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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).

January 5, 2014
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Part one of this article series explains 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.

A commercial tenant’s right to remedy a default by the landlord by performing the required work itself and then offsetting the costs of such work against future rental payments is likely the most immediate and effective remedy a tenant could ever have. However, a tenant needs to closely review the lease agreement and know the local applicable law before ever deciding to take such an aggressive measure. Most leases (and the laws of most states, if the lease is silent) essentially prohibit the right of offset, so the sophisticated and creditworthy tenant will need to negotiate for such a right before the lease is finalized.

In Part I of this blog post, we discussed the varied interests of the landlord and the tenant's lender in the tenant’s personal property located at the premises in the context of a commercial lease.  Part II below will discuss suggested compromise solutions and a typical landlord waiver.