Friday, October 23, 2009

Intro to Lease Causes: For the Landlord and the Tenant

In my last two posts, I discussed commercial lease clauses that should be included from the perspective of a landlord or that of a tenant. This week I want to discuss lease clauses that are of mutual benefit to both the landlord and tenant. I’ll also answer last week’s puzzler question.

First, to lease issues. When a landlord is going to be providing extensive leasehold improvements, in addition to a clear mutual understanding of the scope and cost responsibility for the improvements, there should be a clear change-order procedure. Almost every construction job brings with it the attendant “while you’re at it” changes, as well as changes that only become apparent once actual construction is underway.

Without clear understanding of how to document those changes and the costs, both parties are asking for post-execution confusion and disagreement. A clear procedure for documenting changes should be included as part of the lease documentation.

In any lease having a term of five or more years, it is likely that sometime during the term of the lease the tenant is going to want to make decorating changes.
So long as these changes are non-structural and not visible from outside the premises, the landlord should be willing to let the tenant make them without the landlord’s consent so long as the tenant understands that, at the end of the term, the landlord has the right to require the tenant to restore the premises to their original condition, ordinary wear and tear excluded.

Any other type of change or alteration should be subject to the landlord’s prior consent, but that consent should be subject to a “not to be unreasonably withheld, conditioned or delayed’ standard.

If the premises are served by an HVAC system located within the premises, the lease should be clear on the maintenance responsibility. It is fair and reasonable for a landlord to require the tenant to purchase a service contract with a contractor acceptable to the landlord and to be responsible for minor, ordinary operating repairs but the landlord should bear the responsibility for replacing a unit if it fails during the term and for making major repairs.

Insurance requirements are important to both the landlord and tenant. In addition to the obvious need for both parties to carry adequate liability insurance, landlords have an interest in requiring their tenants to carry property insurance equal to 100% of their property in the premises.

Otherwise, the landlord and tenant could discover that, after a fire in the premises (regardless of who was at fault), the tenant no longer has sufficient financial ability to re-fixture the property, purchase inventory and the like.

One subject area that is often misunderstood is the distinction between a tenant’s “waiver of claims” and a tenant’s obligation to provide a “waiver of subrogration.” A waiver of subrogation is not a waiver of claims.

A “waiver of claims” is a lease provision in which one party to the lease waives all claims it may have against the other party for losses or damages suffered by the tenant (e.g., interruption of business due to a fire). So long as the waiving party insures against the claims being waived (e.g., property damage or business interruption) in the event of a loss, it will have recourse to its own insurance. If a party affirmatively chooses not to purchase adequate insurance, the other party should not have to bear the consequences.

A “waiver of subrogation” on the other hand requires the tenant’s insurer to agree that if, the landlord causes loss or damage to the tenant or its property or business and the tenant’s insurer compensates the tenant for such loss or damage, the tenant’s insurer will not take advantage of its legal right to be subrogated to the claims of its insured and pursue recoupment against the landlord.

One subject that causes landlords and tenants alike much angst are indemnity provisions. Both parties often mistakenly think that, absent an indemnity in their favor, they risk waiving recourse against the proposed indemnitor.

All an indemnity provides is that the indemnitor will step in upon notice from the indemnitee to defend a claim or satisfy a loss. If the indemnitor fails to act (and a clever attorney can frequently find a reason why the indemnity is inapplicable), the indemnitee typically still has the same recourse against the proposed indemnitor except that to realize upon that recourse it may have to bring a lawsuit.

Admittedly, indemnity clauses frequently go beyond the two parties to the lease and include their respective principals, partners, shareholders, directors, etc., but in most lease situations those “tag-alongs” are generally not at risk anyway.

It is always a benefit to both parties to a lease to have unambiguous provisions. Lease transactions generally result in long-term relationships and it is in everyone’s interest that the parties get along and not have needless disputes because respective rights and obligations are not clearly articulated.

Finally, as promised, the answer to last week’s puzzler, namely from whence the term “saved by the bell”? During the plague in medieval Europe, there was a rush to bury people. The problem was that some people weren’t dead; they were only in comas. Sometimes those people awoke from the coma during the funeral – or worse, after burial.

Worried that perhaps someone who appeared to be dead wasn’t, one solution was to tie one end of a string onto the "dead" person's hand and the other to a bell; if the person revived enough to pull the string and ring the bell, s/he would be unburied and would have been “saved by the bell. If a buried person pulled the string that rang the bell, s/he was a “dead ringer,” and, in some graveyards, a person was assigned to sit by the grave to listen for the bell – hence the term “graveyard shift.”

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