COMMERCIAL OFFICE LEASE: A smaller TENANT’s OVERVIEW
CLE presentation by Jeffrey A. Margolis, Esq. The Margolis Law Firm Sept. 28, 2005
Suite 150511 East 44th Street
New York, NY 10017
212-490-0900 + FAX 212-490-0700
>website: www.margolislawfirm.com
>e-mail: / Margolis
The Margolis Law Firm
Memo
To: CLE
From: JAMargolis
Date: 9/28/05
Re: COMMERCIAL OFFICE LEASE: A smaller TENANT’s OVERVIEW
REBNYPARA. # / HEADING / COMMENTS (“must haves” in BOLD)
(iii) and 15 / Landlord
and Tenant / · confirm correct entities
· T: newco to be formed? corp.? LLC? general/limited partnership?
· take in one name/right to assign to newco
WITNESS-SETH / Premises / · rentable, leasable, useable, carpetable
· REBNY standards as to measurement; also BOMA, etc
· re: description of the demised premises (“DP”)—attach a diagram
· specify square footage
· once diagram received, check to make sure that the DP have been properly outlined
WITNESS-SETH / Term / · fixed or sliding
· REBNY form is fixed—easy
· sliding—date T takes occupancy or L completes L’s Work
· if sliding: effect of delays-outside date (“drop dead” date) for completion of work/delivery of possession
· commencement contingent on various approvals and permits (e.g., C of 0, plans/specs for T's Work, SLA)
· rent penalty—2x days rent for each day of delay
· provide for commencement date agreement
· right to enter prior to rent commencement date for fixturing/communications work/decorations
WITNESS-SETH / Rent / · fixed
· first months rent due on signing
· try to change to pay at completion of L’s Work
· as to any “free” rent: no give-backs by reason of (claimed) T default
(none) / Escalation Rent / · additional rent
· CONFIRM PROPER BASE YEAR (RELATIVE TO LEASE START DATE)
· Confirm T’s proportionate share -- L representation as to amount and basis of total bldg square footage used in denominator.
CPI
· confirm proper base data
· use appropriate index
Porter’s Wage
· proper base year
· multiplier - penny for penny, etc.
· to reflect base hourly rate only
· exclude “fringe” benefits and value of time-off
· CPI and PW: advantage: easy to calculate
Operating Expenses
· review as to suitability of items included
· limit to L’s “actual” expenditures
· carve out capital items, amounts reimbursed by other tenants or included in their rent, items not fully related to operation of the building, e.g., home office management, executives salaries, brokerage commissions, L’s insurance, legal fees for lease enforcement against other tenants-prep of space for tenants’ occupancy, if a “cost saving” device is included, should be only to the extent = a savings—right to inspect L’s books/audit
· “gross-up” expenses in base year
· one year deadline for billing
Tax Escalation
· use fair base year (get full year or close to it)
· what is T's proportionate share?
· L to provide copies of tax bills
· give careful review to definition of "taxes"
· exclude special assessments, penalties, interest
· what is present tax status of building?
· special problems re new construction and increase relating to new construction (actual vs. transitional assessments)
2 / Use / · "Any lawful use"—looking for flexibility—esp if later sublease/assignment
· cover all aspects of proposed business
· L to rep proposed use is covered by C of O and will not result in increased insurance premiums
· eliminate prohibitions such as a use which would “adversely effect the character and reputation of the Building”—too vague
· general or executive offices
· look out for list of “no’s”
· add right to use DP for “incidental” uses—also present use must be interpreted in some flexible way—add use X “as same may change from time to time” (example, toys & book store now wants to carry video tapes, DVD’s)
3 / Alterations / · T to have right to make non-structural alterations, decorations, or alterations costing less than ($25,000) without L's prior consent
· all installations made by T remain T's property
· right to remove (T to repair the damage)
· no obligation to remove at end of term
· If L reserves right to change lobbies, configuration of corridors, etc., add provision re no impairment of egress, ingress, visibility, etc.
L’s Work (esp. initial work)
· need specific plans and specifications—outside date for completion
· “drop-dead” date (terminate lease)
· liaise with T's architect/designer
T’s Work
· on initial work, get approval upfront—no charge for L review on initial T work.
· Construction allowance
Specific plans and specifications
· must T use contractors approved by L? -Union help?
· right of T to contest liens
· liaise with L's architect/designer
· limit time for L review
· If no objection w/i time frame, L deemed to have approved
· decorative –no consent required
· T to be allowed to use work allowance $ for any purpose related to lease
all alterations—no obligation to remove at end of term
4 / Maintenance and Repairs / · general division T, inside; L, outside and all building systems
· also add that L responsible for elevators
· L to make all structural repairs, repairs to HVAC, utility lines, and such nonstructural repairs as occasioned by L's negligence, etc.
· building to be maintained in attractive, clean, first-class manner
· T not required to make repairs (i) covered by warranties of L's contractors, or (ii) covered by insurance carried by either party—try for agreement that L to make all repairs covered by L’s insurance, regardless of whose responsibility under the lease--
· L’s repair work to be performed so as to minimize interference w/ T’s business
· work to be done in good and workmanlike manner
· T to get reas advance notice (exc. emergency)
· if L fails to make a repair, T right of self-help, at least a broad indemnity of T
· L to rep that at CD, all major systems in good order and repair
6 / Requirement of Law / · generally, to be L's responsibility, at L's expense, unless caused by T's "manner of use" (compare with mere "use")
· rep that at commencement of term DP will be in compliance with all laws—esp as to asbestos, fire command system, ADA compliant, etc
· L responsible for all environmental matters
6, 9 / Insurance / · REBNY form is not specific
· waiver of subrogation
· review ins requirements with T’s agent
· require L to carry typical insurance
7 / Subordination / · what is present ownership status of fee (land/building)
· obtain specifics as the present mortgages and ground leases, if any
· (for larger leases): Non-Disturbance Agreements (re present and future mortgages, etc.)
4, 8,20,
27,31 / Indemnity-
Exculpation / · Form (Art. 8) already has “unless caused by L’s negligence” as a carve out—add “willful misconduct or omission”” to “negligence”
· make reciprocal
· carve out L’s negligence from Art. 27 (inability to perform), too
9 / Damage
Or
Destruction / · under certain circumstances (e.g. total destruction of premises) T to have right to cancel (esp. if event is in last year or two of term)
· full abatement and partial abatement (to run until both L and T restoration work completed)
· requirements re L's repair and restoration (outside dates, etc.)—shorten dates for completion—reduce time for L decision making on rebuilding—“untenantability” to mean T unable to carry on its work in full DP in normal manner
· note that damage to some parts of DP can be more important than others
· L to give adequate notice when DP will be ready for re-occupancy
· be careful as to phrases such as restoration work begins after L’s receipt of the insurance proceeds (could be major delay if as L and carrier slug it out)
· if substantial damage or destruction, explore T's right to reoccupy space in "new building"
· “substantial damage”—work on definition—
· L to restore interior of DP to state as of start of term (i.e, re-do L’s Work)
11 / Assignment and Sublet / · key word: FLEXIBILITY”
· right to assign or sublease to affiliate, subsidiary, parent or in connection with sale of all assets (successors) without L's consent; release of original tenant and guarantor from liability (provided net worth = or + than original parties
· all other assignment or sublease, consent not to be unreasonably withheld, conditioned or delayed
· right to have clients, customers occupy desk space without consent
· no recapture; if recapture no partial recapture
· discuss profit on assignment or sublease (not apply to “family” transfers—also no recapture)
· try for expedited approval process
· preliminary term sheet to suffice (not required to go all the way to signed sublease)
· be specific—as to profits—make it just that: “all costs”—include legal fees, ads, alterations done to prep DP for new occupant
12 / Electricity / · rent inclusion is typical
· check that rate is comparable to other buildings (now in NYC, $3 per rsf is typical)
· if submetered, T not to pay more than direct rate (tariff) paid by L
· L to rep that electric adequate for office purposes.
· Specify electrical capacity __amps, broadband capacity, etc.
· L not to discontinue service unless does so as to majority of tenants by rsf
13 / Access / · L to use all reas effort not to interfere with w/conduct of T’s business
· give notice of entry (except emergency)
· L to clean-up/restore after its work is done
15 / C of O / · L to rep that proposed use is permitted under C of O
16 / Bankruptcy / · Bankruptcy law trumps lease provisions
· “ipso facto” clauses (lease terminate on T’s becoming insolvent) are not enforceable
17 / Default / · notice and opportunity to cure before being held in default, esp as to rent
· T should have right to dispute defaults (include stay of termination pending resolution)
· include "unavoidable delays" clause
· note “conditional limitation” language—trump that with notice and opportunity to cure
· MUST HAVE GRACE PERIOD AFTER NOTICE FOR ALL ALLEGED DEFAULTS—even if only 5 days
18 / Remedies / · T to get notice
· L to be obligated to use reasonable efforts to mitigate damages (See Kenneth Cole case: commercial L not obligated to re-let, mitigate damages)
· delete references to “threatened” breach
19 / Fees and Expenses / · must be reasonable
· notice prior to L exercising self-help
· make mutual
· prevailing party to get legal fees
· try for right of offset
20 / Rights of L / · changes to common areas not to impair T’s access to the DP or restrooms etc—nor visibility of T’s door
21 / No Repre-sentations by L / · exclude defects not observable, such as in walls
· make “as is” clause subject to other obligations of L for repairs etc, found elsewhere in lease
22 / End of Term / · no obligation to remove property/restore DP
· restoration to exclude ordinary wear and tear
· T to remove only what it wishes to
· alternative is to require that L specify if removal will be required as part of consent to alteration process
23 / Quiet enjoyment / · form says “so long as T not in default”—etc , add: provided T has rec’d notice and opportunity to cure
24 / Failure to Give Possession / · outside “drop dead” date
· L to diligently pursue eviction of any holdover tenant—contra to Sec 223-a of NY law—says L will deliver possession at beginning of term
· compensate T for any holdover penalty it must pay at its present space
25 / No Waiver / · make mutual
26 / Waiver of trial by Jury / · note: small T probably better off with no jury—expedites matters—keeps costs down
· also look into ADR
27 / Inability to Perform / · make reciprocal—rent abatement after x days
· force majeur excludes L’s financial condition
· T to get business interruption insurance—
28 / Bills and Notices / · FORM is antiquated
· use FEDEX , some method where delivery is confirmed with a receipt
· cc attorney for T—avoid inadvertent problems
· attorney authorized to give notices
29 / Services / · make sure all basics are included: HVAC, cleaning, elevator, etc
· 24/7/365 access
· overtime AC? Freight elevator? To be billed at L’s cost, not a profit maker
· supplementary AC unit?
· Overtime AC charge to be allocated if several offices benefit
· DELETE PROVIDED NOT IN DEFAULT language
· no charge for freight car on move in/out
· min. interruption of T’s business when making repairs
· also if service not available for prolonged periods then abatement
· HVAC specs—HVAC season
· cleaning schedule
· building security
· use standards such as “typical of a first class office building in midtown Manhattan”
33 / Rules/Regs / · to be uniformly enforced
· if conflict, lease terms prevail
34 / Security Deposit / · trust funds, per NY GOL (Gen’l Obligations Law)
· T’s property
· ask for interes
· after x years, sec dep start burning off
· use Letter Of Credit if T can secure one
35 / Estoppel Certificate / · “best of knowledge” of T
· if conflict with lease terms, lease prevails
-- / Directory listings / · include subtenants and permitted co-occupants (clients, customers etc.)
· if electronic, unlimited entries
-- / Relocation / · NO
· if lease must include this clause, then provide that T must approve the new location
· be specific as to equivalent space (size, view, position on floor, visibility from elevator lobby), also L must pay ALL costs, so T is not out of pocket
· L to recreate existing space in all respects
· ask for right to terminate (rather than relocate)
· no more than 1 move in lease term
-- / Guaranty / · various forms—try to limit—good- guy guaranty
· try to limit partnership liability
-- / Option to
Expand / · right of first offer on contiguous space
-- / Option to renew / “Fair Market” Rent
· exclude brokerage commissions, buildout, other non-recurring items
· non-material default no bar to exercise
· if T assigns lease, renewal option goes to assignee
-- / Option to terminate / · fixed $ amount
-- / Signage / · agree up-front
-- / Holdover / · no penalty rent if in good faith negotiations
-- / Broker / · make rep and indemnity mutual
-- / Arbitration
ADR / · keeps T’s costs down if there is a dispute
· more efficient
· use expedited arbitration
· esp. useful in time sensitive disputes (e.g., reasonableness of L withholding consent to a sublease)
-- / Tenant
Incentives / · L to cooperate (w/o charge) in obtaining govt incentives for T
-- / Demolition / · NO
· If must, then negotiate long notice, demo permit obtained, good faith, simultaneous termination of all leases
NOTES