Tenant Issues in Real Estate Leases

Real Estate, Land Use & Construction Law

Tenant Issues in Real Estate Leases

Oct 29, 2010 | Real Estate, Land Use & Construction Law

An earlier blog post focused on important issues relating to the Letter of Intent. Assuming now that you have gotten past the letter of intent stage and are moving forward to a binding lease agreement, we will now focus on common legal issues reviewed from the tenant’s perspective. If your current lease is up for renewal or you are in the market for new space, the following is a list of important but basic issues to address with your attorney in connection with any successful lease negotiation with your landlord.

This Part I will focus on basic provisions such as assignment/subletting, use restrictions and the commencement date, and Part II will address other issues including insurance, mutual waivers and defaults.

Rent Commencement Date.

The rent commencement date is the date set forth in the lease when rent first becomes due. Often this is tied to when the build-out of tenant improvements is complete or when the tenant first occupies the space to conduct their business.

· Tenant Issues. The tenant should provide some protection with an outside delivery date. There may be issues affecting delivery of the premises including the removal of existing tenants and the completion and performance of landlord’s work. Often a tenant can provide for an estimated delivery date after which free rent or some other financial remedy will accrue to the tenant and an outside delivery date after which the tenant will have the right to terminate the lease if the space has not yet been delivered. Both retail and office tenants will want to have sufficient time to build out and fixture their space.

· Landlord Issues. From the landlord’s perspective, know that the landlord will want the rent to commence on a date that is within the landlord’s control. Tenants typically will not want to pay rent until they are open for business. An outside rent commencement date could be tied to execution of the lease, landlord’s delivery of the premises with its work complete or some other objective factor.

Assignment and Subletting Issues.

As a tenant, you need flexibility to transfer your leasehold interests in the event of unforeseen changes in the economy, your business or simply the amount of space you need. Therefore, rights to assign or sublease the lease with as few restrictions from landlords as possible are very important.

· Assignment vs. Subletting. An assignment is a transfer by a tenant of its entire interest in the lease. A sublease is a transfer of less than the tenant’s full interest (such as less than the entire premises or for less than the remaining term). Absent specific restrictions, the laws of most States provide that leases can be assigned and subleases entered into without landlord’s consent.

· Consent Not to be Unreasonably Withheld. This has become the standard in negotiated commercial leases. Landlords, however, often include a list of criteria that it is reasonable for them to consider. These criteria could include:

– Financial strength of assignee (independent of continuing liability of original tenant).

– Business reputation and experience.

– For retail leases, experience in operating for the proposed use and the use is compatible with tenant mix and not in violation of any covenants, restrictions or agreements.

– Tenant not then in default beyond any applicable notice and cure periods.

· Sale of Business. Tenants should include provisions permitting a transfer of the lease in connection with a sale of the business or in connection with a corporate reorganization. And for a retail use, a sale all stores in a given retail market should trigger a permitted assignment.

· Use Issue. For retail uses, providing that consent is not to be unreasonably withheld on assignments and sublettings is not worth much unless the tenant also negotiates for flexibility in changing its permitted use.

· Release of Liability. It is very desirable, but often difficult, for the tenant to obtain language in the lease providing that it is released from all liability from and after the date of the assignment. A landlord will strongly resist such an approach, but may agree depending on the net worth of the assignee or other similar factors.

Use Restrictions.

This typically applies to retail uses and not office uses. A retail tenant often wants assurances from the landlord that no other tenant in the shopping center will compete with their current use.

· Primary Purpose Restrictions. Landlords often attempt to negotiate exclusives prohibiting retail operations whose primary purpose is the tenant’s category of use (i.e., prohibit stores whose primary purpose is the sale of consumer electronics, as opposed to an outright prohibition on the sale of consumer electronics).

· Existing Tenant Rights. A landlord will often provide that exclusive use restrictions are subject to the rights of tenants under existing leases. Most small shop leases will be limited to a specific use and no other purpose. Anchor and other major tenant leases, however, may permit a change in use, and a landlord therefore may not be able to guarantee that it can prohibit an existing tenant from changing its use or assigning to a third party in violation of a new exclusive. The issue to negotiate becomes the tenant’s potential remedies if a landlord breaches the exclusive.


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