Essential Insights on Commercial Leasing Agreements
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Presented by:
Sean P. Callan
T
h
e
L
e
t
t
e
r
o
f
I
n
t
e
n
t
•
Non-binding outline of fundamental
economic terms of lease
•
Varying degrees of detail for varying
business reasons
•
Important to us because they are the basis
for drafting the lease.
T
h
e
L
e
t
t
e
r
o
f
I
n
t
e
n
t
•
Rent, term, space, renewals …..
•
Some items not discussed – may be
intentional or unintentional
•
Thoughts ….. Not directions but things to
think about when drafting LOI
A
G
E
N
D
A
1.
Continuous Use/Operating Covenant
2.
Passthroughs
3.
Early Termination
4.
Use, Exclusives and Radius
5.
Assignment and Subletting
6.
Construction and Commencement
7.
Co-tenancy
C
o
n
t
i
n
u
o
u
s
U
s
e
/
O
p
e
r
a
t
i
n
g
C
o
v
e
n
a
n
t
How critical is it?
Retail
Office
Industrial
C
o
n
t
i
n
u
o
u
s
U
s
e
/
O
p
e
r
a
t
i
n
g
C
o
v
e
n
a
n
t
If not mentioned in the LOI, is the Tenant
required to continuously operate?
Landlord – of course – part of standard
lease form!!!
Tenant – of course not – its not in the LOI!!!
C
o
n
t
i
n
u
o
u
s
U
s
e
/
O
p
e
r
a
t
i
n
g
C
o
v
e
n
a
n
t
•
The “one day” compromise
•
Exceptions – legal holidays, remodeling,
closures due to casualty/condemnation
and inventory
•
Remedies
•
With covenant – standard lease remedies
•
With no covenant – must be negotiated –
recapture in shortest time possible
•
On recapture – tenant may demand unamortized
improvements and expenses
P
A
S
S
T
H
R
O
U
G
H
S
CAM, real estate taxes and insurance
and sometimes utilities
P
A
S
S
T
H
R
O
U
G
H
S
C
o
m
m
o
n
I
s
s
u
e
s
•
GLA/GLOA
•
Audit
•
Cap
–
Cumulative – add 5% every year
–
Non-cumulative – 5% over actual
•
Carve-outs
•
Anchors – cannot be included in denominator
•
Outlots
•
Base year/gross up
E
a
r
l
y
T
e
r
m
i
n
a
t
i
o
n
When the lease ends prior to natural
expiration of term …
Huge issue for Landlord
- changes pro-forma cash flow
Huge issue for Landlord lenders
- lenders limit early termination rights
E
a
r
l
y
T
e
r
m
i
n
a
t
i
o
n
Typical early termination scenarios
1.
Gross sales kickout (repay unamortized
TI)
2.
Negotiated buy-out
3.
No operating covenant
4.
Landlord breach of special covenant
1.
Exclusive
2.
Co-tenancy
U
S
E
-
P
e
r
m
i
t
t
e
d
L
a
n
d
l
o
r
d
•
Specific
•
Narrow – at least
restrict to national
operations
•
Trade name
•
No change without
consent
T
e
n
a
n
t
•
Broad
•
Any lawful use
•
No specific trade
name
•
Free to change use or
trade name
•
Free right to change
within corp. umbrella
U
S
E
–
E
x
c
l
u
s
i
v
e
s
L
a
n
d
l
o
r
d
C
o
n
c
e
r
n
s
1.
Narrowly defined – more focused than
permitted use
2.
Restricted to tenant’s core business
3.
Permit incidental sale of restricted items
4.
Geographically limited – to building or
center at most; bookstores/groceries
U
S
E
-
E
x
c
l
u
s
i
v
e
s
T
e
n
a
n
t
C
o
n
c
e
r
n
s
1.
Wants broadest definition possible,
including ancillary goods
2.
Largest geographic reach possible – 2
miles?
3.
Real remedy for violation
U
S
E
-
E
x
c
l
u
s
i
v
e
s
C
a
r
v
e
-
o
u
t
s
1.
Anchors
2.
Existing tenants – but may bind LL where
LL has consent rights over change in use
3.
Incidental uses
4.
Anticipated tenants – problematic, and
can be remedied with later waiver
U
S
E
–
E
x
c
l
u
s
i
v
e
s
T
e
r
m
i
n
a
t
i
o
n
o
f
R
i
g
h
t
Protection intended for tenant’s core
business; need for protection may go
away
•
Assignment/Sublease
•
Change in use
•
Failure to continuously operate
•
Default
U
S
E
–
E
x
c
l
u
s
i
v
e
s
R
e
m
e
d
i
e
s
Cure period
After some period of time, substitute rent – 5%
gross; ½ minimum rent
After further period - termination
U
S
E
–
E
x
c
l
u
s
i
v
e
s
L
a
n
d
l
o
r
d
C
o
n
c
e
r
n
s
–
R
e
m
e
d
i
e
s
•
Longest cure period possible
•
Longest alternative rent period possible
•
tie remedies to demonstrated harm; i.e.,
decrease in sales
•
No remedy if another tenant violates its
lease
•
Restraint of trade/antitrust – ask for tenant
indemnification
U
S
E
-
R
a
d
i
u
s
L
a
n
d
l
o
r
d
p
r
o
t
e
c
t
i
o
n
Flip side of exclusive
Prohibits tenant from competing with
landlord’s center
5 miles – negotiate down – have seen 10
miles
Remedy – add in Gross Sales
A
s
s
i
g
n
m
e
n
t
a
n
d
S
u
b
l
e
t
t
i
n
g
A
s
s
i
g
n
m
e
n
t
o
f
L
e
a
s
e
An assignment (i.e., the transfer of rights or
property) in which a lessee transfers the
entire unexpired remainder of the lease
term
or
All of the space for the rest of the term
A
s
s
i
g
n
m
e
n
t
a
n
d
S
u
b
l
e
t
t
i
n
g
S
u
b
l
e
a
s
e
Where a lessee transfers a part of its premises for
the whole remaining term, or the whole premises
for a part of the remaining term
or
Some of the space for the whole term, or all of the
space for less than term
A
s
s
i
g
n
m
e
n
t
a
n
d
S
u
b
l
e
t
t
i
n
g
•
Assignment – new tenant primarily liable
to LL; old tenant a guarantor
•
Sublease – LL has no relationship to
subtenant – original tenant wholly liable to
LL
•
Each are permitted unless lease says
otherwise
•
“not to be unreasonable withheld” vs. LL’s
“sole discretion”
A
s
s
i
g
n
m
e
n
t
a
n
d
S
u
b
l
e
t
t
i
n
g
C
o
m
m
o
n
s
c
e
n
a
r
i
o
s
•
In connection with sale or merger
–
Involves x number of stores
–
X
$
n
e
t
w
o
r
t
h
,
o
r
e
x
c
e
e
d
s
T
’
s
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w
o
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t
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a
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t
i
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f
l
e
a
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a
n
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o
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a
s
s
i
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n
m
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C
o
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s
t
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u
c
t
i
o
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a
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d
C
o
m
m
e
n
c
e
m
e
n
t
W
o
r
k
L
e
t
t
e
r
•
Allocates responsibility for build-out – should be as clear
as possible; should be reviewed/approved by
construction manager
–
P
a
d
d
e
l
i
v
e
r
y
–
o
u
t
l
o
t
s
–
L
a
n
d
l
o
r
d
p
r
o
v
i
d
e
s
b
u
i
l
d
a
b
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p
a
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a
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d
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t
i
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i
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y
s
t
u
b
s
t
o
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e
a
s
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l
i
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e
o
f
p
a
d
–
C
o
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d
d
a
r
k
s
h
e
l
l
–
L
a
n
d
l
o
r
d
p
r
o
v
i
d
e
s
s
t
r
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c
t
u
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e
,
u
t
i
l
i
t
y
s
t
u
b
s
a
n
d
p
a
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;
a
l
l
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t
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r
w
o
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k
i
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a
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’
s
i
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c
l
u
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i
n
g
s
t
r
o
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f
r
o
n
t
a
n
d
s
l
a
b
–
W
h
i
t
e
b
o
x
–
s
p
a
c
e
i
s
d
r
y
w
a
l
l
t
a
p
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d
,
s
a
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a
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d
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a
d
y
t
o
p
a
i
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t
;
t
e
n
a
n
t
f
i
n
i
s
h
–
T
u
r
n
k
e
y
–
L
a
n
d
l
o
r
d
d
o
e
s
a
l
l
w
o
r
k
C
o
n
s
t
r
u
c
t
i
o
n
a
n
d
C
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m
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c
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t
T
e
n
a
n
t
F
i
n
i
s
h
Installed in a good and workmanlike manner
In accordance with applicable law
Design should reflect tenant’s prototypical store
In accordance with plans and specs reviewed and approved by
Landlord
Design, plans and specs need to be finalized as soon as possible in the
build-out process – Critical point! Cost & timing implications
C
o
n
s
t
r
u
c
t
i
o
n
a
n
d
C
o
m
m
e
n
c
e
m
e
n
t
C
o
m
m
e
n
c
e
m
e
n
t
•
Tied to delivery – give tenant time to
complete finish
•
P
a
d
d
e
l
i
v
e
r
y
–
1
8
0
–
2
4
0
d
a
y
s
•
C
o
l
d
d
a
r
k
s
h
e
l
l
–
9
0
–
1
5
0
d
a
y
s
•
W
h
i
t
e
B
o
x
–
3
0
–
6
0
d
a
y
s
•
T
u
r
n
k
e
y
–
n
o
m
o
r
e
t
h
a
n
3
0
d
a
y
s
C
o
n
s
t
r
u
c
t
i
o
n
a
n
d
C
o
m
m
e
n
c
e
m
e
n
t
Commencement – When does the clock
start?
•
Landlord plan approval
•
Tenant failure to draw good plans
–
Do not comply with law
–
Not proto-typical store/office
–
Special needs
–
Do not comply with preliminary plans
•
Permits
–
Tenant should apply by date certain and diligently pursue
–
Same with liquor and business licenses
C
o
n
s
t
r
u
c
t
i
o
n
a
n
d
C
o
m
m
e
n
c
e
m
e
n
t
Commencement – late delivery
–
Potentially huge issue for tenant
–
Penalties
–
Termination if not delivered by outside date
–
Force majeure
–
Tenant delays
C
o
-
t
e
n
a
n
c
y
Tenant’s obligations under lease are conditioned
upon the continued presence and operation of
another entity at a certain location
•
R
e
t
a
i
l
–
o
t
h
e
r
t
e
n
a
n
t
s
i
n
s
h
o
p
p
i
n
g
c
e
n
t
e
r
–
Named tenants – reasonable replacements
–
Percentage of center – what about anchors and
premises?
–
Shadow anchors
•
O
f
f
i
c
e
/
i
n
d
u
s
t
r
i
a
l
–
t
i
e
d
t
o
p
r
e
s
e
n
c
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o
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c
l
i
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o
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c
u
s
t
o
m
e
r
C
o
-
t
e
n
a
n
c
y
R
e
m
e
d
i
e
s
f
o
r
v
i
o
l
a
t
i
o
n
–
Cure period
–
Alternative rent for some period of time
–
Termination
–
Repayment of out-of-pockets?
Explore the key aspects of commercial leasing agreements, including the non-binding nature of letters of intent, continuous use/operating covenants, passthroughs like CAM and taxes, and considerations for early termination. Gain valuable insights into critical clauses and considerations for drafting comprehensive lease agreements in the commercial real estate sector.
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Presentation Transcript
LEASING The Letter of Intent Presented by: Sean P. Callan
The Letter of Intent Non-binding outline of fundamental economic terms of lease Varying degrees of detail for varying business reasons Important to us because they are the basis for drafting the lease.
The Letter of Intent Rent, term, space, renewals .. Some items not discussed may be intentional or unintentional Thoughts .. Not directions but things to think about when drafting LOI
AGENDA 1. Continuous Use/Operating Covenant 2. Passthroughs 3. Early Termination 4. Use, Exclusives and Radius 5. Assignment and Subletting 6. Construction and Commencement 7. Co-tenancy
Continuous Use/Operating Covenant How critical is it? Retail Office Industrial
Continuous Use/Operating Covenant If not mentioned in the LOI, is the Tenant required to continuously operate? Landlord of course part of standard lease form!!! Tenant of course not its not in the LOI!!!
Continuous Use/Operating Covenant The one day compromise Exceptions legal holidays, remodeling, closures due to casualty/condemnation and inventory Remedies With covenant standard lease remedies With no covenant must be negotiated recapture in shortest time possible On recapture tenant may demand unamortized improvements and expenses
PASSTHROUGHS CAM, real estate taxes and insurance and sometimes utilities
PASSTHROUGHS Common Issues GLA/GLOA Audit Cap Cumulative add 5% every year Non-cumulative 5% over actual Carve-outs Anchors cannot be included in denominator Outlots Base year/gross up
Early Termination When the lease ends prior to natural expiration of term Huge issue for Landlord - changes pro-forma cash flow Huge issue for Landlord lenders - lenders limit early termination rights
Early Termination Typical early termination scenarios 1. Gross sales kickout (repay unamortized TI) 2. Negotiated buy-out 3. No operating covenant 4. Landlord breach of special covenant 1. Exclusive 2. Co-tenancy
USE - Permitted Landlord Specific Narrow at least restrict to national operations Trade name No change without consent Tenant Broad Any lawful use No specific trade name Free to change use or trade name Free right to change within corp. umbrella
USE Exclusives Landlord Concerns 1. Narrowly defined more focused than permitted use 2. Restricted to tenant s core business 3. Permit incidental sale of restricted items 4. Geographically limited to building or center at most; bookstores/groceries
USE - Exclusives Tenant Concerns 1. Wants broadest definition possible, including ancillary goods 2. Largest geographic reach possible 2 miles? 3. Real remedy for violation
USE - Exclusives Carve-outs 1. Anchors 2. Existing tenants but may bind LL where LL has consent rights over change in use 3. Incidental uses 4. Anticipated tenants problematic, and can be remedied with later waiver
USE Exclusives Termination of Right Protection intended for tenant s core business; need for protection may go away Assignment/Sublease Change in use Failure to continuously operate Default
USE Exclusives Remedies Cure period After some period of time, substitute rent 5% gross; minimum rent After further period - termination
USE Exclusives Landlord Concerns Remedies Longest cure period possible Longest alternative rent period possible tie remedies to demonstrated harm; i.e., decrease in sales No remedy if another tenant violates its lease Restraint of trade/antitrust ask for tenant indemnification
USE - Radius Landlord protection Flip side of exclusive Prohibits tenant from competing with landlord s center 5 miles negotiate down have seen 10 miles Remedy add in Gross Sales
Assignment and Subletting Assignment of Lease An assignment (i.e., the transfer of rights or property) in which a lessee transfers the entire unexpired remainder of the lease term or All of the space for the rest of the term
Assignment and Subletting Sublease Where a lessee transfers a part of its premises for the whole remaining term, or the whole premises for a part of the remaining term or Some of the space for the whole term, or all of the space for less than term
Assignment and Subletting Assignment new tenant primarily liable to LL; old tenant a guarantor Sublease LL has no relationship to subtenant original tenant wholly liable to LL Each are permitted unless lease says otherwise not to be unreasonable withheld vs. LL s sole discretion
Assignment and Subletting Common scenarios In connection with sale or merger Involves x number of stores X$ net worth, or exceeds T s net worth at time of lease and time of assignment
Construction and Commencement Work Letter Allocates responsibility for build-out should be as clear as possible; should be reviewed/approved by construction manager Pad delivery outlots Landlord provides buildable pad and utility stubs to lease line of pad Cold dark shell Landlord provides structure, utility stubs and pad; all other work is tenant s including strorefront and slab White box space is drywall taped, sanded and ready to paint; tenant finish Turnkey Landlord does all work
Construction and Commencement Tenant Finish Installed in a good and workmanlike manner In accordance with applicable law Design should reflect tenant s prototypical store In accordance with plans and specs reviewed and approved by Landlord Design, plans and specs need to be finalized as soon as possible in the build-out process Critical point! Cost & timing implications
Construction and Commencement Commencement Tied to delivery give tenant time to complete finish Pad delivery 180 240 days Cold dark shell 90 150 days White Box 30 60 days Turnkey no more than 30 days
Construction and Commencement Commencement When does the clock start? Landlord plan approval Tenant failure to draw good plans Do not comply with law Not proto-typical store/office Special needs Do not comply with preliminary plans Permits Tenant should apply by date certain and diligently pursue Same with liquor and business licenses
Construction and Commencement Commencement late delivery Potentially huge issue for tenant Penalties Termination if not delivered by outside date Force majeure Tenant delays
Co-tenancy Tenant s obligations under lease are conditioned upon the continued presence and operation of another entity at a certain location Retail other tenants in shopping center Named tenants reasonable replacements Percentage of center what about anchors and premises? Shadow anchors Office/industrial tied to presence of client or customer
Co-tenancy Remedies for violation Cure period Alternative rent for some period of time Termination Repayment of out-of-pockets?
