presents commercial lease assignments and subleases...
TRANSCRIPT
presents
Commercial Lease Assignments and Subleases: Negotiation Strategies in a Troubled Market
presents
Negotiation Strategies in a Troubled MarketBest Practices for Landlords, Tenants, Subtenants and Assignees to
Avoid Legal PitfallsA Li 90 Mi t T l f /W bi ith I t ti Q&A
Today's panel features:Dorothea W. Dickerman, Partner, McGuireWoods, McLean, Va.Ruth A. Schoenmeyer, Of Counsel, Jenner & Block, Chicago
A Live 90-Minute Teleconference/Webinar with Interactive Q&A
y , , , gElizabeth K. Cooper, Esq., Managing Director – Brokerage, Jones Lang LaSalle, Washington, D.C.
Thursday, March 25, 2010
The conference begins at:The conference begins at:1 pm Eastern12 pm Central
11 am Mountain10 P ifi10 am Pacific
You can access the audio portion of the conference on the telephone or by using your computer's speakers.Please refer to the dial in/ log in instructions emailed to registrations.
For CLE purposes, please let us know how many people are listening at your location by
• closing the notification box • and typing in the chat box your
company name and the number of attendees.
• Then click the blue icon beside the box to send.
Commercial Lease Assignments and Subleases: Negotiation Strategies in a Troubled Market – Best Practices for Landlords, Tenants, Subtenants and Assignees to Avoid Legal PitfallsSubtenants and Assignees to Avoid Legal Pitfalls
Presented by:Elizabeth K. Cooper, International DirectorJones Lang LaSalle, Inc.
Dorothea Dickerman, PartnerMcGuireWoods LLP
Ruth Schoenmeyer, Of CounselJenner & Block LLP
M h 2 2010
1
March 25, 2010
I. Current Market TrendsElizabeth Cooper
Jones Lang LaSalle, Inc.
2
A. Supply vs. Demand
3
Q4 2009 office clock – several markets beginning to stabilizeto stabilize
Charlotte, Orlando, Tampa
Atlanta, Detroit, Miami, Phoenix, West Palm Beach
Chicago, Cleveland, Fairfield County, Hartford / New Haven, Los Angeles, New Jersey, Orange County, Philadelphia, Sacramento, Westchester County, Seattle
Boston, Indianapolis, Jacksonville, New York, Oakland / East Bay, Richmond San Francisco Peninsula Silicon Valley St Louis
Peaking market Falling market
Richmond, San Francisco Peninsula, Silicon Valley, St. Louis
Austin, Dallas, Denver, Fort Lauderdale, Houston, Memphis,San Diego, San Francisco
Baltimore, Raleigh / DurhamMinneapolis San Antonio
The Jones Lang LaSalle office clock shows where each market sits within its real estate cycle. Markets generally move clockwise around the clock with
Rising market Stabilizing market
Minneapolis, San Antonio
Pittsburgh
W hi t DC move clockwise around the clock, with markets on the left side of the clock generally landlord favorable and markets on the right side of the clock generally tenant favorable.
Washington, DC
4
U.S. vacancy levels will continue to rise into 2010, but at slower levelsat slower levels
18.3%20%
16%
20%
8%
12%
4%
8%
0%2000 2001 2002 2003 2004 2005 2006 2007 2008 Q1
2009Q2
2009Q3
2009Q4
2009
5
Tenants more certain of future, pushing leasing activity higher for the second consecutive quarter
Quarterly percent change
higher for the second consecutive quarter
10%
0%
10%
-10%
0%
9.8 percent annual decline
-20%decline
-30%Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009
6
Sublease space levels drop for the first time in two years as leasing activity grew on the discounted space
SF
years as leasing activity grew on the discounted space
Levels decreased by more than a half million
square feet in Q4120,000,000
140,000,000
60 000 000
80,000,000
100,000,000
20,000,000
40,000,000
60,000,000
0
, ,
Peak duringlast downturn
Q2 2007 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009
7
'01 - '03
Marketed rents down more than 15.0 percent from peaks established in 2008
Quarterly percent change
peaks established in 2008
4%
6%
0%
2%
-4%
-2%
-6%
4%
Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009
8
Net effective rents in primary markets starting to stabilize after such steep declinesstabilize after such steep declines
0.0%
-20.0%
-10.0%
-40.0%
-30.0%
-60.0%
-50.0%
Overall net effective rent decline Largest percent decline in specific building
-70.0%NYC Boston Chicago San Francisco Los Angeles Washington, DC Dallas
9
Tenant-favorable conditions to persist in 2010
% change from peak of market (2007) to bottom (mid-2010)
12-month outlook
Employment
Leasing activity
-7.4 to 7.7 million jobs
-63.0%
Sublease space
Marketed rents
+ 37.0 MSF
-20.0%
Effective rents
Rent abatement
-33.0%
+150.0%
Tenant Improvement allowances
New construction activity
+30.0%
-100.0%
10
B. Lease Terms and Renewals
11
Today’s environment – reasons to sublease
• Reduction or mitigation of real estate costs
• Mergers and acquisitions
• Early relocation desired
• Excess space is not only costly but can lead to low morale in an office
12
Subleasing is difficult even in a healthy market
• Understand your sublease clause
• Set financial recovery expectations properly (use an expected and realistic range)
• Set timing expectations of when the task can be accomplished
• Understand your landlord’s motivations, and their other building/portfolio dynamicsTrust and take the advice of your real estate broker (or don’t hire them)
• Go ugly early – don’t just meet the market – beat it• Go ugly early – don t just meet the market – beat it
• The best subtenant prospect for a decent financial recovery is always from within the building, then from within the complex….and so on
• It’s far better to be “in-the-way” of a larger tenant needing additional space – rather than being “good” at what you do
13
Structure your lease acquisition with all of this in mind.
II. Distinctions Between Assignment and SubleaseRuth Schoenmeyer
Jenner & Block LLP
14
A. Legal Differences
15
Reversionary Interest
• Number one difference: reversionary interest- Assignment: Transferor does not retain a reversionary interest in lease- Sublease: Transferor retains a reversionary interest in lease
Sublease term ends at least one day prior to the end of the term- Sublease term ends at least one day prior to the end of the term- Or, transferor retains options to terminate, expand or renew
16
Reversionary Interest
• How do courts determine whether an assignment or sublease has occurred?- Reversionary interest, not intent
• Danger: Unintentional assignment pro tanto- Issues for transferor
- Loses right to evict subtenant- Loses control of renewal rights and other lease optionsg p- Liability remains
- Issues for transfereeUncertainty as to rent- Uncertainty as to rent
- Uncertainty as to rights upon transferor default
17
Relationship with Prime Landlord
• Transferee has direct relationship with prime landlord if assignment
• Transferee has indirect relationship with prime landlord if sublease- Consent to transfers, alterations, etc.- After hours services
18
Liability
• Not a distinction between an assignment and sublease
• Liability of the transferor continues under the original lease unless:- Novation (i.e., full substitution of assignee for assignor)- Prime landlord agrees transferor is off the hook in original lease or consent
19
B. Drafting Differences
20
Drafting Assignments and Subleases
• Step one: Review prime lease to determine whether any particular language must be included in assignment or sublease- Prime lease often requires assignee to expressly assume all obligations under the
prime leasep- Prime lease sometimes includes other magic language for any assignment or
sublease, e.g., if a pension trust owns the property, a transferee might be required to make certain representations regarding its relationship (or lack thereof) with to make certain representations regarding its relationship (or lack thereof) with prime landlord
21
Drafting Subleases
• Different approaches: stand-alone document or document that incorporates all or some of the prime lease provisions by reference
• Regardless of which approach you use, transferor cannot give more than he received under the prime leasereceived under the prime lease
• For example, if all alterations, without exception, require prime landlord’s consent under the prime lease, transferor cannot agree that certain p , gcosmetic alterations will not require anyone’s consent
22
Stand-alone Sublease
• Start with normal lease document
• Certain provisions are simply between transferor and transferee: term, rent, security deposit, condition of premises, etc.
• Other provisions will need to be adjusted to account for prime landlord responsibilities or consent rights: maintenance and services, alterations, restoration obligations upon casualty or condemnation, etc.g p y ,
• Finally, add provision regarding prime lease: neither party will cause a default thereunder, transferor will not amend the prime lease without t f ’ t ttransferee’s consent, etc.
23
Sublease Incorporating Prime Lease by Reference
• In many ways, it looks similar to a stand-alone sublease: it will include the provisions that are simply between transferor and transferee (e.g., term, rent, security deposit, etc.)
• However, instead of systematically going through the prime lease and addressing , y y g g g p geach prime lease provision in the sublease, the sublease includes a general provision regarding the sublease that says something like:
Tenant, as if it were the tenant under the Prime Lease, hereby assumes and agrees to perform faithfully and on time, and be bound by, with respect to the Premises, and in addition to all of Tenant’s other obligations set forth in this Sublease, all of Landlord’s obligations, covenants, agreements and liabilities under the Prime Lease and all terms, conditions, provisions and restrictions contained in the Prime Lease (which terms are hereby incorporated herein by this reference to the extent that such terms contain obligations of "Tenant" under the Prime Lease which shall become obligations of Tenant under this Sublease) except: [review Prime Lease to determine which provisions should not be incorporated; transferee wants the list of exclusions to be long, while transferor wants the list to be relatively short].
24
Drafting Assignments
• Provisions to include- Assignment and assumption: Be careful of when assignment and assumption
occurs; transferee should assume only those obligations and liabilities arising after the date of transfer
- Indemnity: Same issue regarding date of indemnity- Condition of premises: If transferor must remove certain personal property or
perform certain work, date of transfer should not occur until such conditions are satisfiedsatisfied
- Bill of sale: Include conveyance language if ownership of furniture or other items is being transferred to the transferee. If sales tax returns must be filed, assign a value to the items being transferredvalue to the items being transferred
- Plans and warranties: Require delivery of “as built” plans, if any, and copies of any warranties, as well as an assignment of the warranties themselves
25
Drafting Assignments
• More provisions to include:- Surrender: Requirement that transferor surrender possession- Security deposit: If cash posted, transferor should be reimbursed; if letter of credit,
transferee should post replacement letter of credittransferee should post replacement letter of credit- Brokerage representation: Any brokers involved, and if so, who pays- Rent: Adjustment of base rent and other amounts between the parties of as of the
ff ti d t f i teffective date of assignment- Prime landlord consent: Condition effective date upon obtaining prime landlord
consent and an estoppel certificate from prime landlord- Representations by transferor: Complete copy of prime lease delivered; prime
lease in full force and effect; no defaults; etc.
26
C. Pros and Cons of Each Option
27
Pros and Cons of Subleases and Assignments
• Transferors usually prefer subleases- They are more costly and time-consuming to draft, but transferor maintains control- If subtenant defaults, transferor can evict
Transferor must consent to alterations- Transferor must consent to alterations- Transferor must consent to further transfers- Control is important because liability of transferor continues
• Transferees usually prefer assignments- No risk of termination if transferor defaults or files for bankruptcy- No middleman to contend with if want to make alterations, perform a transfer,
obtain building services, enforce prime landlord’s obligations, etc.
28
III. Key Considerations/Best Practices When Negotiating Assignments and Subleases
Dorothea Dickerman
McGuireWoods LLP
29
A. Landlord Perspective
30
Landlord Perspective
• How do you feel about your tenants subleasing or assigning your space?• What are your overall goals (before you sign the lease with your tenants) –
particularly, as concerning:– profits from subleasing– type of subtenant that is ok (and not)type of subtenant that is ok (and not)– time to for you to review subtenant and give your sublease approval (goes hand in hand with
financial recovery)how divisible is the space– how divisible is the space
– how much term remaining– number of subtenants – demising issues and cost to remove partitions if necessary– restoration requirements– credit of assignee
t i ht
31
– recapture rights– pass through of landlord’s legal fees to review a sublease or assignment
Why does the landlord want control over a tenant’s subletting?
• It’s the landlords building
• “You’re not in the real estate business – we are”
• Landlord does have to manage all the moving pieces – however
• It’s all about the money and…
• It’s about the landlord satisfying their other tenants – which is valid but…- it normally doesn’t help the tenant at all financially and…- it is a one-way street- it is a one-way street
• When SHOULD the relative parity in this relationship be established?- Very early on in the negotiation
• Because when negotiating to acquire its space a tenant has the most leverage -later - the leverage shifts, never to be recovered
32
B. Tenant Perspective
33
First things first… You have excess office space and think you want to sublet it – some threshold questions to ponderwant to sublet it – some threshold questions to ponder…
• For the entire term or an interim period?• Are you willing to demise the space if necessary?• Will you offer any cash concessions to induce a subtenant to lease the space? • Will you permit alterations to the space? • Have you thought about restoration obligations?• What net income can be garnered from subleasing (over and above the costs of doing so)?• What are the specific restrictions to subletting/assigning set forth in your lease?p g g g y• What rights does the prime landlord have -- recapture right, profit sharing, reasons to withhold
consent?• What are the required notices?• Can you assign the lease – if so, do you remain primarily liable?• Can you freely transfer to an affiliate, subsidiary or new firm?
34
Cost of subleasing
• Market concessions, (e.g., tenant improvement allowances, free rent periods, cash)
• Brokerage fees (listing and procuring)
• Demising/code costs
• Not atypical to recapture only 50% of a tenant’s remaining lease obligation in a subleasein a sublease
• Restoration
35
Pitfalls
• Landlord recapture/consent rights
• Quality of building, length of remaining term, etc.
• Anti-competitive lease language
• Credit of subtenants/assignees
36
How to carve up profit sharing
• Must haves… if one must carve it up at all…–Deduct tenant’s “normal & customary” costs to sublet–TI’s
Transaction fees–Transaction fees–Abatement–Marketing costsMarketing costs–Legal fees–Any other inducements
37
Restoration
• Few subleases are done entirely “as-is” – subtenants will likely do somework— a tenant should be careful or it may inherit a restoration obligation
• If the use of the tenant’s in-place FF&E is being offered as an inducement, be very careful pleasebe very careful, please…
- do an exacting FF&E exhibit as a first step (again, you will be glad you did)- be painfully specific about what conveys & what does not- is it to be merely “used” or “conveyed” at the end of the term?- who insures?
i d t di b d! - misunderstandings abound!
38
Dealing with the prime landlord
• A tenant will need the landlord’s cooperation and consent (get the consent document negotiated with the sublease)
• A tenant will want the landlord to do things much faster than required under the leasethe lease
• A tenant will likely need latitude beyond what its lease states (signage, renewal rights, parking)g , p g)
• Size up the landlord and its point(s) of influence
• Use broker relationships – they mean more than the tenant’s in this instance
Moral – unless the language states clearly that the landlord has virtually no rights
p y(e.g., repeat business influence)
39
– be very nice – you’ll be glad you were
C. Subtenant/Assignee Perspective
40
Subtenant’s Perspective• It is not “just” a sublease. It is not “simpler” than a lease. It may or may not be “cheap”
from a legal fees point of view.
• Read the sublease and the lease (and any over leases)• Read the sublease and the lease (and any over leases).
• Subletting & assignment restrictions
A l i j it ill l t t i l h i fi t d ft • A new lease in a major city will almost certainly show up in first draft form with subletting restrictions relating to:- existing tenants in the building, the landlord’s portfolio, and/or people they’ve litigated against- prospective, direct tenants they are “talking” to (whatever that means)- price- term term - credit- sole discretion language
further sub subletting
41
- further sub-subletting- number of total subtenants (or per floor)
Subtenant’s Perspective
• Use restriction
• Landlord’s right to approve- Sole and absolute discretion (ie: arbitrary or “no reason”)- Reasonable discretion- Conditioned- Conditioned
• Time to review- How much time (15 days? 30 days? A reasonable time? No limit?)( y y )
• What to review- What does landlord get to review about a subtenant? An assignee?
42
Subtenant’s Perspective
• Financial condition of the Sublessor/Tenant- Bargain price on the rental rate can distract from a hidden problem
A bankrupt sublessor/tenant has two assets in its bankruptcy: lease between itself - A bankrupt sublessor/tenant has two assets in its bankruptcy: lease between itself and landlord and sublease between tenant and sublessee
- The tenant needs to be your advocate with the landlord and enter a three-way ti l th bt t t th th i ti f th t t t d l conversation, unless the subtenant gets the authorization from the tenant to deal
directly with the landlord on everything but cost items.- Get a non disturbance and attornment agreement with the landlord in the event of
ftenant default.
43
Recapture
• “Chilling” effect on a subletting or assignment- Prospective sublessees should ask for a non-redacted copy of this clause to
assess the likely position of the landlord when being given notice of intent to sublease by its tenanty
• “Mechanics” of Recapture- Before the subtenant start the effort or…- After the subtenant spend a year marketing, touring, negotiating, running
numbers, proposing, dealing with outside agents, etc.?
• Under what negotiated conditions should the landlord be entitled to • Under what negotiated conditions should the landlord be entitled to recapture?- e.g., if subtenant is subletting all of the space for all of the remaining term?
44
Why tenants prefer direct leases to subleases
• Most lease rights are personal and are contractually prohibited from being transferred without the landlord’s consent
• No direct contractual relationship with the landlord exists under a sublease
• Rightful concern over sublessor credit throughout the term
• Sub-subletting challenges – more hoops (and approvals) to jump through
• Subtenants have to live with tenant’s existing lease (with no changes)
45
Landlord Bankruptcy/Tenant Bankruptcy/Subtenant Bankruptcy
• Just a word: in all 3 scenarios the lease becomes the asset of the estate of the bankruptcy entity and will have repercussions with you and your rights under your lease or sublease;under your lease or sublease;
• While the landlord is insulated from the subtenant’s bankruptcy by the tenant, a tenant’s bankruptcy affects both the landlord and the subtenant;, p y ;
• And the bankruptcy of the landlord will affect both tenant and subtenant, and not much subtenant can do about it.
46
Elizabeth K Cooper Dorothea Dickerman Ruth SchoenmeyerElizabeth K. CooperInternational DirectorJones Lang LaSalle
1801 K Street NW, 10th Floor Washington, DC 20006
Dorothea Dickerman Partner
McGuireWoods LLP1750 Tysons Blvd, Ste. 1800
McLean, VA 22102
Ruth SchoenmeyerOf Counsel
Jenner & Block LLP353 North Clark St.Chicago, IL 60654g ,
direct: 202.719.6195elizabeth.cooper@am.jll.comwww.us.joneslanglasalle.com
McLean, VA 22102direct: 703.712.5387
Chicago, IL 60654direct: 312.840.8651
47