Selected Silent Lease Issues
Colorado Real Estate Journal, November 6, 2002
The first steps in representing a tenant in a lease negotiation will be to talk to the client, review any term sheet or letter of intent, and carefully review the draft lease. Tenant's counsel will comment on any discrepancies, errors, or inconsistencies, ask that any errors be corrected, and try to make sure that the terms and provisions presented in the lease form are fair and reasonable-longer notice periods, opportunity to cure defaults, narrowing of landlord discretion, and clarity on all monetary obligations. While that is, in itself, a significant part of the lawyer's job, he or she should also address issues that may be more difficult to spot because they do not appear in the lease at all.
The list of "silent lease issues" that could be raised is quite long, and space does not permit a comprehensive treatment here. The purpose of this article is to caution tenants and their attorneys to look beyond the actual text of the lease when negotiating it. Especially since there is no "standard" lease form in Denver, it is wise to have an experienced attorney involved in the lease negotiation, not only to explain or clarify some of the more troublesome terms, but also to notice what is missing and try to have it addressed in the final document. This exercise is valuable even when the effort is not entirely successful. Knowledge is power.
Landlord Duties. Most leases pass through a laundry list of costs to the Tenant. If the landlord sweeps the parking lot, fixes the elevator, paints the hallways, or buys insurance on the structure, these costs are shared pro rata by the tenants. But, assuming you want the landlord to do those things, make sure there is an affirmative duty to do so.
Assignment and Subletting. If the lease is silent on assignment or subletting, then it is permitted, making this one "silent" issue that favors the tenant. Note that "assignment" means that everything the tenant has, and all the tenant's duties, are transferred to the assignee. If assignment is permitted, the lease should not impose any conditions on the assignee that do not apply to the original tenant. If transfer of stock in the tenant is deemed an assignment for consent purposes, it should not result in the transferee assuming liability under the lease. Require the landlord to keep the terms of any assignment or sublease confidential. Specify what information must be presented in order to request consent, preferably a term sheet or letter of intent rather than the completed assignment or sublease. The landlord should not have a right to meddle with the actual sublease document unless the landlord is asked to be a party to it (such as when the landlord is asked to agree to allow the subtenant to lease directly from the landlord if the prime lease is terminated.)
Damage, Destruction, and Other Events. Obtain a termination right or rent abatement if there is a material adverse change in zoning, parking, access, or visibility of the premises. If the leased space is not damaged but another part of the property is, landlord cannot terminate unless landlord either makes tenant whole or terminates the leases of all other similarly situated tenants (i.e., the landlord can't use casualty as an excuse to discriminate against a particular tenant.) Make sure landlord is responsible for all losses for which it has obtained insurance or is required to maintain insurance under the lease. Obtain rent abatement if there is an interruption of services that negatively impacts tenant's use, whether or not the landlord is "liable" for such interruptions.
Costs, Operating Expenses, Review Rights. Are any capital costs passed through? Which ones and on what basis? Is the "operating expense" language so broad that a major capital item could be included in its entirety in the year the expense is incurred? Are expenses pro-rated for partial years? Define a time by which annual operating expenses statements should be delivered. Have a "statute of limitations" on operating expense adjustments. Make sure the review right can realistically be exercised by this particular tenant in light of the location of accounting staff, agility of response to information, internal procedures, and the like. If significant errors are discovered in one year, the tenant should have the right to go back and review prior years. In a "base year" lease, the review right should include the base year. If another tenant's audit uncovers a discrepancy, tenant should automatically receive the benefit of any adjustment without having to ask for it. Maintain a checklist of operating expense exclusions and compare it to the exclusions listed in the lease form.
Practical Considerations. Will the tenant actually be able to use the space as it intends? Is there access and heating, ventilation and air conditioning at all hours that the tenant operates? In a retail lease, are the required "open" hours consistent with the tenant's practices? Do any other tenants have exclusives that will pose a problem? Should the tenant get an exclusive? Are all utilities sufficient? Does the landlord have to keep them that way (i.e., affirmative covenant to provide specified amounts of water, power, cable, etc.?) Are inappropriate uses prohibited in all leases? Do the rules and regulations apply to all tenants, and does the landlord have to enforce them even-handedly? If the landlord's obligations are limited to its interest in the building, and if a purchaser of the building assumes only obligations that are incurred after the date of transfer, then how will the tenant enforce its rights for defaults of the old landlord prior to the transfer?
