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THE LAW OFFICE OF DENNIS NEGRON

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Title: THE LAW OFFICE OF DENNIS NEGRON


1
THE LAW OFFICE OF DENNIS NEGRON
2
REDUCING EXPOSURE
  • RIGHTS, RESPONSIBILITIES OF TENANTS AND
    LANDLORDS AND IMPORTANT LEASE PROVISIONS

3
HOW TO REDUCE EXPOSURE FOR MY CLIENT?
  • Ensure the Lease reflects the deal made by your
    client (memoranda letter of intent)
  • Legal activists
  • Broker activists
  • Client activists.
  • Team in place early
  • The right team for the deal
  • Start early the time necessary to do a fully
    negotiated transaction is often underestimated.

4
SOME LEASE PROVISIONS ARE MORE EQUAL THAN OTHERS?
  • Each Lease is a unique transaction and the forces
    that will govern the negotiation are as varied as
    the Landlord, Tenant and the property at issue.
  • The Parties need each other but their respective
    positions in a Lease negotiation can be
    diametrically opposed.
  • Negotiations by and between the Landlord and
    Tenant are controlled by many factors and all
    must be considered.

5
HOT MARKET - LANDLORD IS LORD
  • The hotter the market the less likely a Landlord
    will negotiate its standard form Lease
  • If you will not sign the Lease the Landlord has
    five other Tenants that will
  • When the market is hot the Landlord will desire
    to minimize its costs by reducing attorneys
    fees
  • Time is money and if another viable Tenant will
    take the Lease as is, why spend the time
    negotiating.

6
COLD MARKET TENANT IS KING
  • The cooler the market the more precious a viable
    Tenant becomes
  • The Tenant now has several options and if this
    Landlord will not negotiate the next one will
  • The Landlords standard Lease form becomes highly
    negotiable.

7
NORMAL MARKET - EQUAL AS IT GETS
  • Alternatives may be available but not desirable
  • In this situation the Landlord and Tenant still
    need each other, time becomes a critical factor
  • The Landlords standard Lease form is negotiable
    but all issues are vigorously defended.

8
FINANCIAL WHEREWITHAL
  • He who has the gold makes the rules
  • Large well funded Tenants - own parameters for
    any real estate transaction
  • Sophisticated in house real estate department -
    certain legal and financial parameters
  • Real estate department exceptions.
  • Exceptions are rare but not unheard of.
  • governing committees
  • or different operational executives with the
    organization.
  • The larger and more sophisticated the Parties,
    the more demanding they will be during the Lease
    negotiations.

9
ORDER OF MAGNITUDE
  • Small Transaction
  • a lease less than 5,000 rsf with a duration
    (including options) of less than 3 years would be
    considered by most a relatively small lease
    transaction.
  • Medium Transaction
  • a lease greater than 5,000 rsf up to 30,000 rsf
    with a duration of at least 5 years.
  • Large Transaction
  • a lease greater than 60,000 rsf with a duration
    of at least 5 years would be considered by most a
    major transaction.

10
DIRECT VS INDIRECT
  • Direct Leases - more hotly negotiated than
    assignments and subleases
  • Landlords are not excited about expending
    extensive legal fees and time to accommodate an
    assignee or subtenant.
  • As between the Sublandlord-Assignor-Subtenant the
    Assignor-Sublandlord will be reluctant to make
    major changes from the Master Lease.

11
DURATION OF LEASE
  • The longer the commitment the more likely that
    the parties will vigorously negotiate.
  • The shorter the commitment the less likely either
    party will expend considerable time and effort
    negotiating
  • Even a small lease could be fully negotiated if
    for a relatively long duration.

12
BUILD OUT VS. EXISTING
  • Two types of build-out
  • Entire Building
  • Tenant Improvements.
  • The more complex transaction involves the
    construction of a new Building
  • Tenant Improvements to raw space
  • Tenant Improvements to finished space
  • Minor improvements to finished space.

13
OWNERSHIP
  • The more parties involved the more complex the
    negotiations
  • When the Landlord owns the Building and the Land
    upon which the Premises sits the Landlord
    controls its own destiny and can be more flexible
    in its negotiations.

14
SOPHISTICATION OF REPRESENTATION
  • Representation by a sophisticated broker and
    attorney is essential
  • If one party is well represented and the other is
    not then anything can happen
  • a great deal of time and effort over issues of
    little import or significance
  • While spending little to no time on issues of
    great significance.
  • When both parties to the transaction are properly
    represented by experienced brokers and counsel
    there is at least a fair opportunity to address
    most of the major issues.

15
THE XV COMMANDMENTS
  1. The perfect Lease does not exist
  2. Most provisions of a Lease assume bad things are
    going to happen
  3. Entrance strategy fun to negotiate exit strategy
    a dread
  4. Landlords know their standard form Lease very
    well
  5. No such thing as a pure legal or business
    provision
  6. Most standard form Leases are drafted by
    Landlords and greatly favor Landlords (what a
    shocker)

16
THE XV COMMANDMENTS
  1. Landlords do not sign Tenants standard form
    Lease
  2. Never say never or take it or leave it
  3. Do not concede a point because of the current
    law
  4. What does the Lease say
  5. Do not ignore boilerplate

17
THE XV COMMANDMENTS
  1. Statutes that favor Landlord are sacred and
    statutes that favor Tenant are evil or vice
    versa
  2. Leases should be read at 400 a.m. slowly with
    strong coffee
  3. Most provisions are written in a lawyers blood.
  4. Leases are not written for the lawyers but the
    users.

18
BIG NINE OR MORE
  1. Description of Premises
  2. Use
  3. Lease Term and Lease Commencement Date
  4. Rent and Operating Expenses
  5. Assignment and Subleasing
  6. Damage and Destruction
  7. Parking
  8. Options (Additional Space and extension of the
    Lease Term) and
  9. Tenant Improvement.

19
PREMISES
  • Related provisions. Rent, Operating Expenses,
    Use, Rules and Regulations, Insurance, Parking,
    Damage and Destruction, Condemnation, Property
    Taxes, Signs, Compliance with Law and Options
    (Space and Term)
  • One of the most overlooked provisions of the
    Lease.

20
PREMISES - TENANT
  • Must specify what you are getting
  • Common areas - how important?
  • Telecommunication access - needs
  • Measurement of space.
  • Rentable tied to Rent
  • Usable tied to Tenant Improvement Allowance
  • Architects, BOMA
  • Other standards (NYC, D.C., Industrial etc.)

21
PREMISES - LANDLORD
  • Common areas - must have the flexibility to meet
    the needs of the market
  • Telecommunications access reasonable
  • Measurement of space
  • The Rent is what it is
  • Measure now or waive.

22
PREMISES - RESIDENTIAL
  • Typically not an issue in the residential Lease.
    The typical residential Lease will provide a
    street address only and very little else.

23
USE
  • Related Provisions. Description of Premises,
    Building Services and Utilities, Rules and
    Regulations, Assignment and Subleasing, Hazardous
    Waste, Damage and Destruction, Condemnation,
    Indemnity, Insurance, Abatement of Rent,
    Non-Competition, Tenant Improvements, Compliance
    with Law and Options (Space and Term)
  • The importance of this provision cannot be
    overstated
  • Entrance and exit strategy.

24
USE - TENANT
  • any legally permitted use.
  • most Tenants would not want a Topless Bar across
    from their business office
  • any legally permitted purpose that is consistent
    with the character of the Tenants in the Building
    and that is not prohibited via another tenants
    exclusive use.
  • Warranty fit for use
  • Buildings Systems (HVAC, electrical, structural,
    plumbing, lighting, etc.)
  • Zoning.
  • Assignment Subletting - Use provision to be as
    permissible as possible.

25
USE - LANDLORD
  • Control of Tenant mix
  • Maintain the quality and character of their
    Building
  • Class A Building where professionals are housed
  • Exclude Tenants that are inconsistent (e.g. drug
    rehabilitation center).

26
USE - RESIDENTIAL
  • Landlord must at all times be wary of use that he
    does not desire on the Premises.
  • prohibit illegal activities
  • prohibit many undesirable activities which may be
    legal (e.g. kennel, child care, telemarketing,
    etc.).
  • Home office - technology - Tenants have
    computers, printers, fax etc., and some operate a
    business out of the residence.
  • overload on the electrical or HVAC system of the
    residence.
  • Waterbed or other water filled furniture,
    California Civil Code 1940.5 An owner or an
    owner's agent shall not refuse to rent a dwelling
    unit in a structure which received its valid
    certificate of occupancy after January 1, 1973,

27
USE - RESIDENTIAL
  • As a general rule animals can be restricted
    except a seeing-eye dog or signal dog for the
    hearing impaired
  • Occupancy limits - discriminatory against
    families with children?
  • When business to business disputes occur the
    Courts and Arbitrators are less likely to become
    judicial/arbitrator activists, than in the
    residential arena.

28
LEASE TERM
  • Related Provisions. Rent, Operating Expenses,
    Tenant Improvements, Options, Default, Damage and
    Destruction, Condemnation, Assignment and
    Subletting, Notices, and Hold Over.
  • Leases contain several dates of importance.

29
LEASE TERM - DATES
  • for reference purposes only for
    identification
  • The Effective Date Lease is viable and
    enforceable
  • Lease Commencement Date the date the Term
    commences
  • Rental Commencement Date the date Tenant must
    commence the paying Basic Rent under the Lease
  • Additional Rent Date the date the Tenant must
    commence the payment of operating expense pass
    throughs
  • Operating Expense Adjustment Date the date upon
    which the Landlord may adjust the operating
    expense passthroughs

30
LEASE TERM - DATES
  • Beneficial Occupancy Date - the date in which
    the Tenant is allowed to occupy the Premises
  • Free Rent Period the period of time in which no
    Basic Rent and/or Additional Rent is payable
    under the Lease
  • Delivery Date - the date the Premises are
    delivered to the Tenant to occupy or to commence
    the construction of Tenant Improvements
  • Option Date the date upon which Tenant must
    exercise an option set forth in the Lease
  • Expiration Date the date the Lease Term ends on
    its own terms.

31
LEASE TERM - TENANT
  • During any Early Occupancy Period or Beneficial
    Occupancy Period clarify what is payable if
    anything
  • Date Confirmation - the ability to dispute any
    Landlord confirmation of a Lease/Rent
    Commencement Date or any other rental trigger
    date in the Lease
  • Lease Extensions discussed in more detail below.

32
LEASE TERM - LANDLORD
  • Tenant occupies must pay Rent
  • The most sacred provision in the Lease to the
    Landlord is Rent Commencement Date.
  • Does not desire to debate this issue with their
    Tenants.
  • May allow some sort of ADR process so long as the
    Tenant pays the Rent (even if he pays it under
    protest).

33
LEASE TERM - RESIDENTIAL
  • Most of the time the Term of the Lease is not an
    issue in a residential situation exception poor
    documentation.
  • Notice requirements for termination have changed.
    The month to month tenancy only required one
    months prior written notice to terminate. The
    California Civil Code 1946.1 requires the owner
    of a residential dwelling to provide at least
    sixty (60) days' notice of termination if the
    Tenant has lived in the residence for a year or
    more.

34
ACCEPTANCE
  • Existing Space
  • No TIs - walk through by Tenant and Landlord
    confirmed in writing
  • TIs
  • Tenant constructs walk through on Delivery by
    Landlord
  • Landlord constructs walk through on completion.

35
ACCEPTANCE
  • Defects
  • Patent
  • Latent
  • Punch list.
  • Documentation is King Honeymoon vs. Divorce

36
ACCEPTANCE - TENANT
  • Latent defects excluded
  • Patent defects some grace period
  • Punch list
  • Diligently
  • Timely
  • No disruption
  • Off Tenant hours
  • Fumes
  • Noise
  • Access
  • Large vs. small transaction

37
ACCEPTANCE -LANDLORD
  • Latent defects Tenant must
  • Promptly report when discovered
  • Diligently investigate
  • Not cause loss of warranty.
  • Patent defects one time shot.
  • Punch list
  • Reasonable
  • During Building Hours
  • Minimize disruption
  • Memorialize
  • Cannot be Tenant caused (move in)
  • Large vs. small transaction

38
ACCEPTANCE RESIDENTIAL
  • Very seldom documented
  • Exception property managers
  • No inspections
  • Mostly visual walk through
  • Punch list usually carpet, paint and necessary
    repairs

39
RENEWAL, EXPANSION AND TERMINATION
  • Related Provisions. Premises, Parking, Term,
    Rent, Security Deposit, Use, Hazardous Waste,
    Tenant Improvement Allowance, Brokers Fees,
    Notices, Default, Surrender and Hold Over.
  • This provision normally takes an inordinate
    portion of the time devoted to Lease
    negotiations.
  • Rarely exercised as set forth in the Leases.
  • Each party is insistent that the rights are
    clearly defined
  • The process of exercising these Options must be
    specifically identified with a timetable that
    actually works.

40
RENEWAL, EXPANSION AND TERMINATION
  • Types
  • Renewal Expansion
  • ROFR
  • ROFO
  • NEGOTIATE
  • Early Termination

41
RENEWAL - TENANT
  • The extension and expansion options can be very
    critical to the Tenant.
  • When committed?
  • Transferable to an Assignee or a Subtenant?
  • What is the expansion size?
  • All or a part thereof?

42
RENEWAL - TENANT
  • How many extension options?
  • Is it a real option or does it only occur if
    space becomes available?
  • Is it a right of first refusal or a right of
    first offer?
  • What triggers this right?
  • Types
  • (i) expand or reduce the Premises,
  • (ii) extend or early terminate of the Lease Term,
  • In Options (i) and (ii) the first issue that must
    be resolved is the Rent.

43
RENEWAL - TENANT
  • In Option (i) (ii) if during the Lease Term or
    any renewal or extension period thereof, the Rent
    should be the lower of
  • the Rent in the Lease or
  • the Fair Market Rental Rate
  • a percentage of the Fair Market Rental Rate (e.g.
    90).
  • Transferable to
  • Any Transferee
  • Subtenant/Assignee
  • Affiliates/Subsidiaries.

44
RENEWAL - TENANT
  • Disputes as to Rent.
  • Negotiation, Mediation, Arbitration
  • Baseball
  • Averaging
  • Arbitrator determined.
  • Fair Market Rental Rate - comparable Premises,
    Buildings, size, location, floor, Term of Lease,
    parking, brokers fee and other privileges and all
    forms of market concessions currently available.
  • Additional Space and Upgrades
  • Sign rights
  • Parking privileges

45
RENEWAL - TENANT
  • Two articles on Renewal available at
  • TO RENEW OR NOT TO RENEW?
  • THE MEDIUM LEASE
  • http//www.dirtatty.com/publications/Renewal_VOL_I
    _20RV_7-17-03.pdf
  • TO RENEW OR NOT TO RENEW?
  • THE MAGNUM LEASE
  • http//www.dirtatty.com/publications/Renewal_Vol_I
    I_rv_7-18-03.pdf

46
RENEWAL - LANDLORD
  • Landlords are not in the business of selling
    options in their Buildings
  • Landlords are often forced to concede this point
    to a significant Tenant that anticipates growth
    and longevity in the Building.
  • Landlords generally attempt to restrict the
    Tenants options assuming that nothing has
    changed, that is extension of Term OK if Tenant
    has not sublet or assigned and occupies all of
    the Premises.

47
RENEWAL - LANDLORD
  • Expansion of space only if Tenant has not sublet
    or assigned.
  • No right to reduce space.
  • At Landlords then applicable Building Rent.
  • No Transfer of rights.
  • No upgrades.
  • Will agree to negotiation, mediation and
    arbitration.
  • Must take is this really an option.
  • Early determination timing
  • Lack of default.
  • Never vs. oops but cured

48
RENEWAL - RESIDENTIAL
  • Tenants are seldom granted a right to renew
  • Most become month to month rentals pursuant to
    the Terms of a written Lease.

49
RENT, ADDITIONAL RENT, SERVICES
  • Related Provisions. Description of Premises,
    Tenant Improvements, Security Deposit, Operating
    Expenses, Damage and Destruction, Condemnation,
    Abatement of Rent, Assignment and Subletting,
    Late Charge, Interest on Past Due Obligations,
    Compliance with Law, Repairs and Maintenance,
    Utilities and Services, Insurance, Transfer of
    Landlords Interest and Options.

50
RENT, ADDITIONAL RENT, SERVICES
  • Types
  • Base Rent this number is generally the absolute
    bottom line figure that the Landlord desires to
    recover on a monthly basis and all other Rents
    are in addition to this Rent. As a result this
    is the first real number the Tenant and Landlord
    discuss and frequently the most negotiated Rent
    in a Lease. Unfortunately the myriad of Lease
    forms that call themselves Gross or Net (labels
    mean little) make it impossible to determine
    exactly what the Tenant gets for the payment of
    the Base Rent, without a thorough reading of the
    Lease.
  • Caution in a long Term Lease it is not unheard
    of for the Operating Expenses, Additional Rent to
    exceed the Base Rent.

51
RENT, ADDITIONAL RENT, SERVICES
  • Additional Rent generally consists of several
    Rents due under the Lease
  • Operating Expense is Rent intended to reimburse
    the Landlord for the operating costs of the
    Building
  • CAM Charges most lease forms include the common
    area maintenance charges in the Operating
    Expenses but sometimes they are separate.
  • Services and Utilities most Lease forms provide
    that if the Tenant requires additional services
    (special events or needs) or additional utilities
    (after HVAC), the Landlord shall bill for those
    additional charges as part of the Additional Rent
    provision.

52
RENT, ADDITIONAL RENT, SERVICES
  • Percentage Rent mostly seen in shopping centers
    Leases in addition to all other Rent payable
    under the Lease whereby the Tenant is to pay the
    Landlord a percentage of gross revenues.
  • Parking fees sometimes part of the Rent at
    other times a separate and distinct fee. Visitor
    parking always an issue to be discussed.
  • Hidden Rent this is the type of Rent that many
    new entrepreneurs simply forget to include in
    their business plans. These would include the
    obligations to provide repairs and maintenance,
    insurance, comply with a law, shortfalls in the
    Tenant Improvement Allowance, if any.

53
RENT, ADDITIONAL RENT, SERVICES
  • On smaller leases the Rent is generally very
    ascertainable. In larger more complex Leases
    often it is unclear what is included in the Base
    Rent and what is an Additional Rent item.
  • Each Lease should address
  • Where paid
  • When paid
  • What happens if paid late
  • Prorations for partial months
  • When and how Rent is adjusted.
  • The Building services included in the Basic Rent
    or Operating Expense pass throughs must be
    specified
  • Janitorial specifications
  • What is extra

54
RENT, ADDITIONAL RENT, SERVICES - TENANT
  • Tenants prefer certain methodology
  • Modified Gross Lease or a Modified Net Lease
    Large Lease
  • Full Service Gross Small Lease (since small
    keep it simple).
  • Flat Rent - Short duration.
  • Basic Rent adjustment
  • fixed amount
  • annual CPI adjustment
  • fair market rental rate
  • Landlords determination
  • Rent in the Building
  • favored nations clause.

55
RENT, ADDITIONAL RENT, SERVICES - TENANT
  • Basic Rental in a Lease - Right of offset for any
    Abatement of Rent.
  • Dispute as Rent - the right to pay any Basic
    Rent, Additional Rent and Rent set forth in the
    Lease under protest.
  • Assignment of Lease - the Landlord should not be
    allowed to assign the Lease until Landlord has
    paid for or escrowed the dollar value of all of
    the Rental concessions. Landlords will strongly
    resist any restriction on Landlords right to
    assign.

56
RENT, ADDITIONAL RENT, SERVICES - TENANT
  • Rental Concessions
  • free Rent
  • discounted Rent
  • moving allowance
  • relocation allowance
  • sign allowance
  • FFE
  • advertising and promotion
  • assumption of existing leases
  • Tenant Improvement Allowance (design and
    construction)
  • Free parking and Visitor validations
  • Documentation
  • specifically set forth
  • or cross-referenced in this provision.

57
RENT, ADDITIONAL RENT, SERVICES - TENANT
  • Operating Expense.
  • The Base Year methodology sets forth a calendar
    year which serves as the base line for operating
    expense increases. The Base Years should be
    grossed up as if the Building was 100 (or
    another agreed upon percentage) occupied during
    such Base Year. Only increases over this Base
    Year will be added to the Rent.
  • If the Base Year is to be the last year of the
    previous tenants occupancy, then first and
    foremost, you must ensure that the previous
    tenant in the Building was fully occupied and had
    similar use of the Premises and requirements for
    all the utilities in the Building. If not, then
    the Base Year (depending on which one is used)
    may be insufficient to handle Tenants needs.

58
RENT, ADDITIONAL RENT, SERVICES - TENANT
  • Ideally, the Base Year operating expense should
    be the first full year that Tenant is in the
    Premises fully grossed-up and the pass-throughs
    do not commence until after a full year of
    occupancy. This will hopefully establish a
    realistic basis from which to increase the Rent.
  • Types of Protections
  • Base Year (implied cap)
  • Expense Stop
  • Stipulated Base
  • Hybrids.

59
RENT, ADDITIONAL RENT, SERVICES - TENANT
  • Additional Rental. Here the Tenant is paying for
    any additional charges he may incur for after
    hours utilities and non standard services. The
    biggest issue here is the determination when
    these charges are triggered.
  • utilities are generally triggered on what is
    commonly referred as after-hours or over standard
    use (discussed under metering).
  • Landlords and Tenants often conflict on what
    services are provided as part of the Base Rent,
    Operating Expenses and what is an Additional Rent
    item. Who does the catch all favor?

60
RENT, ADDITIONAL RENT, SERVICES - TENANT
  • Proposition 13 8 reassessments.
  • Tenant also desires to avoid Operating Expense
    increase resulting from a change of ownership
    California Revenue and Taxation Code 60 69.5
    (especially in an escalating market).
  • In such circumstance the Rent will be increased
    without any benefit to the Tenant. If the Base
    Year is low due to a Proposition 8 reduction for
    that year, the Base Year shall be grossed up
    retroactively when an if the Proposition 8
    reduction expires. In other words the Base Year
    should be a valid number.
  • Exclusions and Inclusion Lists - All real estate
    professionals have lists of operating expense
    exclusions. I have seen some as short as 5 (for
    small leases) and as numerous as 75 (for larger
    transactions). It is important that the list of
    exclusions and inclusions are appropriate for the
    transaction at hand. For an excellent sample
    list see http//www.cyberleasellc.com/boca.html.

61
RENT, ADDITIONAL RENT, SERVICES - TENANT
  • Tenants desire the right to audit the Landlord
    for compliance with those exclusions and
    inclusions to the operating expenses.
  • (a) for how long
  • (b) at what point does the cost of the audit
    shift
  • (c) how are audit results handled (solicitation,
    confidentiality)
  • (d) who can audit
  • (e) what the Landlord must provide, when, where
    and how.
  • Shopping center leases caution, some Tenants
    may be restricted by law from paying a percentage
    rent although such rents are typical for shopping
    centers.

62
RENT, ADDITIONAL RENT, SERVICES - TENANT
  • Shopping Center and Triple Net form leases
    harshest of the Landlord standard forms.
  • Why
  • Anchors.
  • Metering.
  • Why
  • Tenant is a low utility user and the other
    tenants in the Building are high utility users.
  • Landlord initiates
  • Tenant is not using excess utilities, Landlord
    pays
  • Tenant is using excess utilities, Tenant will
    have the option of (a) paying such excess and
    costs of the metering, or (b) challenging
    independently metering same.
  • Tenant initiates
  • Landlord overcharging, Landlord pays
  • Landlord is not overcharging, Tenant pays
  • Retroactive?

63
RENT, ADDITIONAL RENT, SERVICES - TENANT
  • Assignment and Subletting. On those occasions
    where the Tenant has a very favorable Rent, the
    Tenant will want that favorable Rent to be passed
    on to an Assignee or Subtenant (see below
    Assignment and Subletting).

64
RENT, ADDITIONAL RENT, SERVICES - LANDLORD
  • Basic Rental. Landlords need their Basic Rent in
    order to pay their mortgages and to make a
    profit. Rights of offset will be very narrowly
    defined if allowed at all. The right for the
    Tenant to Abate Rent should only be in those
    cases where the Tenant has exhausted a very
    onerous notice and right to cure process set
    forth in the Lease. In many circumstances the
    Landlord may be restricted from allowing
    Abatement of Rent due to (a) insurance policies
    and (b) Lender requirements.
  • Dispute as to Rent. Landlords as a general rule
    do not overly object to the Tenants paying any
    Rent under protest, so long as timely paid.
    Some Landlords will require certain information
    be provided when paying Rent under protest and
    that the Tenant must take action within a
    specified period of time after the protest or
    waive its rights concerning the particular
    payment under protest.

65
RENT, ADDITIONAL RENT, SERVICES - LANDLORD
  • Rental Concessions. Landlords will often go out
    of pocket for rental concessions in order to
    obtain a particular Tenant for their Building.
    In the event the Tenant terminates the Lease
    prematurely or assigns or sublets the Landlord
    will desire to recover the cost of the rental
    concessions on an amortized basis. On occasion
    the Landlord will specifically set forth the
    payment of the unamortized portion of the Tenant
    concessions as a condition precedent to any
    assignment or sublease of space in the Premises.

66
RENT, ADDITIONAL RENT, SERVICES - LANDLORD
  • Additional Rental. Applies to
  • After hours utilities,
  • Overstandard utilities and services
  • Late charges and backcharges.
  • Proposition 13 8 reassessments
  • ability to transfer their asset at its highest
    value.
  • Landlord may accept some prohibition on
    Proposition 13 pass through for a limited period
    of time (3-5 years).
  • If Landlord agrees to seek Proposition 8 property
    tax reductions, it must only be obligated to do
    so when in Landlords good faith judgment the
    benefit will exceed the cost of obtaining the
    reduction.

67
RENT, ADDITIONAL RENT, SERVICES - LANDLORD
  • Tenants desire the right to audit the Landlord
    for compliance with the operating expense
    provision. There are many issues raised here
    (a) for how long (b) at what point does the cost
    of the audit shift (c) how are audit results
    handled (d) who can audit.
  • Metering. If Landlord meters he wants the Tenant
    to pay for so long as Landlord had a reasonable
    suspicion of over use. If the Tenant is found to
    be a high utility user the Landlord will either
    (a) a fair allocation of the utility costs (b)
    direct pass through.
  • Capital Expenditures. Take time to define.
    Often during the Term of a Lease (the longer the
    Lease Term the more likely), a Landlord will make
    improvements to the Building and the Common
    Areas. Landlords will vigorously oppose any
    opposition to the passing on of Capital
    Improvements, however they will generally concede
    to amortization over the useful life of the
    Capital Improvement.

68
RENT, ADDITIONAL RENT, SERVICES - RESIDENTIAL
  • Unlike in commercial Leases, where market
    conditions always dictate what the Rent will be
    residential Landlords have the additional
    challenge imposed in those jurisdictions where
    rent-control applies.
  • Notice requirements are dictated by state law for
    month-to-month and other tenancies that do not
    have a fixed term. Those procedures for
    increasing Rent must be strictly complied with
    otherwise the Landlord could face a viable
    challenge.
  • In fixed Term Leases Rent increases are generally
    governed by the provisions of the Lease. Again
    in those jurisdictions in which Rent control does
    not apply, the Lease may specify automatic rent
    increases, at any time specified in the Lease.

69
REPAIRS AND MAINTENANCE
  • Related Provisions. Hazardous Materials, Tenant
    Improvements, Compliance with Laws, Alterations
    and Additions, Use, Abatement of Rent, Building
    Services and Utilities, Parking, Damage and
    Destruction, Consents, and Assignment and
    Subletting.
  • Three categories
  • Tenant Responsible
  • Landlord Responsible
  • Landlord does, Additional Rent.

70
REPAIRS AND MAINTENANCE
  • Landlords will perform certain repair type
    services and then charge the Tenant for the cost
    of such services plus a fee.
  • Many Leases attempt to segregate the
    responsibilities so that the Tenant is
    responsible for the Premises Systems and the
    interior of the Premises and the Landlord is
    responsible for the Building Systems and
    everything external to the Premises. Even then
    some of the items interior to the Premises are
    customarily Landlord duties (e.g., light bulbs,
    fixtures etc.). In such event the only question
    is whether or not chargeable to Tenant and what
    charge.

71
REPAIRS AND MAINTENANCE - TENANT
  • Repair and maintenance obligations should be
    limited to the Premises Systems, and the
    interior walls, ceiling tile and suspension
    system therefor, and all systems or equipment
    that serve only the Premises regardless of where
    they are located (roof, common areas).
  • Contractors. A point of contention between the
    Landlord and the Tenant is the use of certain
    contractors and suppliers.
  • any qualified and competent supplier and
    contractor, union or not, who will not void any
    warranty applicable to the Base Building
    Systems, or any part thereof.

72
REPAIRS AND MAINTENANCE - TENANT
  • Timing of the Tenant repairs.
  • Tenant, prior to being in default of the Lease,
    must have written notice thereof and thirty (30)
    days to complete the repair and/or maintenance.
  • If more than thirty (30) days are required to
    complete the repair and/or maintenance of such
    item, then Tenant should be given a reasonable
    amount of time to complete such
    repair/maintenance so as long as Tenant commences
    the repair as soon as reasonably possible and
    pursues the repair/maintenance in a diligent
    fashion.
  • Chargeback. In either event, after thirty (30)
    days notice and the party notified of their
    repair and/or maintenance responsibility has not
    complied with the terms of the Lease, the other
    party, that is, the non-breaching party, shall
    have the right to self-help to effectuate the
    repair and charge back the other party.
  • Additional Rent
  • Offset
  • Emergency

73
REPAIRS AND MAINTENANCE - LANDLORD
  • Landlords have a vested interest in making sure
    that a Tenants space is in good order and
    repair.
  • The interior and exterior of a Building must
    remain attractive and in good order to attract
    Tenants that the Landlord desires.
  • Control over day to day appearance
  • janitorial,
  • light bulbs,
  • lights etc.
  • Although the Landlord may perform all of these
    some may be backcharged as Additional Rent.

74
REPAIRS AND MAINTENANCE - RESIDENTIAL
  • Tenants have a statutory right of self help set
    forth in the California Civil Code 1942 to self
    help under certain conditions set forth in the
    statute.
  • Uninhabitable
  • Cannot
  • Waive this right
  • exceed more than one month's Rent and
  • be used more than twice in any consecutive twelve
    month period.

75
REPAIRS AND MAINTENANCE - RESIDENTIAL
  • In many circumstances if the habitability of the
    Premises are impacted by significant problems the
    cost of repairs could be in excess of one months
    Rent (HVAC, roof, sewer, electrical etc.).
  • Although well intended I would personally caution
    any Tenant to use this only as a last ditch
    effort.
  • It is not going to thrill the Landlord,
  • what happens if the repairs are defective?
  • What if someone is later injured?
  • What happens if the repairs are negligently
    performed and they actually harm the Building
    (make roof leak worse).

76
SECURITY DEPOSIT LEASE GUARANTIES
  • Related Provisions. Rent, Transfer of Landlords
    Interest, Options, Assignment and Subletting,
    Notices, and Hold Over.
  • Landlords will always ask for a security deposit
    and poorly represented Tenants pay as a mandatory
    and customary fee.
  • Often Tenants prefer to provide alternative
    security (see below)
  • Credit checks
  • Commercial small entities
  • Residential almost all

77
SECURITY DEPOSIT LEASE GUARANTIES
  • The California Civil Code 1950.8 provides in
    part. (a) This section applies only to
    commercial leases and nonresidential tenancies of
    real property. (b) It shall be unlawful for any
    person to require, demand, or cause to make
    payable any payment of money, including, but not
    limited to, "key money," however denominated, or
    the lessor's attorney's fees reasonably incurred
    in preparing the lease or rental agreement, as a
    condition of initiating, continuing, or renewing
    a lease or rental agreement, unless the amount of
    payment is stated in the written lease or rental
    agreement.

78
SECURITY DEPOSIT, LEASE GUARANTIES AND CREDIT
CHECKS - TENANT
  • Most of the Tenants that are represented by
    sophisticated practitioners will ask the question
    is a security deposit really necessary?
  • Tenants do not desire to pay a security deposit
  • Earn interest and segregated.
  • Use of the security deposit must be very narrowly
    defined (e.g., delinquent rent, repairs etc.).

79
SECURITY DEPOSIT LEASE GUARANTIES - TENANT
  • Alternative Security
  • Letter of credit,
  • Corporate guarantee,
  • Personal guarantee,
  • Lease Bond,
  • CD pledge,
  • Stock pledge.
  • Triggering events careful drafting

80
SECURITY DEPOSIT LEASE GUARANTIES - TENANT
  • Transfer or sale of the Building.
  • Estoppel Certificate - something is happening
  • The whereabouts of the security deposit can
    become an issue.
  • Nondisturbance, Subordination and Attornment
    Agreement for the benefit of Tenant and a
    Recognition Agreement for the benefit of any
    Subtenant in a form acceptable to the Tenant and
    its Subtenant, as the case may be.

81
SECURITY DEPOSIT LEASE GUARANTIES - TENANT
  • Additionally, the Landlord cannot transfer the
    property and security deposit to a new Landlord
    as a subterfuge to limit Landlords liability
    under the Lease.
  • Upon termination of the Lease, the security
    deposit is to be returned to Tenant within thirty
    (30) days after the expiration of the Lease
    (Civil Code 1950.7 (c) (3)).
  • In the event there is a dispute on the amount of
    the security deposit to be returned to Tenant,
    the Landlord should pay to Tenant the undisputed
    portion of the security deposit.

82
SECURITY DEPOSIT LEASE GUARANTIES - TENANT
  • Use of any security deposit must be in strict
    compliance with the California Civil Code
    1950.7.
  • Any dispute will be subject to Alternative
    Dispute Resolution provision of the Lease.
  • Personal guarantees.
  • Loss of corporate shield
  • To be avoided if possible
  • Burn off

83
SECURITY DEPOSIT LEASE GUARANTIES - LANDLORD
  • The Landlord will always desire a security
    deposit.
  • No matter how sound the entity.
  • Previously invincible entities.
  • Tenet
  • Dotcoms
  • The more volatile the industry the more likely
    this problem can arise (e.g. Internet,
    Healthcare, Defense etc.).
  • New entities
  • personal guarantees
  • Letter of credit
  • Lease bond
  • Use during the Term of a Lease - the Landlord
    will desire that the Tenant restore the security
    deposit within a few days of notice.

84
SECURITY DEPOSIT LEASE GUARANTIES - RESIDENTIAL
  • It is not unusual for a residential Landlord to
    ask for a security deposit.
  • Over legislated?
  • problem tenant, bad credit, bad everything but
    has convinced you the Landlord that he/she has
    made a new start in life.
  • However the legislature has protected these
    Tenants so well that they may not be able to Rent
    a place from you.
  • The legislature limited the total security
    demanded or received by a landlord for a
    residential rental it may not exceed an amount
    equal to two months' rent for an unfurnished
    Premises and an amount equal to three months'
    rent on a furnished Premise, see the California
    Civil Code 1950.5(c)
  • Alternative solution. This subdivision does not
    prohibit an advance payment of not less than six
    months' rent if the term of the lease is six
    months or longer.

85
SECURITY DEPOSIT LEASE GUARANTIES - RESIDENTIAL
  • Confusion can occur by and between advance Rent
    paid and the actual security deposit. Advance
    rent is not part of the security deposit.
  • Some jurisdictions,
  • require payment of interest
  • regardless of whether the deposit is
    characterized as a security deposit or as last
    month's rent.
  • Many residential Lease forms provide how and when
    the interest will be paid. Often these
    provisions have a sunset provision that basically
    provides that Landlord will pay this interest
    only as long as the Landlord is legally required
    to do so.

86
SECURITY DEPOSIT LEASE GUARANTIES - RESIDENTIAL
  • Arguably the Landlords use of the security
    deposit is limited to (i) delinquent Rent (ii)
    damages to the Premises in excess of normal wear
    and tear and (iii) any necessary cleaning of the
    Premises after Tenant vacates. Some Landlord
    counsel advise their clients that the use of the
    security deposit is much broader and actually
    intended to cure any default by Tenant, others
    take the more conservative route.

87
CREDIT CHECKS
  • Credit checks are seldom used by and between
    major entities.
  • Landlords obtain the necessary prescreening and
    permission to run a credit check via the use of a
    written Tenant Application.
  • must be signed by all parties that intend on
    being a Tenant under the Lease or month to month
    rental.
  • Some applications provide for multiple applicants
    and other forms are intended for a married or
    individual applicant.

88
CREDIT CHECKS
  • Several entities or individual applicants should
    each complete a separate Tenant Application.
  • Non-refundable screening fee.
  • False information
  • entities named as references, including but not
    limited to former Landlords, employers, etc
  • contents of the Tenant Application
  • credit report
  • release the Landlord from any liability that may
    be incurred during the application review and
    investigation process.

89
CREDIT CHECKS
  • The typical information set forth in a Tenant
    Application is substantial similar to any credit
    application you may encounter with some
    additional information that is pertinent to a
    Lease.
  • Primarily the Landlord desires to rent to a party
    who is stable (job and debts), has ability to pay
    the rent stated in the Lease. The other problem
    a residential Landlord must be wary of whom the
    Tenant is and who has rights. The law tends to
    punish nice guy Landlords.

90
CREDIT CHECKS
  • The Law concerning the use of credit report
    information is complex and provides many triggers
    beyond the purview of today's seminar. In
    general the residential applicant is very
    protected under various sections of the
    California Civil Code 1950.6. California Civil
    Code 1785.1-1785.35) commonly known as the The
    Consumer Credit Reporting Agencies Act, and
    1786-1786.56) commonly known as the
    Investigative Consumer Reporting Agencies Act
    control the use of consumer credit or
    investigative reports as a basis for accepting or
    rejecting Tenants of a dwelling For Tenants
    seeking to Lease a commercial unit the same
    protections are not available.

91
CREDIT CHECKS
  • Landlord must within three (3) days of requesting
    an investigative consumer report (a) disclose to
    the Tenant(s) that an investigative consumer
    report will be prepared on the applicant's
    character, general reputation, personal
    characteristics, and mode of living and (b)
    provide the Tenant(s) with the name and address
    of the agency preparing the report and a summary
    of the provisions of the California Civil Code
    1786.22, which governs the Tenant(s) right to
    inspect the agency's files that contain
    information about the Tenant(s).

92
CREDIT CHECKS
  • If the residential applicant is rejected or the
    Rent is increased based on an investigative
    report, the California Civil Code 1786.40 (a)
    Whenever insurance for personal, family, or
    household purposes, employment, or the hiring of
    a dwelling unit involving a consumer is denied,
    or the charge for that insurance or the hiring of
    a dwelling unit is increased, under circumstances
    in which a report regarding the consumer was
    obtained from an investigative consumer reporting
    agency, the user of the investigative consumer
    report shall so advise the consumer against whom
    the adverse action has been taken and supply the
    name and address of the investigative consumer
    reporting agency making the report.

93
CREDIT CHECKS
  • On occasion a Landlord will desire to report a
    defaulting Tenant to a credit reporting agency.
    If the Landlord is going to do this he/she must
    give notice to the Tenant, prior to or within
    thirty (30) days after the Landlords transmittal
    of such credit information. This notice must be
    provided by personal delivery or first class mail
    to the tenant's last known address California
    Civil Code 1785.26(c).

94
ASSIGNMENT AND SUBLETTING
  • Related Provisions. Use, Rent, Term, Security
    Deposit, Consent, Brokers Fees, Tenant
    Improvements, Alterations, Repairs and Options.
  • In small leases of relatively short duration
    Landlord tends to hang very tough on these
    issues.
  • In a large leases be prepared to spend a lot of
    time negotiating the rights and obligations
    during an Assignment, Subletting or Transfer.
  • Unless the Lease specifies to the contrary the
    Tenant is generally free to transfer (assign or
    sublet) all or any portion of its interest in the
    Lease, California Civil Code 1995.010,
    1995.210(b) and 1044.

95
ASSIGNMENT AND SUBLETTING
  • California Civil Code 1995.230. Allows for an
    absolute restriction but this is rare. Often you
    will see language in the Landlords sole and
    absolute discretion which sounds fairly harsh.
    The effect of this language is somewhat tempered
    by the California law which requires the Landlord
    to act "reasonably" when granting or withholding
    consent to a proposed transfer. Since the
    California law favors transferability Courts to
    often narrowly construe restrictions and any
    ambiguity in a Lease will favor of
    transferability California Civil Code 1995.220.
  • There is no doubt that the sophisticated and
    Landlord and Tenant fully recognize that in a
    long Term Lease of significant magnitude an
    Assignment, Subletting or other Transfer are
    highly likely to occur during the Term.
    Therefore these provisions are a battleground for
    much wordsmithing. Although the Landlords and
    Tenants interest are not clearly diametrically
    opposed that certainly can be.

96
ASSIGNMENT AND SUBLETTING - TENANT
  • E E E2 Exit strategy Entrance strategy.
  • Recapture
  • Timing and
  • Profit Sharing.
  • Consent.
  • Assignments by operation of law are not to be
    prohibited.
  • Landlord must consent or provide Tenant all its
    objections in reasonably sufficient detail within
    five (5) business days.
  • Cure improper transfer.
  • Where no consent is to be required, Tenant will
    provide a sufficient prior written notice of
    transfer affiliates and subsidiaries).
  • Transfer Fee.
  • Recognition Agreement.
  • Release contingent liability.
  • Expansion/Term Options.
  • Vacancy Credit

97
ASSIGNMENT AND SUBLETTING - LANDLORD
  • Landlords Right to Collect Rent from
    Subtenant/Assignee. The right to collect Rent
    directly from a Subtenant/Assignee if Tenant is
    in default of the Lease.
  • CAUTION material vs. technical default.
  • Recognition Agreement. Landlord will only sign a
    Recognition Agreement with each and every
    Subtenant of a material nature.
  • Release. Releasing of the Assignor is never an
    easy issue for the Landlord to accept. The
    Landlord sees little incentive in releasing the
    Assignor unless there is some direct benefit to
    the Landlord, e.g., the Assignee will extend the
    Lease, and the Assignee is financially sound and
    desires to commence negotiations for a direct
    deal but desires the Assignor out of the way. Of
    primary concern to the Landlord is an
    economically viable tenant that can meet the
    obligations under the Lease. Great
    Assignee/Subtenant and Landlord more flexible.

98
ASSIGNMENT AND SUBLETTING - LANDLORD
  • Profit Sharing. Landlords position is simple.
    We leased this space to you the Tenant, real
    estate is our business not yours. We are not
    asking for the original deal to be changed but we
    are asking that you adhere to the original deal.
    We are happy to accommodate you but it is our
    Building and any profits must be ours. We do not
    desire to share in costs that you have initiated.
  • Expansion/Term Options. On most occasions the
    Landlord will not desire that the Assignee
    receive options for either Term or Expansion. If
    Landlord concedes these points it will not desire
    to release the Tenant. Once a Tenant desires to
    leave the Landlords Building the Landlord
    desires to maintain optimum control over the
    tenant mix and Use of the space. The more
    financial security for the Landlord the better.
  • Vacancy Credit. Although hard to argue the
    logic, most Landlords do not maintain accounting
    or Building Systems that are capable of
    accommodating this request. As many Landlord and
    Property Managers have confided in me that it
    cost them more to comply with this provision that
    it would benefit the Tenant.

99
ASSIGNMENT AND SUBLETTING - RESIDENTIAL
  • Although the absolute prohibition on transfer to
    the Lease is permitted pursuant to the California
    Civil Code 1995.230 this right may be limited
    due to local ordinances.
  • Given the law, Landlord may decide to absolutely
    prohibit any assignment or subleasing or to
    require the Landlords prior written consent. If
    the Landlord should determine to absolutely
    prohibit transfer of the Lease he will forfeit
    his remedy set forth in the California Civil Code
    1951.4 "The lessor has the remedy described in
    California Civil Code Section 1951.4 (lessor may
    continue lease in effect after lessee's breach
    and abandonment and recover rent as it becomes
    due, if lessee has right to sublet or assign,
    subject only to reasonable limitations)."
  • As with commercial Leases I would recommend
    specifying what circumstances would allow the
    Landlord to withhold its consent in the Lease.

100
COMPLIANCE WITH LAW
  • Related Provisions. Representations and
    Warranties, Maintenance and Repair, Tenant
    Improvements, Rules and Regulations, Hazardous
    Waste, Default, Entry by Landlord, Notices, Rent,
    Operating Expenses, Alterations, Indemnity,
    Insurance, and Abatement of Rent.
  • That darn boilerplate!
  • In 1994 Hadian v Schwartz (1994) 8 C4th 836, 35
    CR2d 589, and Brown v Green (1994) 8 C4th 812, 35
    CR2d 598, by the California Supreme Court. The
    Court considered whether the Landlord or the
    Tenant is responsible for certain repairs to the
    Premises. The issue at hand was whether or not
    the Compliance with Law required certain repairs
    or renovations to Premises. The Leases at issue
    were standard form Leases contained essentially
    identical clauses concerning responsibility for
    Repair and Maintenance of the Premises and
    Compliance with Laws. The oddity is that the
    Court found that the Landlord was responsible for
    repair in one case and the Tenant in the other
    case.

101
COMPLIANCE WITH LAW
  • In the Hadian case, the Court developed a
    six-factor test as to whom will bear the burden
    of the repair (i) The relationship of the cost
    of the curative action to the rent reserved under
    the lease (ii) The term for which the lease was
    made (iii) The relationship of the benefit to
    the tenant to that of the landlord (iv) Whether
    the curative action is structural or
    nonstructural in nature (v) The degree to which
    the curative action will interfere with the
    tenant's enjoyment of the premises and (vi) The
    likelihood that the parties, especially the
    tenant, anticipated the application of the law or
    order in question. In Hadian the Court held that
    the Landlord must pay for seismic work required
    by law because the Lease, taken as a whole,
    indicated that the parties did not intend the
    Landlord to forgo the advantages of ownership and
    the Tenant did not anticipate having to
    reconstruct the Building during the short Term of
    its Lease.

102
COMPLIANCE WITH LAW
  • In the Brown case, the Court ruled that the
    Tenant must pay for asbestos abatement work
    required by law because the Lease indicated that
    the parties intended to transfer substantially
    all the responsibilities of ownership (including
    government-ordered asbestos cleanup) to the
    Tenant (Brown).

103
HAZARDOUS WASTE AND SICK BUILDING SYNDROME
  • Related Provisions. Representations and
    Warranties, Compliance with Law, Use, Landlords
    Right of Entry, Alterations, Indemnification,
    Repairs and Maintenance, Default, Rules and
    Regulations, Insurance, Indemnity, Abatement of
    Rent, Landlords Right of Entry and Assignment
    and Subletting.
  • We have now come to the understanding that all
    Buildings and homes have Hazardous Materials in
    them. The only real question is whether or not
    they are harmful. The extreme fright that use to
    be associated with Hazardous Materials and Sick
    Building Syndrome has somewhat subsided.
    Landlords, Tenants, Contractors and their
    Attorneys have now had several years to deal with
    these issues. Although most of us know what
    Hazardous Waste is many of us are confused on
    what we call Sick Building Syndrome.

104
HAZARDOUS WASTE AND SICK BUILDING SYNDROME
  • Further adding to the confusion is that Hazardous
    Waste can cause a Sick Building Syndrome but you
    can have Hazardous Waste without a Sick Building
    Syndrome. Sick Building Syndrome occurs when the
    occupants of the Building are experiencing
    fatigue, allergic reactions, headaches, sinus
    problems, eye irritation, breathing issues as a
    result of some material in the Building. This
    material can be Hazardous Material or it can be a
    naturally occurring substance that just happens
    to be in higher quantities in the Building than
    external to the Building.

105
HAZARDOUS WASTE AND SICK BUILDING SYNDROME
  • The biggest challenge in this area is bad
    science, overreaction to an issue and the ongoing
    onslaught of scientists claiming a new substance
    causes problems. I often receive a call from a
    client (Landlord or Building owner) advising that
    one of its Tenants or employees has claimed a
    problem with a Building. On some occasions the
    employee or Tenant has a Dr. report that implies
    it must be the Building causing the problem.
    Naturall
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