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This blog focuses on real estate, land use and construction-related topics affecting Virginia and the Washington, D.C. metro area. With topics ranging from contract drafting and negotiation to local and regional land use project updates, the attorneys at Bean, Kinney & Korman provide timely insight and commentary on the issues affecting owners, builders, developers, contractors, subcontractors and other players in the industry. If you are interested in having us cover a specific topic, please let us know.

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  • Posts by John Kelly
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    John Kelly is a shareholder of Bean, Kinney & Korman and focuses his practice on general corporate law and real property law, including commercial real estate leasing, financing and acquisitions, and business mergers and ...

The second headquarters for Amazon in Arlington, VA is obviously a hot topic in local commercial real estate. Much of the focus so far has been on projected residential price increases and increased commercial leasing. But, let’s not forget about the hotel industry. The forecast for much higher hotel traffic in the area was the reason the Transient Occupancy Tax was included in the incentive package negotiated by the state and local governments. 

Landlord Waiver Agreement in Favor of Tenant’s Lender

As noted in part 1 of this article, the tenant’s lenders will also want a security interest in the tenant’s personal property to secure the repayment of the tenant’s loan obligations, creating a conflict between the lien rights of the landlord and the lender. Because of this conflict, as a condition to the financing, a lender will typically request that the landlord execute a waiver of its security interest.

Banks that provide financing for commercial tenants and the real estate landlords for those same tenants both want additional security in the tenant's personal property located at the premises. The interests of the landlord and the lender are in conflict. The landlord is looking to secure the tenant's rental obligations by taking a lien against the tenant's fixtures, inventory, and equipment located in the space, which may be particularly valuable in the case of certain retail, restaurant or industrial tenants. At the same time, the tenant’s lender providing tenant improvement and/or working capital financing desires a security interest in the same property. A landlord’s lien may be created, depending on the state, under statutory lien rights, the common law, or by contract under the terms of the lease, and gives the landlord the right to levy the property located at the demised premises of a defaulting tenant.

In Part 1 of this series, the definition of guaranty and the means for landlords to enforce guaranties was discussed.

Recognizing that the guaranty is a condition to entering into a lease, and its leverage is limited, the guarantor would still like to limit its exposure under a long-term lease. At the same time, the landlord wants the security of an unlimited and unconditional guaranty, at least until such time as the tenant has a track record of success or can provide better financials. Because these competing interests are critical business terms, any attempts at limiting the guaranty need to be raised early in the lease negotiation process by tenant and preferably at the time of the negotiation of the letter of intent.

As a condition to entering into a new lease, landlords often require a guaranty of lease from a personal or corporate guarantor in connection with those tenant entities that do not have either a high enough net worth or annual revenue, or for whatever other reasons do not meet the landlord’s financial criteria. A guaranty of lease is a covenant by the guarantor to be responsible for the obligations of the tenant. For example, for a tenant business set up as a new limited liability company that has one or two principal owners, the landlord will likely require that the owners personally guaranty the tenant’s obligations under the lease since the limited liability company would have little or no assets and no track record. Or for a tenant entity that is a wholly owned subsidiary of a parent corporation, the landlord will likely require that the parent corporation serve as the guarantor.

Part 1 of this piece can be accessed here.

Specialty Improvements 

As mentioned above, the law is evolving to place greater obligations on landlords with respect to maintenance and repair. The landlords strike back by including onerous provisions in their commercial lease forms. Maintenance and repair of specialty improvements is no different. The form lease document, unless negotiated and revised by tenant’s counsel, will provide that the tenant is responsible for any specialty systems installed by or for tenant and exclusively serving the tenant. Tenants with complex data storage needs are often surprised to learn of the high cost of maintenance and repair. For example, some tenants may be surprised to learn of the expenses associated with older halon fire suppression systems that are increasingly obsolete, expensive to repair and even more expensive to remove.

Issues with HVAC

Disputes over specialized tenant improvements or exclusive heating and air conditioning systems are common in commercial leasing. Landlords and tenants often argue over maintenance and repair obligations, or whether or not such specialized tenant improvements can remain on the premises upon the expiration of the term or if tenant is obligated to remove the alterations at the tenant’s sole cost.

Landlords often require such alterations be removed and the premises restored to their original condition while tenants would obviously prefer not to have to incur such large move-out expenses. With respect to exclusive heating and air conditioning systems, typically the argument between landlords and tenants is whether or not the tenant must incur significant expenses maintaining and/or replacing a defective unit towards the end of the term at tenant’s sole cost for the benefit of the subsequent tenant of the premises. This article will discuss the typical approaches to these issues and offer suggested compromise language for office and retail commercial leases.

Part one of this post explained acceleration of rent provisions and how various courts around the country have scrutinized these provisions and taken varying positions on their enforceability and validity. Part two of this post, below, will discuss how landlords can include enforceable acceleration of rent provisions in their leases.

After first taking into account the laws of the applicable jurisdiction, the landlord needs to carefully review the proposed acceleration of rents provision to verify its enforceability under such law. Revising a potentially unenforceable clause to a simple and more reasonable approach could be beneficial to all parties.

Part one of this post will explain acceleration of rent provisions and how various courts around the country have scrutinized these provisions and taken varying positions on their enforceability. Part two of this post will discuss how landlords can include enforceable acceleration of rent provisions in their commercial leases.

What is an Acceleration of Rent Provision?

An acceleration of rent provision gives the landlord the right, after a default by the tenant, to demand the entire balance of the unpaid rent owed under the lease for the entire remainder of the term to be paid in one lump sum. Under the law of most states, if there is no acceleration of rents provision, the landlord is typically entitled only to collect rent from the tenant as it becomes due under the lease each month for the remainder of the term.

January 13, 2014
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Part one of this article series explained a landlord’s obligations under commercial leases and the remedies available for a commercial tenant should a landlord default. Part two of this article will explain how and when to include offset provisions in a lease.

As mentioned above, landlords will strongly resist including an offset provision in the lease.. In many cases, their lenders will prohibit such provisions for most ordinary lease transactions. The landlord and its lender demand and anticipate an uninterrupted income stream of rental payments and may consider this a deal point in the lease negotiations. In most situations, only the most creditworthy tenant taking sizeable premises with leverage in the transaction should demand the right to offset (perhaps an anchor or near-anchor tenant in the retail context or a financially sound national tenant taking significant multiple floors in an office building).