Commercial Property Herald

Commercial Rent Collections - Do your Due Diligence Up Front

In the first of a series of articles on collecting rents from commercial tenants, I thought I would start, "in the beginning."  This may sound a bit, post-facto or late for those landlords now in the position of considering action against late or "no longer paying tenants," but should be of value when considering lease re-negotiations and tenant workouts.

1. "In the beginning," get as much information as you can from the tenant.  Bank accounts, properties, other assets, social security number, family and business references, loans and credit reports.  Just as important and where I see many landlords fail is follow up and verify the information before the lease is signed.  Included with the factual information provided by the tenant should be a representation, under penalty of perjury, that the facts and information provided by the tenant is true and accurate.
2. Make sure that the lease requires the tenant to provide an updated financial information report on a regular basis along with a renewed representation under penalty of perjury.  On a short term lease, such as a 3 year lease, I would require it at the 1 1/2 year mark but the lease should leave it at the option of the landlord but no often then once a year.  Again follow up and verification is the key to the value of this process.
3. Finally, any tenant or lease workout or modification should include an update of information and if not already included in the lease, a lease provision requiring regular updates of financial information.

Not only will this information give the landlord its best opportunity to decide what course of action it may take in the event of a threatened tenant default, but will give the landlord more effective options to insure collection.  The representation by the tenant may also be of value in a potential tenant bankruptcy if the representations by the tenant were/are false.

 

What Happened to a Good LOI and Why are Brokers Drafting Lease Documents?

I suppose the fact that I am now doing more new leases and lease extensions than I have done in the last 3 ½ years is anecdotal evidence that the economy has at least stabilized or is improving.  That is, of course, a good thing.  I am still handling, predominantly rent collection cases and commercial evictions and my caseload is ever increasing, but there seems to be a bit of a transition going on with my law practice at the moment. I am not terribly convinced that we are quite out of the woods yet or that we are about to experience a meteoric improvement in the economy.  To the contrary, my indicators lead me to believe that the recession is leveling off at this point and with some good luck and frugal economic policies, we will see some gradual improvement over the next year or two while attaining some sense of normalization some time in mid to late 2013 through the 1^st half of 2014.

So much for trying to predict the future of our global and national economy. I wanted to address, however an interesting phenomenon, that I am experiencing with increased leasing activity; requests for new leases or lease extensions from brokers who:

1. Prepare the leases or lease amendments themselves and submit these legal documents to my clients; or
2. Do not obtain a signed LOI.

This may sound like a “Howard Rant,” and to some extent it is, but for the life of me, I cannot understand why a broker would risk the significant liability that comes with the drafting of legal documents. Over the short term it may seem like a good strategy to keep attorneys away from the deal, but over the long term, I have got to believe that it is a lose, lose strategy.

 OK, I get it.  As a broker, I understand the reluctance that many brokers feel about getting an attorney involved.

1. It causes delays, depending upon the attorneys workload and we all know that time kills all deals;
2. Some attorneys feel compelled to give the client as much understanding of the legal ramifications of the lease and the terms so that the client can make the best informed decisions.  This also takes additional time and as we all know, time kills all deals;
3. The attorney has to read all of the relevant documents to make sure that the attorney is giving the client the correct advice and is properly representing the client’s best interests.  This takes considerable focus and attention to detail, which takes time and as we all know……. Well, you get the idea;
4. Some times the attorney will meddle in the business terms and totally mess up the deal, turning the brokers ability to get the parties to agree on terms, into a total disagreeable mess.  Yes, this does happen sometimes; and
5. Sometimes, the broker is even thinking that they are doing the client a favor by saving the client legal fees by doing the legal work themselves. Yes brokers sometime do mean well.

And what ever happened to preparing and getting a comprehensive and thorough Letter of Intent, ("LOI"), signed by both parties?  It’s not just inexperienced brokers failing to obtain signed LOI’s, but experienced brokers who should know better.

Considering that this is a blog post and brevity is an important element of the blogosphere, I will try to keep my comments somewhat brief, but let me make myself abundantly clear:

• A broker should never, and I mean never, prepare or draft a lease, lease amendment or lease extension or any other legal document, for anyone!  In my opinion, this includes filling in blanks on a standard form lease.  Commercial leases are far too complicated to leave the analysis of the lease language up to a standard form that is intended to address most commercial lease issues but not likely to address the legal issues relevant to the particular property at issue or the wishes and desires of the particular parties to the lease.  This is an absolute recipe for disaster for the broker and the parties to the lease.  It is very short-term thinking.  Whatever benefit you may gain from avoiding the attorney, you will pay for in the end, ten fold.
• Always prepare an LOI or, at the very least, memorialize in writing the significant substantive deal points that the parties have agreed to.  This gives the attorney a guideline to follow when preparing the lease.  If the LOI says that base rent is $4.00 per square foot on a monthly basis, then the attorney has no business objecting to or even commenting on the base rent that was agreed to. A thorough LOI makes sure that the attorney cannot meddle in the business terms.
• Do not include in the LOI, terms that you do not understand.  If you need help with the language of the LOI, get help from a more experienced broker, an attorney or the client;
• A template or form LOI is a good place to start from, but not necessarily where you should end.  Pay attention to the language of the template and make sure that it addresses the particular transaction.  If you are dealing with a lease extension or amendment, make sure that the LOI says that it is a lease extension or amendment.  Let the client and the attorney figure out what type of document will best document the agreement of the parties.  

Finally, let me add that I prefer to receive an LOI signed by both the landlord and tenant.  That way, I know that my client has received and knows the substantive terms of the lease and I can feel more comfortable relying on the LOI.

 

Ground Lease Payments as a CAM Expense

I feel a little bit like I am lurking in my LinkedIn groups for topics of interest to write about.  Sorry if it seems so, but there are some good questions and ideas that come out of the groups that I like to comment on, both in the groups and on my blawg, in more detail.

Steve Hupman, CPM, started a discussion on: 

"Ground Lease payments as a CAM expense in a Class A office building."

I chimed in by stating:

"Seems to me that a ground lease payment is just another way to finance an interest in the real property.  From a technical perspective, it is not a "fee" interest but an interest, nevertheless.  From an historical perspective, and I am just speaking from anecdotal experience, owners don't include their financing costs in operating expenses, since they are generally not considered an expense of operating the property.  They would be considered an expense of ownership.  With that being said, I really have no problem with an owner trying to get a pure NNN return on their property so long as it is clear that all of the landlord's expenses of owning, managing and operating the property are to be included in the definition of operating expenses and the broader definition of "building expenses" or additional rent.  For my part, as a tenant, I would strongly resist any attempt by the landlord to include their cost of ownership."

Changed Conditions Clauses in Commercial Leases - Peter Morris

Peter Morris just sent to me a blog post, Advanced Lease Negotiations: Changed Conditions Clause, that he posted in his blog, Advance Beyond The Building.  In this post, he talks about inserting a clause that would allow or perhaps require the parties to the lease to change the terms depending upon the occurrence of pre-defined conditions, including but not limited to:

• Renovation or rehab
• Expansion of the property
• Addition of a major or anchor tenant
• A significant increase in the average sales of the property, indicating a stronger property
• Attainment of LEED or other sustainable certification (this is particularly useful in office buildings)
• Addition of infrastructure positively affecting the property, such as a major transit stop or road realignment
• Or a combination of any or all of these.

It is common for landlord's and tenants to try to hedge their bets by putting in some provisions that allow for changes to the terms based upon a change in circumstances, such as a CPI increase or option language, I have seen all kinds of language that is relatively easy to define as to CPI increases and options.

Now to be truthful, I consider Peter to be one of the more intelligent and articulate real estate professionals that I know.  However, the thought of having to try to define these pre-defined circumstances gives me the "willies". You are just asking for trouble here.  I am confident that no matter how hard you try to define your language, you are likely going to run into trouble and disagreement. 

 

Disclosure for Commission Rebate to Tenant

Wow, shame on me for not writing a post for over 1 1/2 months.  I really got very busy with legal work, representing clients and attending conferences, etc.  Shame on me and hopefully, this shameless dereliction of my duties wont happen in 2012.  I have stored up a lot of comments on issues relevant to Commercial Real Estate and have had some very interesting conversations on CRE Radio over the last month and a half.  More on that in a separate post.

I need to give credit to this post to Dan Smolensky of the Modal Group out of Chicago who started the discussion 6 months ago and asked the question:

"Lease Commission Rebate to Client.  Is anyone giving clients part of their lease commissions?"

There were many comments to the question including people who questioned and condemned the practice on a totally ethical basis or some that felt that the practice was fine so long as some disclosure was made and that it was ok to make disclosure later, rather than sooner.  From my perspective, depending upon the requirements of state or local law and your local broker rules, rebating part of your commission back to the tenant, should be fine, so long as full disclosure is made to all parties and I mean at the very least, the owner or landlord who is paying the commission and the listing broker.  

I also think that disclosure should be made, in writing, sonner, rather than later.  I am not sure that sooner means before execution of the LOI, but I would feel most comfortable, no later than at the time of execution of the LOI and certainly, not as late as execution of the lease.  Please keep in mind that disclosure is the key here and they type of disclosure intended to fully inform all of the appropriate parties of the substance of the transaction.  Simply inserting words into the LOI, simply for the purpose of avoiding potential liability is less important then the actual and clear communication of the intent to do so.

Howard Kline and Joel Hall Discuss and Analyze more commercial lease clauses

On September 28, 2011, Joel Hall joins me on CRE Radio for a little “point/counterpoint” discussion with host, Howard Kline as they delve into the relative positions of the landlord and tenant on specific lease clauses that may include, time permitting:

• Exclusives & Exclusive Waiver Agreements
• SNDA’s
• Surrender/Holdover
• Force Majeur

Click on the CRE Radio link above that is underlined to be taken to the CRE Radio site to listen to the show live.

We are not going do a light brush-over of each of these common provisions but we plan on having an in depth analysis, from both the landlord and tenant perspectives. We want the listeners to walk away from this show with a clear understanding of what these provisions do and don’t do as well as their, often, not too apparent significance.

Joel, a former real estate counsel for the Gap and often transactional counsel handling The Apple Stores, will take a, decidedly, pro tenant position while Howard will represent the perspective of the landlord.  Hopefully they will avoid calling each other names during the show, but you never know.

This show is the 3rd in a series of radio shows presented by CRE Radio and Howard Kline in which Howard and his guests give detailed analyses of  specific commercial lease clauses.  Hopefully, you will learn and be entertained while Howard and Joel duke it out.

After the show airs live, you can listen to the podcast by clicking on CRE Radio and listen to the show online or download the MP3 or iTunes.

Waiver of Jury Trial in a Commercial Lease

Every commercial landlord wants a waiver of jury trial provision in their lease and nearly every commercial lease in California contains such a provision.  Why do landlord's feel that this provision is so important?

The answer is relatively simple.  Most jurors have been tenants albeit, residential tenants at some point in their lives and few have been in the position of a landlord.  Far more jurors will be able to relate to and sympathize with the tenant's position.  Obviously, the landlords fear that a jury will stray from the strict dictates of the law and come to a verdict based more on emotion than the law. As a landlord attorney, I almost never want to be in front of a jury and will do what ever I can to avoid the situation.  On the other hand, when representing a tenant, I almost always want, or at the very least threaten to have the matter heard in front of  a jury.

The real question posed to me by Joel Hall in a Linkedin discussion is; "to what extent is the Waiver of Jury Trial provision often seen in leases, enforceable."

As a California attorney, I can answer that question as to California leases; NO!  A commercial tenant can waive its right to a jury trial, but not until the filing of a suit by one of the parties to the lease.  It is my understanding that the California courts will not enforce the Waiver of a Jury Trial provision in a commercial lease, based upon constitutional grounds.

So if a jury trial is so potentially dangerous to a landlord, what, if anything can a landlord put in a lease to avoid a jury trial?  That is a subject of another blog post and an article I wrote nearly 15 years and which was published in the National Law Journal and as part of the ICSC Annual Legal Review.  Now if I can only find that article.

By the way, although not an expert in residential leasing, I assume that a jury trial cannot be waived in a residential lease either.

Cooperation between Broker & Attorney when Negotiating Commercial Leases

I have been participating in an ongoing discussion having to do with fixed fee billings as part of the Corporate Real Estate Group of Linkedin.  I thought I would share in this post a portion of that discussion relating to cooperation between the client, attorney and broker when negotiating a commercial lease.

via ocrealestate.blogs.com

How Clear and Unambiguous are Your CAM Charges or Pass Throughs

I just responded to a post in the Commercial Law Insider that related to a post by Ann Lisa Braun, ruminating on the clarity of CAM charges provisions and Operating Expense Pass Throughs in commercial leases.  My comment is as follows:

Lisa: My customary response to any CAM provision, when I am representing a tenant is a 3 page canned provision more precisely defining what is and is not included in expenses that can be passed through. It is not unusual that the language that I add is the most hotly contested language for the lease. Whether representing a landlord or tenant in a litigation matter, the CAM charges are the most uncertain of all of the provisions, usually.

From the landlord's perspective, they will want to have their CAM provision written as broad as possible to, as Lisa suggests, pass the kitchen sink through to the tenant.  As a tenant, if you do not take care of the lease language up front and pay attention during the lease, you may find that you are sitting right in that sink.  Be smart and be diligent.  If you are a tenant and you are not sure if you are doing things right, or even if you think you are doing things right, you might want to take a look at the NRTA (National Retail Tenant's Association).  This is an association of tenants educating themselves on CAM charges and Building Operating Expenses and diligently reducing their costs as a result.  Tell them that Howie sent you.

Lease Language to Make the Tenant Comfortable That The Landlord will Pay the TI Allowance

 

I recently received an email from a listener of CRE Radio that wanted to know what kind of language I would put into an LOI (Letter of Intent) and a Lease to make sure that the landlord actually complies with the landlord's agreement to give the tenant TI (Tenant Improvement Allowance). 

I suppose I should have started out my answer by stating that the tenant should make sure that the requirement to provide the TI allowance is actually put in the lease, but I worked upon the assumption that such language was included.  The following is my response:

As you can imagine, I have to be very careful about giving specific legal advice to people over the internet, if for no other reason than for liability.  I will however, try to answer your question in a general way and I hope that it is helpful.

From the tenant's perspective and for the purpose of the TI allowance, in my experience, it is uncommon to include much detail in an LOI regarding a TI allowance, other than an amount, usually stated in terms of an amount per square foot.

The actual terms of the lease is where the parties can get into the real nitty gritty of the negotiations.  The bottom line is that the tenant can ask for anything to be put in the lease that might give them greater assurance of payment of the TI allowance.  Of course, the landlord may or may not agree to what is requested and that is where the negotiation comes in.  So, yes, you can ask to include language that would specifically provide that the lease can be terminated if the landlord does not timely pay the costs of the TI's to the tenant.  Then again, I have never seen a landlord agree to these terms.  With that being said, even if a such a specific lease termination clause is not included in the lease, the tenant may still be able to terminate the lease if the failure to pay the TI allowance is considered a material breach of the contract by the landlord.  It depends upon the language of the lease and the facts and circumstances of the case.

When representing a tenant and assuming that the tenant is in a substantial bargaining position, I would add all kinds of provisions that would give my client as many options to terminate the lease as well as the tenant's lease obligations.  These provisions might include a % of vacancy in the center, anchor's vacating, etc. I might also request a "go dark" provision or rent reduction rather than termination.  The variations are endless.

Let me add, that the amount of lease changes and additions that I may request are typically tempered by the tenant that I represent, including the financial abilities of the tenant and the size of the space.  The cost of representing a single, 1,500 square foot tenant may not warrant 20-30 hours worth of work and toe-to-toe negotiations, not may the tenant wish it.