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  • Chapter 19

    DRAFTING AND NEGOTIATINGCOMMERCIAL LEASE

    Synopsis

    PART A: TRANSACTIONAL CONTEXT

    19.01 Transactional ContextDrafting 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

    191

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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 Tenants Intended Use Is Permissible[3] Negotiating Sign Requirements

    19.22 Drafting Non-Competition and Radius Restrictions on Ten-ants Business

    19.23 Defining Operating Covenants Governing Tenants Business

    192NEW YORK REAL PROPERTY

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  • [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 Tenants 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 Clients

    Technological Needs

    19.32 Providing Heating, Ventilation, Air Conditioning, and OtherServices

    19.33 Negotiating Real Property Tax Payment Responsibility

    DRAFTING AND NEGOTIATING COMMERCIAL LEASE193

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  • 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 LandlordsInterest

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

    lords 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 Tenants Broker

    19.45 Determining Landlords Access to Premises, Representa-tions, Warranties, and Waiver

    [1] Defining Landlords Right to Enter Premises

    194NEW YORK REAL PROPERTY

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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 LEASE195

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  • PART A: TRANSACTIONAL CONTEXT

    19.01 Transactional ContextDrafting 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.

    196NEW YORK REAL PROPERTY 19.01

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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 req

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