A Tenant’s List of Silent Leasing Issues
Jotham Sederstrom Feb. 21, 2012, 1 p.m.
Silence is not always golden. In commercial leasing the “standard” form is anything but, and the typical verbiage we see (leaving aside issues of poor grammar and punctuation) is far from transparent. In fact, to do the right thing by our clients, savvy leasing professionals must also bring a laser-like focus on those “silent” lease issues—the ones lurking beneath the superficial form language—that are traps for the unwary and likely to have a substantial economic impact on landlord and tenant above and beyond a simple base rent calculation.
Yes, it’s hard to believe that in that 110-page megillah of a lease you’ve been handed there’s anything “unsaid,” yet that’s been the subject of a 10-year NYS Bar Association project on “Silent Lease” issues. Our Silent Lease Issues Subcommittee (when we meet there’s no talking … ok … collective groan) produced two documents which I commend to your attention: “Tenant’s Checklist of Silent Lease Issues” and, yes, you guessed it, “Landlord’s Checklist of Silent Lease Issues.” Go to http://www.real-estate-law.com or Google “silent lease issues checklist” to see them.
For this first go-round, I’ve cherry-picked a bunch of topics from the tenant’s checklist, as there is so much to mine here that we will revisit it in the future for more nuggets. (No more hackneyed metaphors, promise.)
Rentable square feet. The ultimate “silent” lease issue, it’s almost never mentioned in the lease as no landlord wants to be sued over just how the space was measured (carpetable, rentable, usable plus loss factor) or misrepresenting the square footage. Of course, there’s exhibit A over there: the befuddled renewal tenant who, thanks to the now standard post-sale space remeasurement, has 15 percent more rentable square feet to pay for. The item is a hot-button issue, for not only is it the basis for rent calculation, but also for the computation of tenant’s pro rata share of taxes, operating expenses and the like.
Possession. Effect of delays: outside (“drop dead”) date for completion of work/delivery of possession. Note here the impact of the Kronish Lieb case (discussed a few columns ago), putting tenant in real financial jeopardy for holding over at present space when an incoming tenant has right of occupancy.
Escalation Rent. Confirm proper base year (relative to start date). Is it a full year? With “leasable” not “leased” space as denominator for pro rata share? Are operating expenses limited to landlord’s “actual” expenditures? Typical carveouts: capital items (per GAPP), amounts reimbursed by other tenants, items not fully related to operation of the building, e.g., home office management, executives’ salaries and brokerage commissions. (Space restrictions here, so send me an e-mail and I’ll send back a comprehensive list.) Request audit rights and use of contingent-fee auditors and add one-year deadline for billing (you don’t want a major invoice for five years of overlooked billing). Landlord to provide copies of tax bills and in definition of “taxes,” exclude special assessments, penalties, interest.
Electricity. If tenant is submetered, not only should tenant pay at same service classification as landlord, but at the same tariff (bulk rate).
Alterations. Tenant to have right to make non-structural alterations, decorations or alterations costing less than ($insert) without landlord’s prior consent (that $ to be escalated by x% per annum over term—keep dollars constant). Delete obligation to remove alterations at end of term or, as a compromise, tenant to remove any specialized or custom alterations. Pre-approve contractors and add cap (“reasonable” limits) on reimbursement to landlord of professional fees (architects, engineers); no charge in connection with initial tenant buildout. Pin down landlord’s cooperation in connection with Building Department approvals and license applications (i.e., liquor, restaurant outdoor seating) without charge. Lastly, landlord to cure violations and tenant to get rent set-off re delays in completion of tenant work occasioned by landlord’s failure to do so.
Jeffrey A. Margolis, Esq., is founding principal of the Margolis Law Firm in New York City, where he specializes in “dirt law” buying, selling and leasing. He writes monthly for The Commercial Observer on legal issues.