rent can rise overtime due to lease clauses calling, for example, for increaseskeyed to the Consumer Price Index, tenant’s attorneyshould negotiate a provision reducing or eliminating per-centage rent should the minimum rent reach a definedlevel.

[3] Adding Additional Restrictions and Exceptions

The percentage rent lease may also include a radius restrictionon the tenant’s ability to conduct business at competing locations.In addition, the lease may require that tenant conduct business atspecified times and may restrict subletting and assignment. Thetenant should add exceptions for fire, strikes, illness, or closingof one or more of the anchor stores or a specified number of smallerstores.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 82.01, § 82.02,§ 82.03 (rent and related obligations).

● New York Practice Guide: Real Estate § 25.06 [2][c] (PG:percentage rents), § 25.03 [3][a] (percentage lease),§ 25.08 [2][b] (percentage lease clauses), § 25.08 [2][b][ii](Form No. 25-9: Merchants’ Association or PromotionalFund), § 25.08 [2][b][iii] (Form No. 25-10: Definition ofGross Sales), § 25.08 [2][b][iv] (Form No. 25-11: Percent-age Lease Reports, Records, and Inspections), § 25.08[2][b][v] (Form No. 25-12: Percentage Clause Based uponExcess Drafting Guide Over Specific Volume), § 25.08[2][b][vi] (Form No. 25-13: Additional Rent Based onExcess over Minimum Gross Sales), § 25.08 [2][b][vii](Form No. 25-14: Additional Rent Based on Percentage ofSales in Excess of Minimum Rent), § 25.08 [2][b][viii](Form No. 25-15: Percentage Rent Formula), § 25.08




[2][b][x] (Form No. 25-17: Right to Cancel PercentageLease).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.14 (Lease to Anchor or KeyTenant: Shopping Center to be Built, Article 4), Form No.200.15 (Landlord-Oriented Shopping Center Lease, Article5(C)), Form No. 200.16 (Tenant-Oriented Shopping CenterLease, Article 5(B)), Form No. 223 (Rent Based on NetProfits), Form No. 224 (Percentage Rent Rate Based onGross Sales).

● LexisNexis AnswerGuide New York Civil Disclosure§ 16.13 (certifying business records).

§ 19.17 Determining Structure of Escalation Clauses

[1] Defining Operating Expenses in Escalation Clause

The purpose of an escalation clause is to cover increasing costsof owning and operating a building, which reduce landlord’s netincome. Some cost increases are covered by lease clauses providingfor pass-throughs of increases in actual operating costs includingutilities, labor, and taxes. However, certain items, for example,financing costs and capital construction costs, are usually notcovered. Operating expenses must be carefully defined, withinclusions and exclusions specified (some are negotiable).

z Strategic Point: Escalation clauses should be carefullyreviewed, especially the base year. Some aspects may benegotiable, particularly the exclusions in calculating actualoperating expenses.

Exclusions from operating expenses should cover the following:

1. Executive salaries;

2. Depreciation;

3. Brokerage commissions;

4. Debt service;




5. Fees paid to landlord’s affiliates;

6. Costs covered by insurance and capital improvements;

7. ADA compliance;

8. Advertising;

9. Artwork;

10. Charitable or political contributions;

11. Environmental compliance costs;

12. Fines and penalties; and

13. Expenses related to specific tenants.

[2] Requiring Statement for Calculating OperatingExpenses

Given rapidly rising costs encountered in recent years, landlordsgenerally attempt to insert escalation clauses requiring tenants toshare in cost increases. The landlord’s attorney should confirm withthe landlord’s staff that the escalation clause reflects the landlord’sactual practice and that the landlord is capable of making therequired calculations.

Tenants should require that the statement of operating expensesbe prepared by an independent managing agent or CPA. The tenantshould have the right to audit the landlord’s books, object to thelandlord’s calculation within a specified time, and resolve anydispute through arbitration or litigation. Any right of the tenant toaudit operating costs should be limited to cases where increasesexceed a specified percentage. The landlord should try to prohibitcontingent fee auditors, suggesting a national CPA firm instead.The tenant should be required to sign a confidentiality agreementfor any audit and the tenant and its advisors should be prohibitedfrom disclosing existence of any audit or its results. If anyovercharges are less than three percent of total annual operatingcosts, the tenant should not be entitled to any correction orreimbursement of its audit costs.

Tenants usually agree to pay their proportional share of increasesin actual operating expenses for the building over a base date(usually date of lease commencement). The tenant’s share should




be based on total rentable area, not rented area. The denominatorand numerator should be calculated on the same basis.

t Warning: In any year a building is not fully-occupied,tenant should require gross-up operating expenses as if thebuilding had been fully-occupied to ensure accuracy oftenant’s proportional share of increases in actual operatingexpense. Do the same for prior years if new expense itemsare incurred.

[3] Selecting Mechanism for Rent Increases UnderEscalation Clause

There are several possible alternative mechanisms for increasesin rent under escalation clauses in addition to pass-through of actualcosts. Some leases use a simpler method of escalating rent,increasing it by the same percentage as increases in a componentof expenses, for example, union wages (including porter’s wages,commonly increasing rent one cent per square foot for every onecent increase in wages, known as penny-for-penny). Fringe benefitsshould be carefully considered. This is simpler to administer, butmay not match actual cost increases very closely.

Some leases have provided periodic increases based on anartificial market rate, set by a third party (for example, appraiser)if the landlord and tenant cannot agree. These clauses can resultin costly proceedings that may last a considerable period of time.

Another alternative is periodic increases in a fixed amount. Thisis the simplest method, but one that will not fully protect thelandlord if the actual rate of inflation is higher than expected. Thus,many landlords choose a method to peg escalation clauses to aninflation index, for example, a consumer price index (CPI), usuallyapplied to a portion of the rent (for example, 25% of rent). Theexact index and location must be specified. Many believe that theCPI for All Urban Areas has increased faster than the CPI for UrbanWage Earners and Clerical Workers. Some landlords use a combi-nation of escalation methods.




t Warning: Tenant’s counsel should ensure that aninflation clause based on a CPI apply only to that portionof the rent actually subject to inflation, typically, only thelandlord’s equity portion. The landlord’s debt and operat-ing expenses are usually otherwise protected againstinflation.

From the landlord’s perspective, an escalation clause can serveas a hedge against inflation. Some landlords have used escalationclauses as a means of additional profits. This occurs to the extentthat costs covered by an artificial escalation clause, including a CPIclause, are not subject to inflation (for example, fixed rate interestcosts on landlord’s mortgage) or are covered elsewhere by actualoperating cost escalation clauses.

z Strategic Point: Tenant’s attorney should try to obtaina cap on annual escalations, particularly those escalationsnot based on actual costs.

[4] Negotiating Pay Now, Fight Later Clauses

t Warning: Because escalation clauses can lead todisputes, landlord’s sometimes include pay now, fight laterclauses, under which the tenant is required to pay the fullamount demanded by the landlord, but the right of thetenant to recover overpayment is preserved.

Pay now, fight later clauses can place the tenant at the mercyof an unreasonable landlord, especially where the landlord sendsthe tenant a huge bill covering accumulated escalation charges thatthe tenant did not expect. Accordingly, tenant’s attorney shoulddemand limitation on the operation of a pay now, fight later clause,either in dollar amount or in the time period during which chargesmay be accumulated.




PRACTICE RESOURCES:

● New York Practice Guide: Real Estate § 25.06 [2][d] (PG:escalation clauses), § 25.03 [3][b], § 25.06 [8][c] (energyescalation clauses), § 25.06 [9][b] (tax escalation clauses),§ 25.08 [2][c][i] (Form No. 25-18: Cost of Living Adjust-ments), § 25.08 [2][c][ii] (Form No. 25-19: OperatingExpense Charge), § 25.08 [2][c][iii] (Form No. 25-20:Operating Expense Escalation), § 25.08 [2][c][iv] (FormNo. 25-21: Porter’s Wage Clause), § 25.08 [7][b][i] (FormNo. 25-39: Building Energy Escalation Clause), § 25.08[8][a][iv] (Form No. 25-43: Tax Contest by Tenant uponConsent of Landlord), § 25.08 [8][b] (Form No. 25-44: TaxEscalation Clauses).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 201 (Retail Store Lease, taxescalation), Form No. 209 (Office Lease, Articles 6 and 7),Form No. 225 (Rent Based on Consumer Price Index), FormNo. 225.1 (Rent Based on Government Index), Form No.230 (Tenant to Share Common Area Operating Costs), FormNo. 232.1 (Tenant to Pay Increases in Property Tax), FormNo. 232.2 (Tenant in Multitenant Building to Pay Increasesin Property Taxes), Form No. 233 (Energy EscalationClause).

§ 19.18 Structuring Security Deposit Clauses

Most commercial leases provide for security deposits, usuallyone or two month’s rent, applied in case of tenant default. Securitydeposits take various forms, including the following:

1. Deposited cash;

2. Irrevocable letters of credit;

3. Marketable securities; and

4. Security interests in tenant’s movable trade fixtures.

Use of a letter of credit or other alternatives to cash requireadditional provisions relating to conversion of security to cash.

Commercial leases are not covered by all the tenant-protectionprovisions of the law governing security deposits, for example, the




interest payment requirement. However, commercial tenants maybargain for inclusion of an interest requirement in the securitydeposit clause and identification of the depositary institution.

t Warning: The landlord may be permitted to commin-gle the security deposit with other security deposits, butnot with other funds.

Tenant’s counsel may also ask for a clause requiring notice ofany sale of the property and requiring the landlord to provide thetenant with written evidence that the purchaser has assumed thelandlord’s obligations to return the security deposit on the termsand conditions set forth in the lease.

Conditions under which additional security can be requiredshould be set forth in the lease. For example, when rent automati-cally increases or a tenant exercises an option to lease additionalspace increasing rent, the security deposit should correspondinglyincrease. Where a lease provides for cost of living rent adjustments,the landlord can insert a provision requiring corresponding securitydeposit increases.

z Strategic Point: Tenant’s counsel should considernegotiating for reduction of the security deposit (burndown provision) over time as the tenant satisfactorilyperforms its obligations.

Mere receipt of a security deposit is not gross income to thelandlord. The security deposit does not become income to thelandlord until the landlord is entitled to apply it to tenant default.

t Warning: It is unwise for the landlord to include leaselanguage permitting a tenant to apply the security againstthe last month’s rent since the IRS may claim the securityconstitutes an advance payment of rent.




PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 82.03 (securitydeposits), § 84.16 (tax considerations).

● New York Practice Guide: Real Estate § 25.06 [2][b] (PG:security deposits), § 27.01 [9] (security deposits), § 25.06[2][b][iv] (tax aspects), § 25.07 [1] (Form No. 25-1: OfficeLease ¶ 34), § 25.07 [2] (Form No. 25-2: Store Lease ¶ 31),§ 25.08 [2][a][i] (Form No. 25-6: Security Deposit),§ 25.08 [2][ii] (Form No. 25-7: Letter of Credit as SecurityObligation),

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.15 (Landlord-OrientedShopping Center Lease, Article 6), Form No. 205 (LoftLease ¶ 32), Form No. 209 (Office Lease, Article 36), FormNo. 234 (Deposit as Security), Form No. 235 (Deposit ofGovernment Bonds as Security), Form No. 235.1 (Bond asSecurity), Form No. 236 (Deposit to Remain Intact), FormNo. 237 (Application of Security to Final Rent Payment),Form No. 238 (Deposit Fixed as Liquidated Damages).

● UCC § 5-103(1)(b) (letter of credit: security depositsubstitute).

§ 19.19 Establishing Guarantor Obligations

Landlords concerned about a tenant’s financial viability oftendemand guarantees from additional parties. A guarantor’s obliga-tions are not unlimited. A guarantee for the lease term and itsrenewals does not extend to holdover periods, and a guaranteecovering the period of tenant’s possession will not apply wherethe tenant never takes possession. On the other hand, guaranteesentail substantial risks, which a prospective guarantor’s attorneyshould seek to minimize.

Where a commercial lease guarantee includes an absolute andunconditional guarantee of payment, the guarantor may not be ableto invoke the tenant’s defenses. Prospective guarantors will prefera guarantee of collection, which is sparked by tenant’s failure topay a judgment against it, requires the landlord to first exhaust itsremedies against the tenant, and allows assertion of tenant defenses.




z Strategic Point: When negotiating a commercial leaseguarantee clause, landlord’s and tenant’s counsel maystrike a good guy guarantee compromise, where there isa guarantee of rent and perhaps all other lease obligations,continuing until tenant physically and legally surrendersthe premises vacant, in satisfactory condition, and free ofoccupancy rights.

Since a lease modification can alter the obligation of the guaran-tor, the guarantor’s consent or a new guarantee should be obtainedby the tenant prior to any lease modification. Alternatively, theoriginal guarantee can be drafted to cover lease modifications orextensions. A guarantee for the lease term may need to be renewedalong with the lease renewal.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 82.39 (liabilityof guarantors).

● New York Practice Guide: Real Estate § 25.06 [17] (PG:guarantees), § 25.03 [3][c][i] (additional parties potentiallyliable for rent: shareholders, fraudulent transfers), § 25.03[3][c][ii] (guarantors), § 25.07 [1] (Form No. 25-1: OfficeLease, Guaranty Attachment), § 25.07 [2] (Form No. 25-2:Store Lease, Guaranty Attachment).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 346 (Third-Party Guaranty ofPerformance by Lessee).




PART D: DRAFTING AND NEGOTIATINGRESTRICTION, ALTERATION, AND REPAIR

PROVISIONS IN COMMERCIAL LEASE

§ 19.20 Checklist for Drafting and NegotiatingRestriction, Alteration, and Repair Provisionsin Commercial Lease

M Establish restrictions on use of tenant’s business. See§ 19.21 below.

Negotiate specific use of property, along with require-ments concerning signs, displays, conducting business,and altering use. See § 19.21 [1] below.

Ensure use is permitted and required approvals areobtained. See § 19.21 [2] below.

Negotiate rights to change use and signage, as well aslandlord’s consent requirements. See § 19.21 [3]below.

M Ascertain radius restrictions applicable to tenant’s business.See § 19.22 below.

Determine whether competing store may be openedwithin specified radius from store or shopping center.

Decide if lease should contain flat prohibition onopening competing store, or instead include sales de-rived from location within radius.

Consider antitrust and restraint of trade implications ofradius restriction clauses.

M Negotiate operating covenants governing tenant’s business.See § 19.23 below.

Determine whether shopping center landlord can re-quire operating covenant ensuring that tenant continueto conduct business in manner enhancing overall imageof shopping center. See § 19.23 [1] below.

Address issues concerning any merchant associationmembership requirement, including percentage of




tenants who must join, fees shared prorata amongtenants, and fair application of rules. See § 19.23 [1]below.

Inform client of option to use Reciprocal EasementAgreement (REA) instead of shopping center lease(primarily used in upstate New York). See § 19.23 [2]below.

M Draft restrictions on leasing to competing business. See§ 19.24 below.

Determine whether landlord is allowed to lease spaceto tenant’s competitor under an Exclusives Clause.

Negotiate terms of Exclusives Clause, including shop-ping center expansion, assignability, renewals, andenforcement.

Consider antitrust and restraint of trade implications ofclauses restricting ability to lease to competingbusinesses.

M Advise concerning need to comply with applicable laws.See § 19.25 below.

Ensure client complies with all present and future laws,orders, and regulations of federal, state and local gov-ernments, and New York Board of Fire Underwritersor similar bodies. See § 19.25 [1] below.

Clarify any differences in obligations between Compli-ance with Laws Clause and Repair and AlterationClause. See § 19.25 [1] below.

Inform client that in net leases of entire buildings,tenants are generally expected to bear all compliancecosts. See § 19.25 [2] below.

Caution that compliance with environmental laws andregulations, along with Americans with DisabilitiesAct, can be costly. See § 19.25 [3] below.

M Allocate responsibility for alterations and improvements.See § 19.26 below.




Determine landlord’s right to refuse consent to struc-tural alterations performed by tenant. See § 19.26 [1]below.

Inform client that improvements are landlord’s prop-erty, unless landlord elects to have tenant remove them.See § 19.26 [1] below.

Inform client that trade fixtures remain tenant’s prop-erty and tenant is expected to remove them at end oflease. See § 19.26 [1] below.

Negotiate issues concerning rights to make alterationsand improvements, including approval, insurance, com-pliance, and assurances of completion. See § 19.26 [1]below.

Ensure office lease provides, pursuant to work letter,for landlord to alter premises to suit tenant. See § 19.26[2] below.

Provide for inspection of premises and agreement onPunch List of non-completed items before tenant takespossession. See § 19.26 [3] below.

Counsel client concerning tax implications of tenantmaking alterations. See § 19.26 [4] below.

M Negotiate responsibility for repair and maintenance. See§ 19.27 below.

Ensure that client understands tenant takes premises AsIs under most commercial leases, landlords and tenantsbear certain responsibilities for repair, and landlord isordinarily responsible only for structural element re-pairs. See § 19.27 [1] below.

Inform that long-term leases and net-leases usually callfor tenants to make most or all repairs. See § 19.27[2] below.

Negotiate requirements for office lease landlord regard-ing cleaning service, elevator service, and water forordinary lavatory purposes. See § 19.27 [3] below.

Advise client that store lease usually requires tenantto pay for insurance, glass replacement, and to maintain




and repair parts of building exclusively serving prem-ises, including storefronts and sidewalks. See § 19.27[3] below.

M Incorporate mechanics’ lien provisions into lease clauses.See § 19.28 below.

Determine whether provision relating to mechanics’lien will be incorporated into commercial lease’s repair,alteration, or compliance clauses.

Ascertain if tenant will be required to obtain waiverof lien or discharge lien so contractor will not assertrights against landlord.

M Search Advisor:


Real & Personal Property Law > Liens > Mechanics’Liens

§ 19.21 Negotiating Use Restrictions

[1] Considering Landlord and Tenant Use Needs

Commercial leases usually state that the premises may be usedfor a specified use and no other purpose. It is reasonable for thelandlord to want to restrict tenant’s use of the premises to reduceits risk under tort law, hazardous substance law, and other laws,or simply to maintain the building’s attractiveness to other tenants.Leases may, for example, regulate the tenant’s signs and displays,the conduct of its business, or what it sells. The tenant, however,seeks flexibility in terms of the use clause, and may ask for a clausepermitting the tenant to change the use of the premises subject tothe landlord’s reasonable consent. In absence of an express restric-tion in a lease, the tenant may use the premises for any lawfulpurpose. Courts will generally construe restrictive use clausesnarrowly to afford the tenant maximum flexibility.

t Warning: A restrictive use clause is not always advan-tageous to the landlord. If the use permitted under the lease




subsequently becomes illegal by reason of zoning changesor other applicable laws or regulations, the tenant may havea basis for cancellation, while a less restrictive use clausemay not have that effect.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 84.03 (right ofpossession and use of premises).

● New York Practice Guide: Real Estate § 25.06 [10] (PG:use of leased premises), § 25.03 [8], § 25.05 [2][b][i][H](preserving intended use), § 25.07 [1] (Form No. 25-1:Office Lease ¶ 2), § 25.07 [2] (Form No. 25-2: Store Lease,Real Estate Board ¶ 2, ¶ 37), § 25.08 [9][a][i] (Form No.25-45: General Use Clauses), § 25.08 [9][a][ii] (Form No.25-46: Continuous Operation, Shopping Center Tenant).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.15 (Landlord-OrientedShopping Center Lease, Articles 4, 8, 15, 29), Form No.200.16 (Tenant-Oriented Shopping Center Lease, Articles6 and 9), Form No. 205 (Loft Lease ¶ 36), Form No. 209(Office Lease, Articles 5, 8, 9, 30), Form No. 246 (Restric-tion on Use).

● RPAPL § 801 (actions against tenants for waste).

● RPL § 231(6) (enjoin continued unlawful business).

[2] Ensuring Tenants Intended Use Is Permissible

The tenant should make sure its intended use is permissible. Astrong tenant’s counsel should request representations in a majorlease, including:

1. Intended use is not prohibited by any restrictive covenantson land or contained in any other leases;

2. Intended use is permitted under existing zoning law, regula-tions, and landlord’s certificate of occupancy;

3. There are no easements that would interfere with intendeduse;




4. If landlord’s mortgage requires lender’s approval of lease,approval has been obtained;

5. There are no tenancies superior to subject lease; and

6. Upon delivery of possession to tenant, premises will be incompliance with all laws, regulations, and standards ofBoard of Fire Underwriters.

The Real Estate Board Store Lease (¶ 37) prohibits pornographicuses, incorporating the Penal Law § 235.00 definition of obscenematerial.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 82.31 (illegalor immoral use).

● New York Practice Guide: Real Estate § 25.06 [10] (PG:use of leased premises), § 25.03 [8], § 25.05 [2][b][i][H](preserving intended use), § 25.07 [2] (Form No. 25-2:Store Lease, Real Estate Board ¶ 2, ¶ 37), § 25.08 [9][a][i](Form No. 25-45: General Use Clauses).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.14 (Lease to Anchor or KeyTenant: Shopping Center to be Built, Article 10), Form No.201 (Retail Store Lease, Articles I and VIII), Form No. 209(Office Lease, Articles 5, 8, 9, 30), Form No. 244 (PurposeClause), Form No. 246 (Restriction on Use), Form No. 247(Miscellaneous Use Clauses).

[3] Negotiating Sign Requirements

Tenants, particularly retailers, often believe a well designed andreadily visible sign is essential to attract customers. Landlords wishto avoid signs incongruous with signs of other tenants or that arein poor taste. Tenants should seek lease clauses relating to thefollowing:

1. Specific authorization to post and install signs of types andstyles acceptable to tenant;

2. Right to remodel and replace signs;




3. Right to erect temporary Coming Soon signs where newstore is opening; and

4. Agreement from landlord not to place For Sale or For Rentsigns interfering with tenant’s business operations or ob-structing tenant’s signage.

PRACTICE RESOURCES:

● New York Practice Guide: Real Estate § 25.06 [10][c] (PG:erection of signs), § 25.03 [8], § 25.05 [2][b][i][H] (pre-serving intended use), § 25.08 [9][a][i] (Form No. 25-45:General Use Clauses), § 25.08 [9][b][i] (Form No. 25-47:Signs: Tenant-Oriented Clause), § 25.08 [9][b][ii] (FormNo. 25-48: Prohibition of Signs Without Lessor’s Consent).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.15 (Landlord-OrientedShopping Center Lease, Articles 4, 8, 15, 29), Form No.200.16 (Tenant-Oriented Shopping Center Lease, Articles6 and 9), Form No. 201 (Retail Store Lease, Articles I andVIII), Form No. 247 (Miscellaneous Use Clauses).

● RPAPL § 711(5) (prostitution or other illegal business).

● RPL § 231(6) (enjoining continued unlawful business).

§ 19.22 Drafting Non-Competition and RadiusRestrictions on Tenant’s Business

Radius restrictions are common in retail store leases, particularlyshopping centers. Where the landlord is concerned that businesswill be diverted away from the shopping center in absence of arestrictive covenant, the landlord should obtain tenant’s agreementnot to open a competing store within a specified radius from thestore or shopping center. Landlords often have this concern dueto a risk that the shopping center as a whole will produce lessincome and become less valuable, or because the tenant pays apercentage rent.

Some commercial leases do not contain a pure prohibition, butinstead provide that sales derived from any location within theradius will be included within gross sales for purpose of calculating




percentage rent. Strong tenants may bargain for radius restrictionsagainst the landlord, forbidding a landlord who owns nearbyproperty from leasing to the tenant’s competitors.

z Strategic Point: An important question in draftingradius restrictions is whether the perimeter will be mea-sured from the store itself, or from the boundaries of theshopping center.

In drafting radius restrictions, it is important to define thebeginning and ending points of the distance. If the restriction isto cover a competing business (as opposed to any business), it isalso essential to define the term competing since such restrictionsare disfavored and narrowly construed.

Antitrust and restraint of trade implications of radius restrictionclauses should be considered. In particular, 1970s and 1980sconsent decrees should be reviewed for applicability in today’smarket.

PRACTICE RESOURCES:

● New York Practice Guide: Real Estate § 25.06 [10][d] (PG:agreements not to compete and radius restrictions), § 25.03[8][c], § 25.05 [2][b][ii] (shopping centers and stores),§ 25.06 [2][c][vii] (radius restrictions: percentage leases),§ 25.08 [2][b][vi] (Form No. 25-13: Additional Rent Basedon Excess over Minimum Gross Sales: Quarterly Payments¶ e), § 25.08 [9][c][i] (Form No. 25-49: Radius RestrictionImposed upon Tenant), § 25.08 [9][c][ii] (Form No. 25-50:Landlord’s Covenant Not to Rent to Competitors).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.14 (Lease to Anchor or KeyTenant: Shopping Center to be Built), Form No. 256 (Cove-nant by Lessor Not to Rent to Competitors), Form No. 256.1(Covenant by Lessor Not to Compete).




§ 19.23 Defining Operating Covenants GoverningTenant’s Business

[1] Negotiating Operating Covenants in ShoppingCenters

In a shopping center, where retail tenants mutually depend uponeach other to generate traffic, the landlord has an interest to ensurethat each tenant continues to conduct business in a manner enhanc-ing the shopping center’s overall image. Landlords frequentlydemand an operating covenant, even though operating covenantsare sometimes difficult to enforce.

Tenants will sometimes be required to join a merchant’s associa-tion, in which case tenant’s counsel should request the following:

1. Tenant not be required to join unless stipulated percentageof other tenants join;

2. Fees be shared on prorata basis; and

3. All association rules be reasonable and applied equally toall tenants.

Landlord’s counsel may seek a covenant under which the tenantwill operate the store during the entire lease term under the samename and with the same or similar use as provided in the lease.Tenants should consider requesting modification of this provisionto permit name changes and selling of sideline items, provided themajority of space is devoted to the use recited in the lease. Thelandlord may ask for discretion to set shopping center operatinghours, although smaller retail tenants often want to limit operatinghours to meet staffing needs.

z Strategic Point: Tenants with strong bargaining powermay condition an operating covenant upon the landlord’sprocurement of operating covenants from other anchortenants.

Tenant business practices may also be regulated under somelease clauses. The tenant may agree to keep its display windows




stocked and electrically lighted while the shopping center is open,and to keep the premises clean and free of trash. However, thetenant will often want to ensure that other tenants also continueoperating.

[2] Using Reciprocal Easement Agreements

A Reciprocal Easement Agreement (REA) in a shopping centerwith several owners and a shopping center lease with one developerand many anchor/lead tenants often cover much of the samegorund. The REA provides for reciprocal easements over theproperty of each owner for the following:

1. Ring roads;

2. Ingress, egress, and access;

3. Parking;

4. Repair of parking lots (including right of self-help); and

5. Maintenance, repair, replacement, and related matters.

The REA usually contains operating covenants whereby eachowner agrees to operate a retail store for a certain number of years,sometimes specifying the store name. The REA is superior inpriority to the lien of construction and superior in priority topermanent loans on the property of each owner, and is thereby notcut-off by foreclosure of any one or more of those loans.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property Ch. 84 (Leasingof Property: Commercial Leases).

● New York Practice Guide: Real Estate § 25.06 [10][e] (PG:operating covenants), § 25.03 [8] (use of leased premises),§ 25.06 [10][c] (erecting signs), § 25.07 [2] (Form No.25-2: Store Lease ¶ 17, ¶ 35), § 25.08 [9] (use clauses),§ 25.08 [9][a][ii] (Form No. 25-46: Continuous Operation,Shopping Center Tenant), § 25.08 [9][b][i] (Form No.25-47: Signs, Tenant-Oriented Clause), § 25.08 [9][b][ii](Form No. 25-48: Prohibition of Signs Without Lessor’sConsent), § 25.08 [9][d][i] (Form No. 25-52A: Conduct ofBusiness by Tenant).




● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.14 (Lease to Anchor or KeyTenant: Shopping Center to be Built, Articles 10 and 11),Form No. 200.15 (Landlord-Oriented Shopping CenterLease, Articles 4, 8, 15, 27, 29), Form No. 200.16 (Tenant-Oriented Shopping Center Lease, Articles 6, 9, 33, 49),Form No. 201 (Retail Store Lease, Articles I and VIII),Form No. 250 (Signs and Advertisements), Form No. 250.1(Tenant’s Right to Display Signs).

§ 19.24 Prohibiting Businesses Competing with Retailor Shopping Center Tenant

Strong retail or shopping center tenants may request that thelandlord agree not to lease space to tenant’s competitors (knownas Exclusive). Carefully describing the tenant’s business is criticalin negotiating such an agreement. Counsel should negotiate anddraft appropriate carve-out provisions.

t Warning: Landlords should be particularly wary of anexclusive agreement involving the food business as it iscommon for many businesses to have multiple lines ofbusiness, including sale of food and also food services fortheir employees.

In particular, tenant’s counsel may want to request that exclusiveclauses provide the following:

1. Exclusives apply to any shopping center expansion;

2. Exclusives require landlord to enforce provisions at ownexpense;

3. Exclusives are assignable; and

4. Exclusives apply to any lease renewal.

Antitrust and restraint of trade implications of radius restrictionclauses should be considered. In particular, 1970s and 1980sconsent decrees should be reviewed for applicability in today’smarket.




PRACTICE RESOURCES:


● New York Practice Guide: Real Estate § 25.06 [10][b] (PG:other tenants), § 25.03 [8][c], § 25.06 [10][d] (agreementsnot to compete and radius restrictions), § 25.08 [9][c][ii](Form No. 25-50: Landlord’s Covenant Not to Rent toCompetitors), § 25.08 [9][c][iv] (Form No. 25-52: HomeImprovement Store Exclusive), § 25.08 [9][d][ii] (FormNo. 25-52B: Landlord Representations, Second KeyTenant).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.14 (Lease to Anchor or KeyTenant, Article 29 Withdrawal of Portion of ShoppingCenter), Form No. 200.15 (Tenant-Oriented Shopping Cen-ter Lease, Articles 6(B) Second Key Tenant), Form No.200.16 (Tenant-Oriented Shopping Center Lease, Articles6(B) Second Key Tenant), Form No. 256 (Covenant byLessor Not to Rent to Competitors), Form No. 256.1 (Cove-nant by Lessor Not to Compete).

§ 19.25 Allocating Costs of Complying with State andFederal Laws

[1] Defining Conditions Under Which Each Party IsResponsible for Work

Most leases require the tenant to comply with all present andfuture laws, orders, and regulations of federal, state, and localgovernments and all orders, rules, and regulations of the New YorkBoard of Fire Underwriters or similar bodies.

Compliance with laws clauses are closely related to repair andalterations clauses, but may involve entirely different obligations.Where, for example, a municipality enacts a provision requiringbuildings to have adequate fire prevention procedures, includingsprinkler systems, the building may be in an excellent state ofrepair, yet installation of the sprinkler system can be expensive.




It is important in lease drafting to define conditions under whicheach party is responsible for work.

z Strategic Point: A compromise for a stronger officespace tenant is for the landlord to be responsible for presentand future laws that generally govern similar buildings andthe tenant to be responsible for legal requirements arisingfrom tenant’s specific or unusual use of the space.

[2] Bearing Compliance Cost in Net Leases of EntireBuildings

In net leases of entire buildings, tenants are generally expectedto bear the entire cost of compliance. Where the obligation ismixed, the parties often provide that the tenant’s obligation doesnot include structural work, although the tenant must bear the costof compliance with laws and regulations applicable by reason oftenant’s particular use of the premises. Thus, in a multi-tenantedbuilding, if there is at least one other occupant whose use is similarto that of the tenant, the lease may provide for an appropriateapportionment of compliance cost.

[3] Subjecting Parties to ADA Compliance Costs

Compliance with the federal Americans With Disabilities Actto remove access barriers for physically challenged persons inplaces of public accommodation and service can be costly. Placesof public accommodation are defined as facilities whose operationsaffect commerce, including shopping centers, hotels, restaurantsand bars, theaters, concert halls, and schools and banks, whichinvite members of the public to purchase goods or services.

t Warning: Both the landlord who owns the buildingand tenant who operates a place of public accommodationcan be subject to ADA requirements.

In absence of a contrary lease provision, financial responsibilityfor major structural work is likely to fall upon the landlord.




However, landlord’s attorney may request a provision conditioningits consent to tenant performed alterations upon the tenant’sassumption of ADA compliance costs related to those alterations.

t Warning: The tenant should be alert to the effect oncommon charges of ADA compliance by the landlord orother tenants.

Environmental compliance may raise similar allocation issues.In New York City, Local Law 5 may require extensive measuresto provide for fire safety, including sprinklers, and material contain-ing asbestos is highly regulated.

PRACTICE RESOURCES:

● New York Practice Guide: Real Estate § 25.06 [5] (PG:compliance with laws, ordinances, regulations), § 25.03 [6],§ 25.07 [1] (Form No. 25-1: Office Lease ¶ 6, ¶ 15),§ 25.07 [2] (Form No. 25-2: Store Lease ¶ 6, ¶ 15, ¶ 29),§ 25.08 [5] (compliance with law clauses), § 25.08 [5][a](Form No. 25-30: Tenant’s Compliance with Laws, Ordi-nances, and Orders), § 25.08 [5][b] (Form No. 25-31:Clause Limiting Tenant’s Obligation of Compliance toDuties, Orders, and Violations Relating to Occupancy),§ 25.08 [5][c] (Form No. 25-32: Tenant’s Obligation toMaintain Sprinkler System).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.14 (Lease to Anchor or KeyTenant: Shopping Center to be Built sec.10.3, 13.2), FormNo. 200.15 (Landlord-Oriented Shopping Center Lease,Articles 8 and 9), Form No. 200.16 (Tenant-Oriented Shop-ping Center Lease, Article 14), Form No. 201 (Retail StoreLease § 8.1(E)), Form No. 205 (Loft Lease ¶ 3, ¶ 5, ¶ 6,¶ 30), Form No. 209 (Office Lease, Articles 9 and 37).

● 28 CFR § 36.101 et seq. (ADA regulations).

● 42 USCS § 12101 et seq. (Americans with Disabilities Act).




● N.Y. City Admin. Code § 27-4001 et seq. (Local Law 5,sprinkler systems).

§ 19.26 Providing for Alteration and ImprovementRights

[1] Establishing Parameters of Tenant’s Right to MakeAlterations

In describing the right to make alterations, leases frequentlydistinguish between structural and non-structural alterations. Mostlandlords seek to reserve the absolute right to refuse consent tostructural alterations by the tenant. However, most leases are farless restrictive in treatment of non-structural alterations. Forexample, the Real Estate Board Form of Office Lease permits non-structural alterations which do not affect utilities, provided that atlease expiration, improvements become the landlord’s property,unless the landlord elects to have the tenant remove them.

z Strategic Point: Tenant should request to limit its dutyto restore to unusual items, for example, an internalstaircase.

Trade fixtures (those necessary for operation of tenant’s busi-ness) remain tenant’s property, and tenant is expected to removethese at lease expiration. If the tenant fails to remove its propertyupon lease termination, then tenant’s property will be deemedabandoned and tenant must pay to remove and store.

A landlord has a legitimate interest in controlling a tenant’s rightto make alterations and improvements and should draft provisionscalling for the following:

1. Right to approve plans, specifications, materials, and ten-ant’s contractors;

2. Right to prior notice of construction so landlord can postproper notices of non-responsibility or other disclaimers toavoid mechanics’ liens;




3. Right to require tenant to provide acceptable bonds, indem-nities, or insurance to assure project completion; and

4. Right to require assurances that, at end of lease and atlandlord’s option, tenant will remove alterations and addi-tions not useful to new tenants or expensive to remove.

In response, tenant’s counsel may want to negotiate for thefollowing:

1. Landlord’s agreement not to unreasonably withhold consentto alterations;

2. Fees imposed in connection with obtaining landlord’s con-sent be reasonable (for example, architects or otherconsultants);

3. Landlord not require changes in tenant’s alterations increas-ing cost, except where necessary to comply with law; and

4. Threshold level for work not requiring landlord’s consent,including decorative or minor alterations, or moving parti-tion walls.

Landlords often seek to set forth the following additionalrequirements:

1. Alterations shall be at tenant’s sole expense;

2. Tenant shall, at its expense, comply with all applicable lawsand regulations;

3. Tenant shall comply with all applicable insurance require-ments and pay amount of any premium increase;

4. Alteration shall not impair building value;

5. Alteration shall not violate provisions of any existing orfuture mortgage;

6. Plans and contracts to perform work shall be approved bylandlord (approval not arbitrarily withheld);

7. Tenant shall indemnify landlord against any liability arisingout of alterations or improvements and shall discharge anymechanics or other liens; and

8. Any alterations, other than trade fixtures, become landlord’sproperty at lease expiration.




[2] Reviewing and Negotiating Work Letters

An office lease usually provides for the landlord to alter thepremises to suit the tenant, pursuant to a work letter. The landlordoften has a standard work letter outlining the procedure forsubmission and approval of tenant plans and specifies in detail whatwork the landlord will pay for (building standard), with the tenantpaying the remainder. A strong tenant can often negotiate foradditions to the building standard list.

t Warning: A landlord’s work letter is usually negotia-ble, and should be reviewed and negotiated in detail. Awork letter is frequently not comprehensible without ad-vice of a competent engineer, architect, or both.

[3] Providing for Inspections and Punch List Items

The lease should also provide for inspection of the premisesbefore the tenant takes possession and for agreement on a punchlist of items not yet completed by the landlord. Landlords shouldattempt to establish a short deadline for tenant to report anyproblem with the landlord’s work and require tenant to leave behindany improvements, fixtures, or personal property for which land-lord paid (including through rent abatement). See § 20.05 [3]below.

s Timing: Substantial completion of the landlord’s workshould include activation of all utilities, communicationssystems, and interior elevator service. Ask landlord todeliver a permanent certificate of occupancy, as temporarycertificates of occupancy usually expire in 90 days.

[4] Considering Tax Treatment for Tenant Alterations

Where the tenant makes alterations, the cost of the work isgenerally treated as a capital expense and is deductible by the tenantas depreciation over the life of the improvement or term remaining




under the lease, whichever is less. No income is realized by thelandlord. The landlord’s acquisition of the tenant’s improvementsat the end of the lease is also not income to the landlord.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 82.14, § 82.15(alterations), § 92.01 (mechanics’ liens).

● New York Practice Guide: Real Estate § 25.06 [3] (PG:alterations and improvements), § 25.03 [4] (alterations),§ 25.06 [7] (mechanics’ liens), § 25.07 [1] (Form No. 25-1:Office Lease ¶ 3, ¶ 20), § 25.07 [2] (Form No. 25-2: StoreLease ¶ 3), § 25.08 [3][a] (Form No. 25-22: Clause Permit-ting Nonstructural Alterations), § 25.08 [3][b] (Form No.25-23: Landlord’s Agreement Not to Unreasonably With-hold Consent), § 25.08 [3][c] (Form No. 25-24: Agreementby Lessee to Alter Building).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 261 (Tenant’s Alterations atTenant’s Expense), Form No. 262 (Limitation on Cost),Form No. 262.1 (Cost Cap), Form No. 265 (Consent ofLandlord), Form No. 266 (Tenant’s Alterations to BecomeLandlord’s Property), Form No. 267 (Lessee to Alter Build-ing and Assume All Costs), Form No. 267.1 (Lessee Autho-rized to make Alterations), Form No. 269 (Alteration ClauseFavorable to Landlord).

● IRC § 109 (lessor’s acquisition of tenant’s improvements).

● IRC § 168(i)(8) (favorable tax treatment for lessor improve-ments abandoned by lessor at lease end).

● Lien Law § 3 (mechanic’s lien).

● RPAPL § 803(1)(c) (court approval for tenant improve-ments).




§ 19.27 Determining Repair and MaintenanceObligations

[1] Defining Structural Elements and What ConstitutesPremises

Most leases provide for the tenant to take the premises in itspresent, as is, condition. In common commercial leases, both thelandlord and tenant bear certain responsibilities for repair. Thelandlord is ordinarily responsible for repairs to the structuralelements. Carefully and specifically define the word structural. Itcan be said, for example, structural elements include, but are notlimited to, exterior load bearing walls, roofs, foundations, andsubflooring.

Where repair obligations are mixed, the landlord should requirethat any repairs necessitated by tenant’s particular use of thepremises be borne by the tenant. For example, a tenant who installsequipment increasing the electrical load, thus necessitating wiringchanges, can be required to bear re-wiring cost.

z Strategic Point: Tenant’s attorney should ensure thattenant repairs will not include work resulting from defec-tive construction of the premises. Seek a dollar cap on theamount tenant must spend on repairs.

Where the landlord’s draft of the lease requires the tenant to keepthe premises in good repair, tenant’s attorney should attempt toobtain certain exclusions from the definition of premises, includingthe following:

1. Foundations, bearing walls, roofs (including downspoutsand gutters);

2. Plumbing, fire protection, electrical, cable systems;

3. Walls, windows, doors;

4. Heating, ventilation, air conditioning systems;

5. Common areas, including parking areas; and

6. Elevators and stairs.




PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 80.29 (duty torepair after fire or casualty).

● Warren’s Weed: New York Real Property Ch. 92 (Mechan-ics’ Liens).

● New York Practice Guide: Real Estate § 25.06 [4] (PG:repairs and maintenance), § 25.03 [5] (obligation to repair),§ 25.03 [11] (destruction of or damage to premises by fireor casualty), § 25.06 [7] (mechanic’s liens), § 25.08 [4][b](Form No. 25-26: Obligations to Maintain Premises; Ten-ant), § 25.08 [4][c] (Form No. 25-27: Heating Plant, Land-lord’s Obligation to Repair, Tenant’s Remedy), § 25.08[4][d] (Form No. 25-28: Tenant’s Obligation to RepairPremises, Landlord’s Right on Tenant Default), § 25.08[4][e] (Form No. 25-29: Landlord’s Obligation to RepairShopping Center, Tenant-Oriented Clause), § 25.08 [12](damage and destruction).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 260 (Covenant by Lessee toMake Repairs), Form No. 260.1 (Lessee’s Limited Obliga-tion to Make Repairs), Form No. 260.2 (Costs Chargeableto Lessee if Lessor Undertakes Work), Form No. 263(Failure of Lessee Repair; Rights of Lessor), Form No.263.2 (Landlord’s Right to Maintain and Repair), Form No.268 (Landlord’s Obligation to Maintain and Repair HeatingEquipment).

[2] Negotiating Repair Obligations Under Long Termand Net Leases

Long term leases and net leases usually call for tenants to makemost or all repairs. Net leases calling for extensive tenant repairspresent a problem when the need for such repairs arise during thefinal few years of a long-term lease. The tenant does not want toundertake an unreasonable burden or provide a windfall to thelandlord.

s Timing: Both parties will want to be particularly clear




in determining the nature and dollar amount of repairsdeemed the tenant’s responsibility when there is less thana specified time remaining on the lease.

PRACTICE RESOURCES:



● New York Practice Guide: Real Estate § 25.06 [4] (PG:repairs and maintenance), § 25.08 [4] (repairs and mainte-nance), § 25.08 [4][a] (Form No. 25-25: Tenant’s Obliga-tion to Maintain and Repair: Arbitration), § 25.08 [4][b](Form No. 25-26: Obligations to Maintain Premises; Ten-ant), § 25.08 [4][d] (Form No. 25-28: Tenant’s Obligationto Repair Premises, Landlord’s Right on Default).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 260 (General Covenant byLessee to Make Repairs), Form No. 260.1 (Lessee’s LimitedObligation to Make Repairs), Form No. 260.3 (Lessee’sObligation to Repair Beyond First Years of Lease).

[3] Specifying Responsibility for Maintaining Premises

Most leases specify who will maintain the premises. Officeleases require the landlord to provide cleaning services, usually ona specified schedule with specified tasks. The landlord is alsorequired to provide elevator service and hot and cold water forordinary lavatory purposes. Store leases usually do not providethese services, but require the tenant to pay for insurance andreplacement of plate glass. The tenant should maintain and repairthose parts of a building, including storefronts and sidewalks,exclusively serving the premises. In addition, tenants should berequired to restore the premises at the end of the term.

PRACTICE RESOURCES:






● New York Practice Guide: Real Estate § 25.06 [4] (PG:repairs and maintenance), § 25.03 [5] (obligation to repairpremises), § 25.08 [4] (repairs and maintenance), § 25.07[1] (Form No. 25-1: Office Lease ¶ 4, ¶ 5, ¶ 9, ¶ 13, ¶ 21,¶ 29), § 25.07 [2] (Form No. 25-2: Store Lease ¶ 4, ¶ 5,¶ 9, ¶ 13, ¶ 21, ¶ 30, ¶ 36), § 25.08 [4][a] (Form No.25-25: Tenant’s Obligation to Maintain and Repair: Arbitra-tion), § 25.08 [4][b] (Form No. 25-26: Obligations toMaintain Premises; Tenant), § 25.08 [4][c] (Form No.25-27: Heating Plant, Landlord’s Obligation to Repair,Tenant’s Remedy), § 25.08 [4][f] (Form No. 25-29A:Cleaning).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 260 (Covenant by Lessee toMake Repairs), Form No. 260.1 (Lessee’s Limited Obliga-tion to Make Repairs), Form No. 260.2 (Costs Chargeableto Lessee if Lessor Undertakes Work), Form No. 263.1(Landlord’s Right of Entry to Examine and Make Repairsfor Safety), Form No. 268 (Landlord’s Obligation to Main-tain and Repair Heating Equipment).

§ 19.28 Incorporating Mechanics’ Lien Provisions intoRepair, Alteration, or Compliance Clauses

Mechanics’ lien and other lien provisions are generally incorpo-rated in repair, alteration, or compliance clauses. The landlord’sobjective is to force the tenant to either obtain a lien waiver ordischarge the lien to prevent contractors from asserting any rightsagainst the landlord where tenant has engaged contractors toperform work. Tenant’s counsel should consider requesting aprovision permitting the tenant to contest a contractor’s claimconditioned upon tenant filing a bond to cover the disputed amount.

PRACTICE RESOURCES:





● New York Practice Guide: Real Estate § 25.06 [7] (PG:mechanic’s liens), § 25.08 [3][c] (Form No. 25-24: Agree-ment by Lessee to Alter Building), § 25.08 [12][d] (FormNo. 25-68: Tenant to Repair, Insurance Proceeds Appliedby Landlord).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Ch. 21 (Mechanics’ Liens).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 270.2 (Lessee to Furnish Bondto Secure Lessor Against Mechanics’ Liens), Form No. 300(Removal of Liens by Tenant: Landlord’s Rights), Form No.301 (Lessee to Discharge Mechanics’ Liens).

● Lien Law §§ 3, 20, 25 (mechanic’s lien, contests).




PART E: DRAFTING AND NEGOTIATINGANCILLARY SERVICE, TAX, AND INSURANCE

PROVISIONS IN COMMERCIAL LEASE

§ 19.29 Checklist for Drafting and NegotiatingAncillary Service, Tax, and InsuranceProvisions in Commercial Lease

M Establish common area and parking arrangement. See§ 19.30 below.

Negotiate common area and parking lease clauses andaddress tenant’s right to use, landlord’s obligation tomaintain, and tenant’s obligation to pay share ofexpense.

Consider limiting landlord’s ability to change commonareas in manner adverse to tenant.

Review carefully any requirement that tenant pay shareof common area maintenance.

M Negotiate utility and energy clauses. See § 19.31 below.

Ascertain nature of arrangement for landlord purchas-ing electricity and providing electricity to tenant. See§ 19.31 [1] below.

Inform client about distinctions between rent inclusionmethod and sub-metering method of purchasing elec-tricity. See § 19.31 [1] below.

Draft and negotiate escalation clause requiring tenantto pay proportionate share of increases in buildingenergy costs over base period. See § 19.31 [2] below.

Provide specifically for payment of water charges undereither frontage or actual use charging method. See§ 19.31 [3] below.

M Provide for heating, ventilation, air conditioning, and otherservices. See § 19.32 below.

Construct office lease services provision requiring thatusual heating, ventilation, and air conditioning (HVAC)




be provided by landlord during business hours inappropriate seasons.

Ensure that landlord agrees to provide necessary eleva-tor facilities on business days at stated hours, alongwith providing cleaning services.

Consider possibility of tenant using landlord’s telecom-munications or fiber optics cable provider, with land-lord controlling roof rights, including installation ofsatellite dishes.

M Establish party responsible for payment of real propertytaxes. See § 19.33 below.

Determine whether tenant is responsible for entireamount of taxes payable (tax clause in net lease) or onlytax increases over specified base period (tax escalationclause).

Discuss nature of sums payable under tax clause,including assessments and substitutes for real propertytaxes.

Negotiate tax escalation clauses and pay particularattention to designation of base year.

Determine necessity of making provision for separateassessment of demised premises.

Review with client income tax reporting implicationsof paying real property taxes.

M Clarify insurance requirements under lease. See § 19.34below.

Define nature and amount of property insurance thatparties must carry under lease. See § 19.34 [1] below.

Ensure insurance company is state-licensed and well-rated. See § 19.34 [1] below.

Request that landlord, its managing agent, and mortga-gees be named as additional insured, not named in-sured. See § 19.34 [1] below.

Recommend that insurance broker or consultant beconsulted to review, update, and improve lease insur-ance requirements. See § 19.34 [1] below.




Request that lease allow insurance policy inspection touncover problems not revealed by binder or certificateof insurance. See § 19.34 [2] below.

Seek to have policy contain mutual waivers of subroga-tion and mutual releases from liability to extent ofcoverage amount. See § 19.34 [3] below.

Negotiate indemnification clause broad enough to suffi-ciently protect landlord and narrow enough to suffi-ciently protect tenant. See § 19.34 [3] below.

M Search Advisor:

Real & Personal Property Law > Insurance > Fire &Casualty Insurance


Real & Personal Property Law > Taxation > Collection

M Investigate Parties on lexis.com®. See § Intro.09 above.

§ 19.30 Maintaining and Altering Common Area andParking Space

Lease clauses dealing with common areas cover three majorissues:

1. Tenant’s right to use;

2. Landlord’s obligation to maintain; and

3. Tenant’s obligation (if any) to pay tenant’s share ofexpenses.

Counsel must carefully define the common area. Tenants, andtheir employees and customers, expect a nonexclusive right to useand pass through common areas. The landlord should reserve theright to temporarily close-off the common area to prevent dedica-tion (prevent, among other things, creation of prescriptive ease-ments); to expand, decrease, or alter the complex; and to erect newbuildings in the area.

z Strategic Point: Tenant’s counsel will want to negoti-ate to limit the landlord’s ability to alter common areas,




for example, the lobby, hallway, parking, and accesspoints, to ensure that changes made by the landlord do notinterfere with tenant’s operation of the premises, reduceparking areas below acceptable levels, or negatively impactvisibility of tenant’s space and signs.

The attorneys should determine the landlord’s obligation tomaintain common and parking areas, including removal of debris,snow, and ice. Many leases require the tenant to pay either aproportionate share or full cost of maintaining the common area(called common area maintenance, or CAM). Other leases requirepayment of the increase in costs over a specified base period.Tenant should make sure that exclusions cover executive salariesand capital improvements, among other things.

t Warning: Parking and vehicle loading facilities areparticularly important in shopping centers. Tenants con-cerned about parking may insert a clause requiring that astipulated number of parking spaces be allocated to theleased space. Counsel needs to specify limits on use bythe landlord or others.

Tenant’s counsel should attempt to require the landlord to listthe tenant on the building or shopping center’s directory board.The number of names listed on an office building directory maybe negotiable.

PRACTICE RESOURCES:

● New York Practice Guide: Real Estate § 25.06 [6] (PG:common areas, parking), § 25.08 [6] (common areaclauses).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.14 (Lease to Anchor or KeyTenant: Shopping Center to be Built, § 4.1(c), § 8.3(c),§ 8.5, Articles 9, 29), Form No. 200.15 (Landlord-OrientedShopping Center Lease, Articles 7(C), 7(D), 28, 37), Form




No. 201 (Retail Store Lease, Article IV), Form No. 209(Office Lease, Articles 7, 14, 24, 34), Form No. 230 (Tenantto Share Common Area Operating Costs), Form No. 231(Tenant to Pay for Maintenance of Parking Spaces), FormNo. 242 (Reservation of Driveway Easement).

§ 19.31 Offering Utilities and Energy to Tenant

[1] Purchasing Electricity

z Strategic Point: Carefully review the method of pro-viding and charging for electricity and the provision foradjusting or escalating charges as some aspects may benegotiable.

Electricity may be purchased through the following methods:

1. Directly from utility company (usually lowest cost optionfor tenant);

2. Sub-metered from lessor’s supply; or

3. Based on square footage or estimates (generally greatestexpense to tenant).

t Warning: Since the landlord can sometimes purchaseelectricity from the utility at wholesale rates and thenprovide electricity to tenants at higher rates, the electricityclause may constitute a profit center for the landlord.

[2] Allocating Electricity Costs

The most common arrangement is for the landlord to purchaseelectricity from the utility company and provide electricity to thetenants, either on a rent inclusion or sub-metering basis.

z Strategic Point: A larger tenant should request that the




landlord reserve a certain number of watts per foot for thetenant to allow for future increases in demand.

Under the rent inclusion method, a specified dollar amount persquare foot is allocated to electricity costs in the rent. The leasewill usually allow the landlord to have an electrical survey per-formed at specified intervals by a consultant selected by thelandlord. If the consultant determines that electrical usage differsfrom the specified amount per square foot, that portion of rentallocable to electricity will be adjusted accordingly. The tenantshould request a right to initiate a usage survey.

Adjustments may also be made where electricity rates increase.Under the sub-metering method, the landlord bills the tenant foractual electrical usage. Tenant’s counsel should ask that chargesbe based on the same tariff under which the landlord pays.

It is not uncommon for escalation clauses to require the tenantto pay a proportionate share of the increase in a building’s energycosts over a base period. The proportion is generally based on theratio between the amount of space rented and the building’s totalsquare footage, with special arrangements for times when largeareas of the building are vacant.

[3] Charging for Water Usage and Being Aware ofClient’s Technological Needs

In some localities, there is a flat rate water tax or frontage chargethat is dependent upon the building classification, not actual waterusage. In other regions, consumers are charged according to theactual amount of water usage as shown by a water meter. The leaseagreement usually provides specifically for payment of watercharges.

t Warning: Counsel for the tenant should be particularlyaware of the client’s technological needs, especially ifcomputerized operations are essential to the client’s busi-ness. The cost and availability of sufficient electricalservice will be a key issue, as will cost and availability




of heating, cooling, and ventilating systems possibly neces-sary when electrical equipment is operating during normaland after hours time periods.

PRACTICE RESOURCES:

● New York Practice Guide: Real Estate § 25.06 [8] (PG:utilities and energy), § 25.03 [3][b] (escalation clauses),§ 25.06 [2][d][iii] (operating expenses, escalation clauses),§ 25.06 [8][c] (energy escalation clause), § 25.07 [1](Form No. 25-1: Office Lease ¶ 12), § 25.07 [2] (Form No.25-2: Store Lease ¶ 12), § 25.08 [7][a][i] (Form No. 25-37:Electricity Clause; Rent Inclusion on Submetering Basis),§ 25.08 [7][a][ii] (Form No. 25-38: Electricity Clause; RentInclusion Basis), § 25.08 [8][b][i] (Form No. 25-39: Build-ing Energy Escalation Clause).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 227 (Lessee to Pay All Water,Gas, and Electric Charges), Form No. 228 (Water Suppliedby Landlord, with Tenant Paying Proportionate Cost), FormNo. 229 (Utilities Paid by Tenant Where Meters Installedby Landlord), Form No. 255.1 (Lessor to Pay WaterCharges), Form No. 255.2 (Lessor to Furnish Power), FormNo. 257 (Landlord to Supply Utilities).

§ 19.32 Providing Heating, Ventilation, AirConditioning, and Other Services

The lease will usually allocate responsibilities for providingheating, ventilation, and air conditioning (HVAC) service and willdetermine if costs are included in any energy-based rent escalationprovision. In a typical office lease, the landlord agrees to provideHVAC services during normal business hours in appropriateseasons, with additional hours of service available upon advancenotice and payment of additional charges. The tenant should askthat the rates and basis of rates for overtime HVAC be set forthin the lease. If the tenant needs to install supplemental HVAC,several issues must be resolved, including access to condenserwater, chilled water, and power.




z Strategic Point: Carefully review the days and hoursof HVAC operation as some aspects may be negotiable.

In an office lease, the landlord also agrees to provide necessaryelevator facilities at stated hours on business days. The landlord’scleaning schedule is sometimes attached to the lease and may benegotiated as to scope and frequency of work.

t Warning: In an office lease situation, tenant’s counselshould request that a security program be specificallydescribed and maintained by the landlord.

PRACTICE RESOURCES:

● New York Practice Guide: Real Estate § 25.06 [8][d] (PG:HVAC), § 25.03 [3][b] (escalation clauses), § 25.06[2][d][iii] (operating expenses, escalation clauses), § 25.06[4][d][i] (HVAC and utilities repair), § 25.07 [1] (Form No.25-1: Office Lease ¶ 29), § 25.07 [2] (Form No. 25-2: StoreLease ¶ 30), § 25.08 [8][c][i] (Form No. 25-39A: Heating,Ventilation, Air Conditioning Clause).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.15 (Landlord-OrientedShopping Center Lease, Article 12), Form No. 200.16(Tenant-Oriented Shopping Center Lease, Articles 10(D),11(D)), Form No. 201 (Retail Store Lease § 4.6, § 6.2,§ 8.1(D)), Form No. 205 (Loft Lease ¶ 31), Form No. 209(Office Lease, Article 12), Form No. 255 (Lessor to FurnishHeat), Form No. 268 (Landlord to Maintain and RepairHeating Equipment).

§ 19.33 Negotiating Real Property Tax PaymentResponsibility

The first question in negotiating a clause relating to real propertytax payment is whether the tenant will be responsible for the entire




amount of taxes payable (tax clause) or only the increase in taxesover a specified base period (tax escalation clause).

The parties should define the nature of the sums payable undera tax clause. It is generally provided that taxes include assessmentsand any substitutes for real property taxes: for example, chargesand special assessments for business improvement districts (BIDs)in New York City.

Tax escalation clauses are commonplace in commercial leases.The tenant may want to ask for the right to require tax reviewproceedings. Tax refunds should be passed to the tenant. If the baseyear is reduced by reassessment, the rent should be adjustedaccordingly. The landlord’s aim is to protect against cost increasesthat would reduce expected net profits, particularly during long-term leases.

t Warning: Carefully note the base tax year as taxescalation clauses generally provide that the tenant will payall tax increases occurring after a selected base tax year.

Clauses requiring payment of all taxes are suitable for a net lease.However, even where the lease is not entirely net, the parties cannegotiate for a lower rent in return for tenant’s agreement to paythe entire amount of taxes attributable to the premises. In this case,the tenant is well advised to make provision for a separate assess-ment of the demised premises where the municipality levying thetax is authorized to do so, or to arrange for a fair method ofapportionment where a separate assessment cannot be effectuated.

z Strategic Point: Counsel for tenants should seek alease provision providing proration against a remaininglease period to protect tenants if the lease term is nearingthe end and tenants are concerned that an assessment mayresult in an unreasonable burden to themselves and wind-fall for the landlord.




Where a commercial tenant pays real property taxes for thelandlord, the amount paid is deductible by the tenant, since thelandlord, who is deemed to have received income, is allowed anoffsetting deduction.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 129.62 (defaultin payment of taxes or assessments in New York City).

● Warren’s Weed: New York Real Property Ch. 133 (TaxesAffecting Real Property).

● New York Practice Guide: Real Estate § 25.06 [9] (PG: taxpayment), § 25.08 [8] (tax clauses), § 25.08 [8][a][i] (FormNo. 25-40: Tenant’s Share of Real Estate Taxes and Assess-ments), § 25.08 [8][a][ii] (Form No. 25-41: Assessments),§ 25.08 [8][a][iii] (Form No. 25-42: Tenant Responsible forPayment of All Taxes), § 25.08 [8][a][iv] (Form No. 25-43:Tax Contest by Tenant), § 25.08 [8][b] (Form No. 25-44:Tax Escalation Clauses).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.14 (Lease to Anchor or KeyTenant: Shopping Center to be Built § 4.5, § 4.6, § 4.7),Form No. 200.15 (Landlord-Oriented Shopping CenterLease, Articles 7(A) and 13), Form No. 209 (Office Lease,Article 6), Form No. 232 (Tenant Required to Pay Taxesand Additional Expenses), Form No. 232.1 (Tenant to PayIncreases in Property Tax), Form No. 232.2 (Tenant inMultitenant Building to Pay Increases in Property Taxes).

§ 19.34 Structuring Insurance Provisions

[1] Defining Nature and Amount of Property Insurance

Where a commercial lease requires the tenant to carry insurance,the lease should define the nature and amount of property insur-ance, typically fire and extended coverage. Boilers and machinery,plate glass, vandalism, and malicious mischief may be coveredseparately. Where rent is based in part on percentage rent, thelandlord should be named as an insured for business interruption




and loss of merchandise coverage. Replacement cost coverageprovides a greater payment than actual value (reproduction costless depreciation).

z Strategic Point: The insurance company involvedshould be licensed in the state and well-rated by Best’sInsurance Reports or another authoritative source.

Insurance issues have become more complex since the Septem-ber 11, 2001 terrorist attacks. The landlord, its managing agent,and mortgagees should be named as additional insureds, not namedinsureds, because the latter may owe premiums. Larger tenants maywant to expressly require the landlord to carry insurance andprovide evidence of insurance upon request.

z Strategic Point: The landlord’s insurance broker orconsultant should be consulted to review, update, andimprove insurance requirements in the lease. Tenant’sinsurance broker or consultant should also review thelease’s insurance requirements.

[2] Determining Insurance Cost and Cost Increases

Some landlords attempt to obtain lease clauses where the tenantagrees to absorb all insurance costs above a base amount. Thisclause can result in large cost increases for tenants due to insurancefactors beyond tenant’s control (for example, additional require-ments imposed by landlord’s mortgage lender). The tenant mayseek to limit its cost increase by limiting increases to those causedby general inflation or the tenant’s particular use of the premises.Regardless of the arrangement, where either party is relying uponthe other to obtain proper insurance, the lease should permitinspection of the policy (which may uncover problems not revealedby binder or certificate of insurance) and the policy should requiresufficient advance notice of cancellation to keep the policy in forceor obtain alternative insurance.




t Warning: Counsel should require evidence of insur-ance through an ACORD 27 form instead of a certificateof insurance (ACORD 25 form).

[3] Drafting Indemnification Clauses

To avoid post-accident litigation and liability, the lease shouldrequire that all policies obtained by the landlord or tenant containa mutual waiver of subrogation, and a mutual release from liabilityto the extent of the amount of insurance coverage. Any indemnifi-cation clause should be drafted to conform with insurance clauses.

The landlord will want the tenant to indemnify against all claimsand liability arising from the tenant’s use and occupancy of thepremises, or to indemnify to the extent of liability in excess ofinsurance coverage. The tenant will want to narrow this indemnityprovision to cover only the following situations:

1. Claims arising from tenant’s negligence or willfulmisconduct;

2. Negligence or willful misconduct of tenant’s employees oragents; and

3. Matters against which landlord is not effectively insured.

The tenant will also want the landlord to bear, at a minimum,responsibility for claims or damages arising from defects in thelandlord’s work within common areas, and preferably within thedemised premises as well.

t Warning: Lenders, including commercial banks,thrifts, and life insurance companies, are increasinglyrequiring environmental insurance coverage for commer-cial real estate loans, instead of, or in tandem with, PhaseI site assessment reports.




PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property Ch. 70(Insurance).

● New York Practice Guide: Real Estate § 25.06 [11] (PG:insurance, indemnification, exculpatory provisions),§ 25.07 [1] (Form No. 25-1: Office Lease ¶ 6), § 25.07[2] (Form No. 25-2: Store Lease ¶ 6, ¶ 8), § 25.08 [10][a](Form No. 25-53: Insurance; Landlord’s and Tenant’s Obli-gations), § 25.08 [10][b] (Form No. 25-54: Tenant’s Obli-gation to Pay Where Increased Insurance Rates Attributableto Tenant’s Acts), § 25.08 [10][c] (Form No. 25-55: Mis-cellaneous Insurance Provisions).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 291 (Tenant to Maintain FireInsurance), Form No. 291.1 (Lessee to Insure Against Lossby Fire), Form No. 292 (Tenant to Maintain LiabilityInsurance), Form No. 293 (Lessee to Insure Plate Glass),Form No. 299 (Landlord’s Exculpatory Clause), Form No.299.1 (Landlord’s Indemnification Clause), Form No. 299.2(Lessee to Indemnify Lessor for Liability to Third Persons),Form No. 303 (Waiver of Subrogation).





PART F: DRAFTING AND NEGOTIATINGCOMMERCIAL LEASE PROVISIONS

CONCERNING CONTINUED OCCUPANCY ANDDEFAULT

§ 19.35 Checklist for Drafting and NegotiatingCommercial Lease Provisions ConcerningContinued Occupancy and Default

M Delineate rights in event of condemnation of property. See§ 19.36 below.

Address limits lease places upon tenant rights if partial,temporary, or complete condemnation occurs.

Determine whether rent will be prorated and if tenantwill share in condemnation award.

Negotiate clause addressing whether tenant is entitledto value of fixtures, value of improvements, and reloca-tion costs.

M Establish remedies for damage and destruction. See § 19.37below.

Negotiate rent abatement and landlord repair provisionsapplicable if property becomes partially or completelydamaged.

Consider and draft lease provision addressing issue oflimiting landlord’s obligation to restore and tenant’srent abatement to amount of insurance proceeds land-lord receives under landlord’s casualty insurancepolicy.

Provide for lease termination rights if premises arebadly damaged and landlord elects to demolish orrebuild.

M Specify subletting and assignment requirements. See§ 19.38 below.

Negotiate lease provision concerning consent neededto sublet or assign lease.




Determine percentage that may be subleased beforelandlord will be entitled to recapture right.

Ascertain whether tenant must pay landlord share ofconsideration or profit tenant receives from sublettingor assignment.

Provide that landlord consent to subletting or assign-ment cannot be unreasonably withheld and refusal mustbe based on specific, objective standards.

M Explain factors to consider in selecting arbitration or ap-praisal. See § 19.39 below.

Suggest that potential disputes be settled by arbitration,with each party designating an arbitrator, and arbitra-tors appointing neutral arbitrator.

Caution that arbitration awards cannot normally be setaside by courts, and judgment confirming award isgenerally granted.

Suggest appraisal to resolve valuation disputes.

M Negotiate default and notice provisions. See § 19.40 below.

Include provisions calling for notice of default or noticeto cure, and remedies if tenant fails to cure default,including termination, right to relet, right to cure defaultat tenant’s expense, and entitlement to default interestor late charges. See § 19.40 [1] below.

Recommend that if tenant fails to vacate and holds overat end of lease term, tenant must pay greater of percent-age of final adjusted monthly rent or percentage of fairmarket rent as use and occupancy charge. See § 19.40[2] below.

Inform client that tenant may seek Yellowstone injunc-tion to toll period allowed for cure. See § 19.40 [3]below.

Negotiate remedies, including specific performance,monetary damages, and limiting liability to propertyinterest if landlord fails to cure default. See § 19.40[4] below.




M Consider implications of sale or mortgage of landlord’sinterest. See § 19.41 below.

Advise client of possible need for tenant to provideestoppel certificate, execute and deliver subordinationagreement, and obtain non-disturbance agreementwhere landlord’s interest is sold or mortgaged. See§ 19.41 [1] below.

Negotiate time period to deliver estoppel certificate andlimit estoppel certificate to tenant’s knowledge. See§ 19.41 [1] below.

Request notice of any sale of property. See § 19.41 [1]below.

Require non-disturbance agreement in connection withsubordination and attornment agreements (SNDAagreement). See § 19.41 [2] below.

M Consider implications of mortgaging tenant’s long-termleasehold interest. See § 19.42 below.

Recommend lease provision permitting appropriatetenants to mortgage leasehold and providing protectionslikely required by lenders, including notice of default,right to cure, and free assignability of lease.

M Search Advisor:

Real & Personal Property Law > Landlord & Tenant> Assignments & Subleases


Real & Personal Property Law > Mortgages & OtherSecurity Interests > Assignments & Transfers

Real & Personal Property Law > Mortgages & OtherSecurity Interests > Remedies on Default

§ 19.36 Delineating Rights in Event of Condemnation

Governmental taking of all or part of a demised premises throughcondemnation is usually not under the control of the landlord ortenant, and condemnation insurance is not ordinarily available.




Consequently, it is desirable for the lease to contain a condemnationclause specifically delineating the rights of both parties in the eventof condemnation.

In absence of a condemnation clause, tenants will share in thecondemnation award to the extent of their leasehold interest value.However, most leases include provisions limiting tenant’s rights.The Real Estate Board Office Lease provides that the leaseterminates upon condemnation and the tenant does not share in theaward. Tenants may negotiate for proration of rent paid in advanceand, where tenant is strong, sharing of the condemnation awardwith the landlord and any mortgagee.

z Strategic Point: If the landlord refuses to agree to sharea condemnation award, tenant’s attorney should request aclause providing tenant the right to compensation for thevalue of fixtures and improvements that cannot be readilyremoved, plus relocation costs.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property §§ 28.29 – 28.44(measure of damages), § 28.55 (leased property, award),§ 84.09 (assessing impact of condemnation: eminentdomain).

● New York Practice Guide: Real Estate § 25.06 [12] (PG:condemnation), § 25.03 [10], § 25.07 [1] (Form No. 25-1:Office Lease ¶ 10), § 25.07 [2] (Form No. 25-2: Store Lease¶ 10), § 25.08 [11] (eminent domain clauses).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.14 (Lease to Anchor or KeyTenant: Shopping Center to be Built, Article 18), Form No.200.15 (Landlord-Oriented Shopping Center Lease, Article22), Form No. 201 (Retail Store Lease § 9.2), Form No.205 (Loft Lease ¶ 10), Form No. 209 (Office Lease, Article16), Form No. 296 (Rights Governed by Lease upon Con-demnation), Form No. 297.1 (Rent to be Apportioned),




Form No. 297.2 (Payments to Compensate Lessee onCondemnation).

● LexisNexis AnswerGuide New York Surrogate’s Court§ 9.03 [4] (Surrogate may authorize release rights to con-demnation award).

§ 19.37 Establishing Obligations and Recovery forDestruction of Premises

Lease terms vary considerably regarding the rights of landlordsand tenants to cancel a lease in the event of fire or other casualty.

RPL § 227 provides that, in absence of a lease provision, atenant who is not responsible for the destruction may give uppossession of the untenantable premises and recover prepaid rent.Since it is generally in the best interest of all parties to preservethe lease even where the premises have been damaged by fire, manyleases contain express waivers of the RPL § 227 provisions. TheReal Estate Board Office Lease Form provides that, if the premisesare partially damaged, the landlord may make repairs and rent willbe abated on the unusable portions of the premises.

s Timing: If damage is total, rent will be fully-abatedfrom the casualty date until the premises are rebuilt andthe tenant is fully-restored to possession.

The landlord may terminate the lease if the premises are badlydamaged and the landlord decides to demolish or rebuild. Wherethe landlord intends to hold the tenant to the lease, the landlordmust perform repairs within a reasonable time.

t Warning: The landlord may attempt to limit the ten-ant’s rent abatement to the rental income insurance pro-ceeds the landlord receives under the landlord’s casualtyinsurance policy. Any obligation of the landlord to restoreshould be limited to recovery of adequate insurance pro-ceeds. Tenant’s attorney should attempt to require the




landlord to restore in all cases, whether or not the landlordhas adequate insurance proceeds.

Tenants in a strong bargaining position should seek a clauseproviding that if an uninsured partial destruction of the premisesoccurs, the landlord will restore the premises and will not beentitled to terminate the lease if restoration cost is below a specifiedthreshold. If more than a specified portion of the premises isrendered unusable by destruction, and the landlord fails to completesuch restoration within a specified time, the tenant should beallowed to terminate the lease. If the landlord fails to make requiredrepairs, the tenant should have the right to perform the work andtake a credit against future rent.

Where the tenant is obligated to make repairs (net leases), thetenant should ask the landlord and any mortgagee to agree thatinsurance proceeds will be applied toward restoration costs. Ten-ant’s counsel may also request the following:

1. Tenant’s obligation be limited to extent of insuranceproceeds;

2. Tenant be required to repair only where cause of loss isinsurable; and

3. Tenant’s obligation will be reduced when loss occurs duringlast few years of lease.

Tenants who anticipate leasehold financing must clear this clausewith their lender in advance.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 80.27, § 80.28,§ 80.29 (destruction or damage by fire or casualty).

● New York Practice Guide: Real Estate § 25.06 [13] (PG:destruction or damage), § 25.03 [5] (obligation to repairpremises), § 25.07 [1] (Form No. 25-1: Office Lease ¶ 8,¶ 9), § 25.07 [2] (Form No. 25-2: Store Lease ¶ 8, ¶ 9),§ 25.08 [12] (damage and destruction clauses).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 270 (Tenant to Repair After




Damage; Insurance), Form No. 270.1 (Procedure for Ten-ant’s Restoration), Form No. 271 (Landlord’s Obligation toRestore), Form No. 271.1 (Lessor to Rebuild in Event ofDestruction), Form No. 271.2 (Fire Damage to Premises),Form No. 271.3 (Destruction of Premises Due to UninsuredRisk), Form No. 273.1 (Apportionment of Rent UponDestruction).


● RPL § 227 (fault-free tenant can abandon property andrecover prepaid rent if premises are destroyed).

§ 19.38 Negotiating Subletting and Assignment Rights

A subletting is a transfer of possession for less than the entireterm remaining on the lease, and the sublessor retains a reversion-ary interest. An assignment is a transfer of the tenant’s entireinterest in the leasehold, and the assignor does not retain areversionary interest. Where the premises are subleased, the primetenant retains renewal rights.

In absence of contrary lease language, a commercial tenant mayfreely assign or sublease. Commercial leases vary considerablyregarding subletting and assignment rights. However, most com-mercial leases require the landlord’s consent to either sublease orassign, including indirect assignments by transferring control orownership of the tenant’s entity.

t Warning: At a minimum, tenant’s attorney shouldrequire that the landlord’s consent to assignment or sublet-ting not be unreasonably withheld or delayed.

Where the lease permits assignments or subleases only withconsent of the landlord and does not provide that consent shall notbe unreasonably withheld, the landlord may refuse consent withoutstating any reason. Where the lease provides that consent shall notbe unreasonably withheld, landlord’s refusal must be based onobjective standards and explained with specificity. If sublets are




contemplated initially, tenant’s counsel may request that the land-lord’s consent is not required if specified objectives and obviouscriteria are met (for example, net worth, reputation, no felonyconvictions, experience, and proposed use).

z Strategic Point: Larger tenants are in a better positionto bargain for the right to freely transfer to affiliates ortransfer in connection with sale of the tenant’s business,although the landlord may require that the assignee orsubtenant thereafter remain an affiliate throughout theentire lease term.

Landlord’s often seek to prohibit assignments or sublets in thefollowing circumstances:

1. Collateral assignment of lease (for example, mortgaging oflease);

2. Assignment or sublet to existing tenants in building;

3. Assignment or sublet to prospective tenants with whomlandlord is actively negotiating; and

4. Assignment or sublet to anyone for less than fair marketor present rent.

The landlord may insist on a recapture right if the tenant wantsto sublease 50 percent or more of its space, and may want to requirethe tenant to pay a share of consideration or other profit the tenantreceives from subletting or assignment, in which case the landlordwill need the right to audit the tenant’s records.

The relationship of the prime tenant and subtenant is that oflandlord and tenant. The provisions of the prime lease should beincorporated into the sublease, so the prime tenant can enforce anybreach against the subtenant. Lease restrictions upon assignmentsand subleases are strictly construed in favor of tenants. The courtsgenerally enforce a lease clause calling for arbitration of disputesrelating to assignments and subleases.

For additional discussion of assignments and subleases, see§ 20.07 below.




PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property Ch. 81 (Leasingof Property: Assignments and Subleases).

● New York Practice Guide: Real Estate § 25.03 [3][a][ii](assignment, percentage leases), § 25.07 [1] (Form No.25-1: Office Lease ¶ 11), § 25.07 [2] (Form No. 25-2:Store Lease ¶ 11), § 28.01, § 28.02 (assignments andsubleases), § 28.04 (Checklist: Drafting Assignment orSublease Clause; Commercial and Residential Leases notCovered by RPL § 226-b), § 28.06, § 28.07, § 28.08(lease clauses and forms providing for assignment orsubleasing).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 295 (Prohibition Against As-signment as of Right), Form No. 295.1 (Covenant AgainstSubletting as of Right), Form No. 295.2 (Covenant AgainstAssignment and Subletting as of Right), Form No. 295.3(Permission to Sublet for Limited Period).

● GOL § 5-703 (assignment of lease for over one year).

● RPL § 228 (subtenant is tenant at sufferance after primelease expires).

§ 19.39 Prescribing Arbitration and AppraisalRemedies If Disputes Occur

Since there are many potential disputes under lease obligations,the parties should prescribe the nature of remedies available if theycannot agree. Many parties believe arbitration is a more effectiveremedy than summary proceedings or plenary actions.

Under one common arrangement, each party designates anarbitrator, and the two arbitrators appoint a third (neutral) arbitrator.Use of the facilities of the American Arbitration Association maybe prescribed. Arbitration awards cannot normally be set aside bycourt, and judgment confirming the award is generally granted asa matter of course.

z Strategic Point: Counsel should specify whether a




commercial lease provision calling for arbitration allowsrecovery of attorneys’ fees incurred during arbitrationproceedings.

Appraisal is another remedy and, like arbitration, involves extra-judicial resolution of disputes by impartial third parties. Arbitrationagreements have two advantages over appraisal agreements:

1. Arbitration generally involves resolution of wide variety ofdisputes, appraisal involves resolution of specific issues,often relating to valuation; and

2. Arbitration awards are enforceable under CPLR Article 75,appraisal must be enforced in separate plenary actions.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property Ch. 8(Arbitration).

● New York Practice Guide: Real Estate § 25.06 [16] (PG:arbitration and appraisal), § 25.08 [17] (arbitration andappraisal clauses), § 29.05 (Checklist for Drafting Arbitra-tion or Appraisal Provisions, lease renewals), § 29.10 [1](Form No. 29-15: Arbitration Clause).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.14 (Lease to Anchor or KeyTenant: Shopping Center to be Built, Article 23), Form No.209 (Office Lease, Article 28), Form No. 312 (Use ofArbitration).

● LexisNexis AnswerGuide New York Civil Litigation § 15.03(identifying written agreement to arbitrate).

● CPLR 7501 et seq. (arbitration and enforcement).

§ 19.40 Defining Default Responsibilities and NoticeRequirements

[1] Requesting Notice and Remedies

There is always risk that the tenant will default in performingone or more lease obligations. Landlords will include lease




provisions requesting notice of default or notice to cure, along withremedies available if the tenant fails to cure the default. Remediesmay include the following:

1. Termination;

2. Right to relet premises and collect any deficiency fromdefaulting tenant;

3. Right to cure default at tenant’s expense; and

4. Entitlement to default interest or late charges on amountspayable.

s Timing: Tenant should ask for grace periods of 15 daysfor payment defaults and 30 days for other defaults.

Tenant’s counsel should request prompt notice of default, promptnotice to cure, and sufficient time to cure, so lease termination canbe avoided. The default rate of interest should be due even afterjudgment and the tenant should waive counterclaims, other thancompulsory counterclaims.

z Strategic Point: Tenants should bargain for the land-lord’s assumption of a duty to mitigate damages if thetenant defaults (not otherwise required by law or courtsin commercial leases), provisions covering landlord de-fault, and a right to cure landlord default at the landlord’sexpense.

Tenants in a strong negotiating position sometimes demand leaseclauses providing for the tenant to offset against rent certain claimsthe tenant has against the landlord (for example, landlord’s breachof any covenant to keep premises in good repair). Landlords areobviously resistant in part because protracted litigation may occurbefore the landlord can collect rent.

z Strategic Point: An effective compromise for




landlord’s and tenant’s counsel in rent-offset disputes isto provide for arbitration of tenant claims against thelandlord, as arbitration is generally less time-consumingthan litigation.

PRACTICE RESOURCES:

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 279 – Form No. 290 (leaseprovisions relating to default, surrender, termination).

[2] Calculating Holdover Cost and Selecting Arbitrationover Litigation

Landlords often require that if the tenant fails to vacate and holdsover at the end of the term, the tenant must pay the greater of apercentage of the final adjusted monthly rent under the lease ora percentage of the fair market rent as a use and occupancy charge(150% is commonly used). The tenant will want to request thatany holdover rent be on a per diem basis for partial months.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property Ch. 8(Arbitration).

● Warren’s Weed: New York Real Property §§ 82.27 – 82.37(lease defaults and litigation).


[3] Preserving Purchase and Renewal Rights ThroughYellowstone Injunction

Options to renew, options to purchase, and rights of first refusalare sometimes made conditional on the tenant not being in defaulton any lease covenant. Thus, when a landlord serves a notice tocure on an alleged lease default, the tenant who fails to cure beforethe applicable deadline potentially stands to forfeit not only thecurrent lease, but also any purchase or renewal rights. Tenant’sattorney should negotiate a clause specifically permitting the tenant




to apply for a Yellowstone injunction (see § 20.09 [3] below)saving the right to cure the alleged default for purposes of renewalrights, first refusal rights, and purchase options.

t Warning: Considerable confusion exists and courtsdiffer as to whether a default clause is a conditionallimitation (supporting Yellowstone injunction) or a condi-tion subsequent (not supporting Yellowstone injunction).In upstate New York, some practitioners seek a Yellow-stone injunction in either case.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property Ch. 154 (Yellow-stone Injunctions).

● New York Practice Guide: Real Estate § 25.08 [18][c](Form No. 25-84: Conditional Limitation), § 27.04 [13](Yellowstone injunction).

[4] Requiring Specific Performance and Attorneys’ Fees

If the landlord unreasonably withholds consent where the leaserequires the landlord to be reasonable, landlord’s counsel shouldrequire that the tenant’s only remedy be specific performance, notmonetary damages. The landlord’s liability should be limited toits interest in the property. The landlord should have open-endedperiods to cure non-monetary defaults, provided the landlord isdiligently prosecuting the cure.

z Strategic Point: A landlord should not rely on ablanket clause merely requiring tenant to pay the landlord’scosts attributable to tenant’s default. A specific provisionregarding attorneys’ fees should be included in the lease.

PRACTICE RESOURCES:

● New York Practice Guide: Real Estate § 25.06 [22] (PG:lease defaults), § 25.07 [1] (Form No. 25-1: Office Lease




¶ 17, ¶ 18, ¶ 19, ¶ 28), § 25.07 [2] (Form No. 25-2: StoreLease ¶ 17, ¶ 18, ¶ 19, ¶ 27), § 25.08 [18][a] (Form No.25-82: Landlord-Oriented Clause), § 25.08 [18][b] (FormNo. 25-83: Tenant-Oriented Clause).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.14 (Lease to Anchor or KeyTenant: Shopping Center to be Built, Article 19), Form No.200.15 (Landlord-Oriented Shopping Center Lease, Articles24, 25, 26, 32, 34), Form No. 201 (Retail Store Lease secs.3.5, 10.2, 10.3, 10.6, 10.7, 11.1, 11.13), Form No. 205 (LoftLease ¶ 17, ¶ 18, ¶ 19, ¶ 28), Form No. 209 (Office Lease,Articles 17, 18, 19, 39).

● RPAPL § 711 (grounds for summary proceedings).

§ 19.41 Requesting Documents in Sale or Mortgage ofLandlord’s Interest

[1] Requesting Estoppel Certificates from Tenant

The purchaser of property generally takes subject to any existingleases. To protect from negative factors undetectable by a titlesearch, prospective purchasers and lenders may ask for estoppelcertificates from tenants, indicating among other things, whetherthe lease has been modified and the nature of any alleged landlorddefaults. Consequently, to facilitate marketability and mortgagea-bility of property, landlords will include lease provisions requiringtenants to execute estoppel certificates when requested.

s Timing: Tenant’s attorney should negotiate adequatetime to reply to requests for estoppel certificates (more than10 days) and establish that the estoppel certificate applyonly to tenant’s knowledge.

A form of estoppel certificate that conforms to typical lenderrequirements should be attached to the lease, leaving flexibility forfuture lender requirements. Tenants should ask that the leaserequire the landlord to give notice of any ownership change andtransfer security deposits to the new owner.




PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 48.48 (estoppelcertificates).

● New York Practice Guide: Real Estate § 25.06 [19] (PG:sale or mortgage of premises), § 25.02 [1] (lease recordingand third party notice), § 25.07 [1] (Form No. 25-1: OfficeLease ¶ 7, ¶ 35 estoppel certificates), § 25.07 [2] (FormNo. 25-2: Store Lease ¶ 7, ¶ 38 estoppel certificates),§ 25.08 [14][a] (Form No. 25-72: Tenant’s Certificate).

● Real Estate Financing: Text, Forms, Tax Analysis § 7.05[8] (estoppel certificates).

● RPL § 248 (lease obligations transferred).

[2] Executing SNDA Agreements with Mortgage ofLandlord’s Interest

Where the landlord seeks financing, prospective lenders oftenrequire that tenants execute subordination agreements. Conse-quently, a lease provision should be inserted requiring the tenantto execute a subordination agreement upon demand. In addition,there are self-executing subordination provisions in leases.

The tenant is often required to agree to an attornment, recogniz-ing the mortgagee as landlord in the event of foreclosure.

z Strategic Point: Where tenant is required to agree toan attornment, tenant’s counsel should request that tenantreceive a non-disturbance agreement stating that in eventof foreclosure, tenant’s possession will not be impairedprovided tenant is not in default under any lease provision.

These combined agreements, signed in connection with a mort-gage of the landlord’s interest, are known as a Subordination,Nondisturbance, and Attornment Agreement (SNDA). Landlordssometimes directly include these provisions in the lease, withrequirements that the tenant agree to any protections a mortgageemay reasonably require.




t Warning: Some fee mortgages require mortgageeapproval for any lease modification.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 80.06(attornment).


● New York Practice Guide: Real Estate § 25.06 [19] (PG:sale or mortgage of premises), § 25.02 [1] (lease recordingand third party notice), § 25.08 [14][b] (Form No. 25-73:Subordination, Non-disturbance, Attornment).

● Real Estate Financing: Text, Forms, Tax Analysis§ 3E.01A [6][k] (Subordination, Nondisturbance, Attorn-ment Agreement).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 302 (Subordination of Leaseto Mortgage), Form No. 320 (Non-Disturbance AgreementBetween Tenant and Mortgagee of Demised Premises).

● RPL § 248 (lease obligations transferred).

§ 19.42 Permitting Mortgage of Long-Term Leasehold

A long-term leasehold is one of the most valuable assets of abusiness. Where the tenant seeks funds for business developmentor expansion, prospective lenders may accept the leasehold ascollateral. Such a tenant will ask for lease provisions permittingthe tenant to mortgage the leasehold and providing protectionslikely required by most lenders. Provisions often include thefollowing:

1. Mortgagee’s right to receive notice from landlord of anytenant default;

2. Right to cure any default; and

3. Right to obtain new lease from landlord.




It is reasonable for the landlord to expect an agreement with theleasehold mortgagee that in event of foreclosure, the lender willbring the lease current with all tenant’s past due obligations, andthe mortgagee will assume tenant’s remaining obligations. Thelandlord may also obtain an agreement with both the tenant andlender that the loaned funds will be used for leasehold improve-ments, rather than being diverted to other uses. Tenant’s attorneymay request that lease amendments be made if needed to meetlender requirements. If agreeable, the landlord should require thatamendments be reasonable and not adverse to the landlord’s interestin any material manner.

z Strategic Point: If the tenant defaults on the leaseholdmortgage, the lender will want to have a freely assignableleasehold interest. Landlords may want to modify thetenant’s proposed provision to ensure that the assignee issubject to landlord consent. Tenants should require thatconsent not be unreasonably withheld or delayed and askto be released from all liability under the lease and lease-hold mortgage once assignee assumes the lease.

Prospective leasehold mortgagees commonly ask the landlordfor an estoppel certificate covering such matters as the following:

1. Whether lease is in full force and effect;

2. Whether there have been any lease modifications;

3. Whether tenant is in default;

4. Whether there are conditions that may result in default;

5. Termination date;

6. Terms of any renewal options; and

7. Nature of any cancellation rights.

The prospective leasehold lender will also be concerned withthe status of any mortgage encumbering the landlord’s title, andconsequently the tenant will request a non-disturbance agreementso the leasehold lender will not fear that the leasehold will beextinguished in event of fee mortgage foreclosure.




t Warning: Where the tenant has subleased any portionof the premises, the leasehold lender, who will be con-cerned with the sublease relationship and its status, willusually require an estoppel certificate and attornmentagreement.

The leasehold lender will request from a ground lessor noticesof ground lessee default and an opportunity to cure those defaultsto prevent ground lease termination and destruction of security forthe leasehold mortgage by the ground lessor.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 80.06(attornment).


● New York Practice Guide: Real Estate § 25.06 [20] (PG:mortgage of tenant’s interest), § 25.06 [19] (nondisturbanceagreements), § 25.08 [14][b] (Form No. 25-73: Subordina-tion, Non-disturbance, Attornment), § 25.08 [15][a] (FormNo. 25-74: Mortgages of Tenant’s Interest).

● Real Estate Financing: Text, Forms, Tax Analysis§ 3E.01A [6][k] (subordination, nondisturbance, attornmentagreement).

● Real Estate Financing: Text, Forms, Tax Analysis Ch. 7(Drafting Ground and Space Leases to Promote Mortgagea-bility), Ch. 7A (Mortgageability of Ground and SpaceLeases).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.16 (Tenant-Oriented Shop-ping Center Lease, Articles 19, 39), Form No. 306 (Permis-sion to Mortgage Leasehold), Form No. 320 (Non-Disturbance Agreement Between Tenant and Mortgagee ofDemised Premises).




PART G: DRAFTING AND NEGOTIATINGOTHER COMMERCIAL LEASE PROVISIONS

§ 19.43 Checklist for Drafting and Negotiating OtherCommercial Lease Provisions

M Protect client against broker concerns. See § 19.44 below.

Ensure that identity of brokers with whom parties dealare listed in lease to indemnify landlord against claims.

Warn client that brokers having written brokerageagreement may file lien for unpaid commission oncommercial lease of over three years.

M Negotiate additional provisions under commercial lease,including:

Determine parameters of landlord’s right to accesspremises, whether any prior oral or written understand-ings exist between parties, whether landlord has dis-claimed any representations or warranties, and if actsconstituting waiver are specifically set forth in lease.See § 19.45 below.

Finalize lease provisions relating to bankruptcy, reim-bursement of fees and expenses, and waiver of jurytrial. See § 19.46 below.

Establish liability limitations for failing to give posses-sion of premises, address impact of rules and regula-tions, and define landlord’s right to relocate tenant. See§ 19.47, § 19.48, § 19.49 below.

M Counsel parties regarding execution, recording, and priorityof lease. See § 19.50 below.

Consider allowing recording of memorandum of leasein lieu of recording lease itself.

Recommend that any memorandum of lease state thatparties do not intend to be bound unless and untilformal lease has been signed.

Ensure that any lease longer than one year is in writingand signed by party to be charged, and ensure any leasemodifications are in writing.




M Search Advisor:


Real & Personal Property Law > Landlord & Tenant> Brokerage Agreements

§ 19.44 Identifying Tenant’s Broker

To ensure the landlord pays the commission to the correct brokerand that no claims arise from others, a typical commercial leasewill include a representation and indemnity from the tenant identi-fying any broker or brokers with whom the tenant dealt.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property Ch. 17 (Brokers).

● New York Practice Guide: Real Estate § 25.06 [18],§ 27.01 [10] (brokers).

● Lien Law § 2(4) (real property improvement for purposeof filing mechanic’s lien shall include performance of realestate brokerage services in obtaining lessee for term ofmore than three years on all or any part of real propertyto be used for other than residential purposes pursuant towritten contract of brokerage employment or compensa-tion).

§ 19.45 Determining Landlord’s Access to Premises,Representations, Warranties, and Waiver

[1] Defining Landlord’s Right to Enter Premises

The landlord will reserve the right to enter tenant’s premises atreasonable hours and with reasonable notice, excluding emergen-cies for performing repairs and showing the premises to a mort-gagee, prospective purchaser, or prospective tenant. The landlordshould agree, when exercising its right to enter, not to unreasonablyinterfere with tenant’s use of the premises.




[2] Setting Forth Prior Oral or Written Understandings

t Warning: If tenant believes there are prior oral orwritten understandings with the landlord, tenant must setforth those understandings in the lease.

Most leases will disclaim any representations or warranties bythe landlord and state that any prior understandings or agreementsare merged into the lease. The tenant will be required to state thatit has inspected the premises and accepts the premises as is.Tenant’s counsel may want to request a representation in the leaseby the landlord that the premises are free of asbestos and hazardousmaterials.

[3] Failing to Insist on Strict Performance Not Waiver

Most leases provide that failure by the landlord to insist on strictperformance of any lease covenant or condition, or of any rulesor regulations, does not prevent a subsequent act, originallyconstituting a violation, from having all force and effect of anoriginal violation.

PRACTICE RESOURCES:


● New York Practice Guide: Real Estate § 25.06 [14] (PG:landlord’s reservation of rights), § 25.06 [15], § 25.07 [1](Form No. 25-1: Office Lease ¶ 13, ¶ 21, ¶ 25), § 25.07[2] (Form No. 25-2: Store Lease ¶ 13, ¶ 21, ¶ 24), § 25.08[13][a] (Form No. 25-71: Landlord’s Representations).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.14 (Lease to Anchor or KeyTenant: Shopping Center to be Built, Article 14), Form No.200.15 (Landlord-Oriented Shopping Center Lease, Article14), Form No. 200.16 (Tenant-Oriented Shopping CenterLease, Article 16), Form No. 201 (Retail Store Lease§ 8.1(L)), Form No. 205 (Loft Lease ¶ 13), Form No. 209




(Office Lease, Article 24), Form No. 307 (No Warranty asto Fitness of Demised Premises).

§ 19.46 Dealing with Bankruptcy, Fees, Expenses, andWaiver of Jury Trial

Many leases state that the landlord can terminate the lease uponcommencement of a bankruptcy proceeding or assignment forbenefit of creditors. However, effective exercise of this right willprobably be subject to bankruptcy court approval.

s Timing: Filing a bankruptcy petition results in anautomatic stay of any pending action to enforce the leaseterms or obtain possession of the premises.

Most commercial leases provide that when the landlord incursexpense in curing tenant default, including attorneys’ fees, thetenant must reimburse the landlord with interest and costs. Tenant’sattorney should attempt to limit fees to actual, out-of-pocket, andreasonable. Only very strong tenants will be able to obtain areciprocal clause. Most commercial leases provide for waiver ofjury trial, which is generally upheld.

PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property Ch. 13 (Bank-ruptcy), Ch. 84 (Leasing of Property: Commercial Leases).

● New York Practice Guide: Real Estate § 25.06 [14] (PG:landlord reservation of rights), § 25.07 [1] (Form No. 25-1:Office Lease ¶ 16, ¶ 19, ¶ 26), § 25.07 [2] (Form No.25-2: Store Lease ¶ 16, ¶ 19, ¶ 25), § 27.01 [8], § 27.04[14], § 27.04 [17].

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 200.15 (Landlord-OrientedShopping Center Lease, Article 24(D)), Form No. 200.16(Tenant-Oriented Shopping Center Lease, Articles 31(B),32(B)), Form No. 201 (Retail Store Lease § 10.1), FormNo. 205 (Loft Lease ¶ 16), Form No. 209 (Office Lease




§ 17.01(A)), Form No. 289 (Termination upon LesseeBankruptcy).

● 11 USCS § 362(a)(3) (automatic stay).

§ 19.47 Coping with Failure to Give Possession andInability to Perform

Many leases do not subject the landlord to liability or impairthe validity of the lease if the landlord is unable to give possessionof the demised premises on the term commencement date due tothe following:

1. Holding-over or retention of possession by prior tenant,subtenant, or occupant;

2. Building under construction not sufficiently completed;

3. Certificate of occupancy not issued; or

4. Any other reason.

However, rent will be abated. Tenants may request a right to cancelif delivery of possession is delayed beyond a specified date.

Leases often provide that tenant lease obligations shall not beaffected due to the landlord’s inability to fulfill any of its leaseobligations if the landlord is prevented or delayed from doing soby reason of the following:

1. Strike or labor dispute;

2. Government preemption;

3. Any rule, order, or regulation of any government agency;or

4. When, in landlord’s judgement, temporary interruption ofservice is necessary due to accident; mechanical failure; orto make repairs, alterations, or improvements.

PRACTICE RESOURCES:

● New York Practice Guide: Real Estate § 25.07 [1] (FormNo. 25-1: Office Lease ¶ 24, ¶ 27), § 25.07 [2] (Form No.25-2: Store Lease ¶ 23, ¶ 26).

● RPL § 223-a (tenant has right to rescind if possession notgiven).




§ 19.48 Enforcing Rules and Regulations

Most leases have an attachment containing detailed rules andregulations for the premises that cover a miscellany of minorsubjects. Tenants should be advised to read these rules and regula-tions to determine whether any may become problematic. The leaseshould allow the landlord to make reasonable changes.

Tenants will want to request that the landlord agree to enforcethe rules and regulations in a uniform and non-discriminatorymanner among all tenants. Request that the landlord also agree toinform the tenant in writing of all changes to the rules andregulations.

PRACTICE RESOURCES:

● New York Practice Guide: Real Estate § 25.07 [1] (FormNo. 25-1: Office Lease ¶ 33), § 25.07 [2] (Form No. 25-2:Store Lease ¶ 35).

§ 19.49 Relocating Tenants

z Strategic Point: Tenant’s counsel may want to negoti-ate for a right to cancel rather than be relocated. Disputesare usually resolved through arbitration.

Some commercial leases give the landlord a right to relocatesmall tenants at the landlord’s expense. This right usually requiresthat the tenant’s new space contain at least the same amount ofusable space as the old space contains and that the landlordreimburse the tenant for architect and engineer expenses attribut-able to relocation.

PRACTICE RESOURCES:

● New York Practice Guide: Real Estate § 25.06 [21],§ 25.08 [16] (Form No. 25-75: Tenant Relocation).




§ 19.50 Understanding Execution, Recording, andPriority of Lease

A lease is both a conveyance and contract, and must be deliveredto be effective. However, where all essential terms and conditionsof an agreement have been set forth in an informal memorandumsigned by the party to be charged, and all that remains is translationof those terms and conditions into a more formal document, acontractual liability may be enforceable.

z Strategic Point: To avoid costly litigation, it is wiseto indicate in writing, at commencement of lease negotia-tions, that the parties do not intend to be bound unless anduntil a formal lease is approved by the respective attorneysand signed by the parties.

Leases of more than one year must be in writing and signed bythe party to be charged. Modifications, surrenders, and assignmentsare also covered by the statute of frauds. The authority of thesigning agent of a party must be in writing unless the party is acorporation and the agent is an officer or director. Proper authoriza-tion of a lease by or to an entity should be verified. BCL § 909;Partnership Law § 20.

s Timing: A tenant possessing a lease with a term longerthan three years may want to record the lease for protectionagainst future purchasers and mortgagees. The landlord,by contrast, has an interest in requesting that the tenantsubordinate its lease to future mortgages, subjecting thelease to the risk of elimination during foreclosure.

In upstate New York, it is uncommon to record a lease in itsentirety because the parties do not want the business terms madepublic. Rather, it is common for the tenant to record a memorandumof lease to take advantage of the recording statute for placing thepublic on notice of the lease’s existence.




PRACTICE RESOURCES:

● Warren’s Weed: New York Real Property § 80.09, § 80.10,§ 80.11 (lease formation), § 80.16, § 80.17, § 80.18,§ 80.19 (lease recording).

● New York Practice Guide: Real Estate § 25.01 (leaseformation), § 25.02 (priority and recording).

● Steinman’s Bergerman and Roth, New York Real PropertyForms Annotated Form No. 324 (Memorandum of Lease),Form No. 325 (Memorandum of Modification of Lease),Form No. 326 (Abbreviated Memorandum of Lease), FormNo. 327 (Short-Form Lease for Recording).

● GOL § 5-703 (lease over one year must be written andsigned by party charged).

● RPL § 290 (not necessary to record leases of three yearsor less).

● RPL § 291 (unrecorded lease of more than three years maybe void against subsequent purchaser).

● RPL § 291-c, § 291-cc (recording memorandum, recordingmodification).





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