X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
When it comes to the commercial real estate business, you never know when the next downturn is going to occur. During such periods, landlords often begin to focus on supporting and stabilizing their existing tenant bases. Prudent landlords should also begin to examine their lease portfolios with a view toward reducing risks and protecting themselves from the consequences of tenant defaults in the future should the market show signs of stagnancy. Real estate counsel can serve as the landlord”s strategic partner in spotting potential trouble spots and providing possible solutions before actual trouble arises. It is an open secret among real estate professionals that no matter how long or hard fought the negotiations over a lease, the document is usually consigned to a file folder or closing binder, never again to see the light of day � unless there is a problem. This means that even in the most well managed buildings, leases are often administered � and commercial landlord-tenant relationships are often maintained � with little or no reference to the contract that created the relationship in the first place. It is only when that problem arises � the tenant is in rental arrears, has assigned the lease without the landlord’s consent or appears to have abandoned the leased premises � that the landlord (and its managing agent and counsel) begins scurrying around to review the lease file to determine whether remedies can be exercised. Usually the first place on which counsel focuses is the default and remedy provisions of the lease. More often than not, the lease contains adequate legal protections for the landlord, assuming the facts line up. All too often, though, it is during the follow-up factual investigation that the landlord’s representatives discover that some of the relevant documents do not exist or do not say what the landlord thought they said. Therefore, a review of a landlord’s lease files before a downturn can uncover these holes and provide an opportunity to fill them. All of the relevant documents should be reviewed and compared. Needless to say, missing documents should be obtained, unexecuted documents should be sent out for immediate signature and conflicts among documents should be flagged for resolution. Counsel can provide invaluable assistance in spotting issues found during this simple file review that may pose obstacles to the landlord’s enforcement of the lease in the future. Some of the more common problem areas found during a file review are addressed below. � Identity of tenant Although it sounds very basic, frequently the tenant is not who the landlord thinks it is. It is not uncommon for a tenant, as part of its internal corporate reorganization, to transfer the lease to another entity without observing the requirements in the lease for assignment, or to simply use an entity to pay the rent that is a different entity than the tenant named in the lease. Most commercial leases contain provisions prohibiting assignments of the tenant’s interest in the lease without the landlord’s consent, specifically stating that a transfer of a majority or controlling interest in the tenant entity constitutes an assignment of the lease for these purposes. Notwithstanding such language, ownership and control interests in tenant entities, and the tenants’ interests in leases, are often transferred without the tenants in question giving thought to the relevant lease provisions. If, after such a transfer, a landlord accepts rent from a tenant’s transferee for an extended period of time, the landlord may be deemed to have waived any purported breach resulting from the assignment. Under these circumstances, the landlord may elect to sue either the assignor or assignee for rent due. To avoid surprise later, it is prudent to periodically cross-check the name of the tenant as set forth in the lease with the entity named on the tenant’s front door (and in the building directory), as well as against the name of the entity paying the rent. In addition, estoppel certificates can be used as a tool to ferret out identity issues. Most commercial leases provide that the tenant is obligated to deliver to its landlord estoppel certificates upon conditions specified in the lease. The typical estoppel provision in a commercial office lease states that the estoppel certificate must address certain matters described in the lease as well as “such additional information as the landlord may reasonably request.” Requesting information as to the identity of the tenant and the ownership and control of that tenant are reasonable areas of inquiry that may be included. Thus, in a situation in which the identity of the tenant or the ownership or control of tenant is in doubt, the landlord’s counsel may wish to suggest that an estoppel certificate be sent to the tenant in question. The information in the certificate can be compared to the information in the lease file and the landlord and its counsel can address any discrepancies. � Commencement date Unless the premises outlined in a lease are pre-built and the space is vacant, typically the commencement date of a lease is not a fixed date and is instead tied to the occurrence of some future event, such as the completion of tenant improvements or the removal of the previous tenant’s belongings. Many other important dates or options are often tied to this floating commencement date, such as the rent commencement date, the dates on which rent payments escalate, the fixed expiration date and the dates on which renewal or expansion options may be exercised. Although establishing the commencement date, as well as other related floating dates, is of obvious importance, landlords and tenants frequently forget to document it. When this occurs, landlord’s counsel should review the lease to determine whether it authorizes the preparation of a commencement date notice or agreement, and if so, whether the lease specifies a form of notice or agreement. If no such document is authorized, an amendment to the lease should be prepared to make certain that both parties acknowledge and are bound by a common date. � Guaranties Landlords require guaranties of leases in a variety of circumstances, including, for example, situations in which a single-purpose entity, a newly formed entity or an entity with limited assets is the named tenant and the landlord seeks a more established or credit-worthy person or entity to be responsible for some or all of the lease obligations. A guaranty of lease obligations constitutes a “special promise to answer for the debt, default or miscarriage of another person” and therefore is subject to the statute of frauds. Locating the guaranty and ascertaining that it is signed by the appropriate party is an important first step in the analysis. The guaranty should also be reviewed by counsel to ascertain (a) that the guaranty is not personal to the named landlord and therefore runs to the landlord’s successors, (b) the scope of the guaranty and (c) any conditions pertaining to the effectiveness of the guaranty. Unless the guaranty states to the contrary, it applies to extensions or renewals of the original lease term. However, the guaranty will not extend to occupancy by tenant after expiration of the original term under an express agreement that is not within the scope of the original lease. Similarly, modifications to a lease without the consent of the guarantor may work to release the guarantor from its obligations. Thus the landlord cannot assume that a guaranty automatically extends to supplements, amendments or related obligations. In each such situation, counsel should confirm that the guarantor has ratified and reaffirmed its obligations under previously made guaranties. � Letters of credit Many landlords now insist that security deposits be in the form of letters of credit rather than cash. Letters of credit require little or no reporting (as opposed to cash balances in bank accounts). And, unlike cash, the proceeds of a letter of credit are available to a landlord even following a tenant’s bankruptcy filing. Given that one of the only defenses generally available against a drawing of an unconditional letter of credit is fraud, it is rare that a landlord can be blocked from drawing on a letter of credit. Thus, a landlord receives the funds and any dispute regarding the landlord’s entitlement to the security deposit (or the amount of damages to be offset against the deposit) is fought while the landlord has all the leverage in its pocket. Administering letters of credit, however, presents a series of practical issues that require careful handling on the landlord’s part. For example, unless the letter of credit expressly states to the contrary, the original letter of credit must be presented to the issuer to draw upon it. All too often, the landlord discovers that someone has misplaced the original document just when a default has occurred and the landlord wishes to draw upon the letter of credit. Counsel should remind landlords that it is critical to maintain and preserve the original versions of letters of credit. Counsel may wish to suggest a periodic review of the files in which the original letters of credit are maintained so that the landlord can determine whether any of the documents are missing before they are needed. Although the letter of credit issuer has no obligation to issue a replacement, it might be persuaded to do so by the person with whom it has the relationship � the tenant. A tenant that is in good standing with its landlord is more likely to work with the landlord to obtain the replacement than a tenant who is in default. A second frequent security deposit letter of credit issue involves the expiration of the letter of credit itself. Many letters of credit do not state an expiration date that coordinates with the fixed expiration date of the lease, but rather have a term of one year, which term is automatically renewed unless the issuer notifies the landlord to the contrary. Landlord’s counsel should check the files to determine whether any notice of termination has been received, and if so, whether a replacement letter of credit from an alternate issuer has been received. Again, if the letter of credit have been terminated, the landlord will have a much better chance of obtaining a replacement from a tenant with which it otherwise has a good relationship than from one already in default. A review and factual analysis of leasing files before lease defaults occur provides an opportunity to spot obstacles to enforcement if a default does occur later. Lawyers who advise landlords should serve as partners in this factual analysis and can then provide the tools to eliminate these obstacles on a nonemergency basis. Jacqueline A. Weiss is a real estate partner in the New York office of Baker & Hostetler. Faige P. Klein, an associate at the firm, assisted in the preparation of this article.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.