Archive for March, 2012

Ten Lease Provisions That Get No Respect
By Jerald M. Goodman, Sharon D. Brown, and Stephen J. Messinger
When negotiating commercial leases, lawyers typically focus
on achieving the business objectives and protecting the legal rights
and remedies of their clients. Often, however, without much thought, at-
torneys tack on a litany of boilerplate provisions. These provisions, which are
usually relegated to the end of the lease or are sprinkled casually throughout the
more “important” lease clauses, are frequently overlooked while the lawyers
dwell on the weightier issues. Nevertheless, boilerplate provisions address
important legal underpinnings and, if improperly drafted, can have significant
legal and financial consequences. A heightened degree of care and respect
toward crafting these provisions can help the parties avoid surprises.
1. Force Majeure
Occurrences defined as force majeure events excuse parties for nonperfor-
mance of their obligations under the lease. Generally, the party with the
most performance obligations will want an expansive definition of force
majeure events. In many cases, the determination of whether an event of de-
fault has occurred can turn on whether the cause for nonperformance is within
the definition of a force majeure event as set forth in the lease. The following
is a typical force majeure provision. The time for the performance of any
act required to be done by either party shall be extended by a period
equal to any delay caused by or resulting from an act of God, war,
terrorism, civil commotion, fire, casualty, labor difficulties, short-
ages of labor or materials or equipment, governmental regulation, a
restraint of law (e.g., injunctions, court or administrative orders or
a legal moratorium imposed by a governmental authority), act or
default of the other party, or other causes beyond the reasonable control of
the party seeking the extension of time (which shall not, however, include the
availability of funds), whether that time be designated by a fixed date, a fixed
time, or otherwise.  Depending on the relative bargaining
power of the parties and the allocation of performance obligations under the lease,
applicability of the force majeure provision may be expressly limited to one of the
parties. Adding a notice requirement to a force majeure provision is another means
of limiting the applicability of the provision. Because the force majeure provision
is effective to excuse a party from liability for nonperformance, parties often seek to
expand the applicability of the provision. The following are some specific examples
of force majeure issues.

Government Prohibition
A New York court has held that a temporary restraining order against a landlord
was a “government prohibition” described in a lease force majeure provision. Reade
v. Stoneybrook Realty, LLC, 882 N.Y.s.2d 8 (App. Div. 2009).

Acts of God
After Hurricane Katrina struck in 2005, lease parties litigated over the extent to
which a party could be excused from performance because of force ma-
jeure. The Louisiana Court of Appeals rejected one tenant’s argument that
the post-hurricane depressed business climate was a continuing force ma-
jeure event under the lease. The court noted that the tenant had presented no
evidence of any physical damage to the leased premises. The tenant thus
was obligated to continue paying rent for the remainder of its five-year lease
term following Hurricane Katrina. The tenant was excused, however, from
paying rent for the two months immediately following the hurricane because
the court found that “the building was inaccessible due to the aftereffects of the
storm.” Meadowcrest Prcf’! Bldg. P’ship v. Toursarkissian, 1 So. 3d 555, 556 (La. Ct.
App. 2008). The court therefore narrowly interpreted the force majeure provi-
sion to exclude the economic effects of the hurricane: “To rule otherwise
would be to make the enforceability of leases dependent on the vagaries of
the marketplace, and this we decline to do.”Id.

2. Limiting Liability
Exculpatory Provisions Landlords typically require that their
liability for claims under the lease be limited by exculpatory provisions. Ju-
dicial treatment of exculpatory clauses varies from state to state. For example,
in North Carolina, courts will generally uphold exculpatory clauses unless
there is evidence that the provision is actually an unconscionable penalty for
enforcing the terms of the lease, that there were formation irregularities in
the lease, or that there is inequality of bargaining power between the parties.
Blaylock Grading Co. v. Smith, 658 S.E.2d 680,682-83 (N.C. Ct. App. 2008) (up-
holding provision in surveying contract limiting the surveyor’s damages to
$50,000). In Pennsylvania, however, although the relative sophistication of the
parties is similarly a factor, the courts have held that an exculpatory clause
is valid and enforceable if the clause does not contravene public policy; the
contract relates entirely to the parties’ own private affairs; is not a contract of
adhesion; and the intention of the parties is expressed with particularity and
demonstrates clear and unambiguous intent to release a party from liability.
Princeton Sportswear Corp. v. H & M Assacs., 507 A.2d 339, 341 (Pa. 1986).
Some courts have held that an exculpatory clause in a commercial lease
“must be construed strictly against the party seeking its protection.” Kaplan
v. Bankers Sec. Corp., 490 A.2d 932, 934 (Pa. Super. Ct. 1985). See also Ultimate
Computer Servs., Inc. v. Biltmore Realty Co., 443 A.2d 723, 726 (N.J. Super. Ct.
App. Div. 1982) (general exclusion of liability for landlord’s negligence did not
keep landlord from being responsible for damage to computer equipment
caused by defective roof). Nebraska has applied general contract law to excul-
patory clauses, considering whether the provision was clear and unambiguous;
whether there was any disparity in bargaining power between the parties;
and whether the provision contravened public policy. Keenan Packaging Sup-
ply, Inc. v. McDermott, 700 N.W.2d 645, 653-54 (Neb. Ct. App. 2005).
The following is a sample exculpatory provision: Landlord’s liability under this Lease
shall be limited to its interest in the Demised Premises, and neither
Landlord nor any member or partner in Landlord nor any member,
partner in any such member or partner nor any other person having any
direct or indirect interest in Landlord, shall have any personal liability
with respect to any of the provisions of this Lease.
Although most tenants will accept such a limitation, many will add language
that precludes limitation of liability in the event of intentional misconduct of
the landlord.

3. Notices
A vague or unclear notice provision can prevent the parties from efficiently en-
forcing critical rights and remedies under the lease. Notice provisions should
specifically identify the acceptable methods of delivery and clearly specify
when notices will be deemed to be given. Hand Delivery Method ~
If hand delivery is an acceptable means of providing notice, the parties should
consider whether that method is likely to be effective under their particular cir-
cumstances, taking account of the size of the entities involved and other practical
considerations. In addition, the hand delivery method must expressly require an
acknowledging signature, receipt, or other documentation to evidence the actual
delivery. Facsimile and E-Mail: Delivery Methods: The parties should also consider whether
to allow notice given by the more convenient methods of facsimile and e-mail,
which will depend in part on the term of the lease since facsimile numbers and
e-mail addresses will likely change over time. Accordingly, the notice provision
must require the parties to update their contact information as needed. Most
practitioners still require that faxed and e-mailed notices be effective only in ac-
companied by a hard copy.

4. Integration Provisions
An integration provision states that all prior oral agreements and representa-
tions are integrated into the final signed lease. In general, integration provisions
are interpreted by the common law plain meaning rule: “When a contract contains
an integration clause, extrinsic evidence may not be admitted to prove different or
additional terms in the contract, although such evidence may be admitted to inter-
pret ambiguous terms of an integrated contract.” United Artists Theatre Circuit,
Inc. v. Sun Plaza Enter. Corp., 352 F. Supp. 2d 342 (E.DN.Y. 2005) (citing Proteus Books
Ltd. v. Cherry Lane Music Co., 873 F.2d 502, 509-10 (2d Cir. 1989)). The parties should
consider, however, how this provision applies to lease exhibits. Typically, the parties will provide that
the exhibits are incorporated into the integrated document even when the exhibits
are attached or finalized after full execution of the lease. Although it is not unusu-
al for the exhibits to be included as part of integrated lease provisions, the parties
may overlook the effect of terms contained in the exhibits. In one recent
case, a dispute regarding the meaning of the word “proposed” contained
in the exhibits to a lease allowed the tenant to introduce extrinsic evidence
to interpret the lease. Chesterfield Exch., LLC v. Sportsman’s Warehouse, Inc. 572
F. Supp. 2d 856, 867 (ED. Mich. 2008). The tenant argued that in its lease the
landlord represented that Sam’s Club was the “proposed” anchor tenant for
the shopping center because a plan of the shopping center attached as an ex-
hibit to the lease depicted Sam’s Club as a “proposed” tenant. The tenant
argued that in this context “proposed” meant “planned” or “intended,” and
that the tenant entered into the lease based primarily on the presence of
Sam’s Club as the anchor tenant. The landlord argued that the word “pro-
posed” merely meant “possible” or “likely” The court disagreed, holding
that the extrinsic evidence demonstrated that the lease meant “intended”
because “[ajfter all, it was the participation of Sam’s Club that rekindled the
lease negotiations.” Id. at 867.
5. Surrender
Lease surrender provisions describe the physical condition of the premises
required at the time of surrender by the tenant. Lease parties frequently litigate
over the condition required by surrender provisions.
Common Law Surrender Requirements
If the lease is silent, the standard at surrender is generally that the “lessee is
under a duty at common law to return the premises in substantially the same
condition as when they were received, reasonable wear and tear excepted.”
Statler Arms, Inc. v. APCOA, Inc., 700 N.E.2d 415, 428 (Ct. c.P. Cuyahoga Cty.
Interaction with Maintenance Provisions
When surrender provisions are litigated, a court will likely interpret the sur-
render provision in the context of the lease as a whole, especially in conjunc-
tion with the maintenance provisions contained in the lease. Depending on
the scope of the tenant’s maintenance obligations during the term of the lease,
the tenant may be liable for repairs or replacements at surrender that are not
apparent from a reading of the surrender provision alone. Statler Arms, 700
N.E.2d at 423-25,429. See also SLWj UTAH, t.c. v. Griffiths, 967 P.2d 534, 536
(Utah Ct. App. 1998) (surrender clause read with the maintenance clause to
require a new roof). For example, although a lease was silent about surren-
der, because the tenant was obligated to maintain and repair structural elements
of the leased premises during the term of the lease, the court held that the
tenant was liable to replace the roof on surrender of the premises. Statler Arms,
700 N.E.2d at 428. Addressing Special Personal Property:  In drafting a lease, counsel should
be sure to address the disposition of tenant’s specific personal property or
fixtures on lease surrender. Satellite dishes and other telecommunications
equipment installed by a tenant at its sole expense can become problematic
on surrender. In many cases, the landlord will require such equipment to be
removed and for the tenant to repair any damage caused by the removal.
6. Waiver Provisions
Waiver provisions address acts or omissions that have the potential to
function as a renouncement of rights and remedies otherwise available
under the lease. As one New York court explained: “A waiver is the voluntary
abandonment or relinquishment of a known right. It is essentially a matter of
intent which must be proved.” Jifpaul Garage Corp. v. Presbyterian Hoep., 61
N.Y.2d 442, 446 (N.Y. 1984). By including waiver provisions in a lease, the parties expressly agree that specific acts
and omissions that could constitute a waiver will not be deemed a waiver.
In some leases, waiver provisions also can address conduct of parties other
than landlord and tenant. For example, a waiver provision that is applicable
to a defined category of “Landlord’s Parties,” which expressly includes
“independent contractors,” will likely be held by its plain meaning to apply to
landlord’s construction subcontractors. H & M Hennes & Mauritz LP v. Skanska
USA Bldg., Inc., 617 F. Supp. 2d 152, 159 (EDN.Y. 2008).
Another basic function of waiver provisions is to “give a contracting
party some assurance that its failure to require the other party’s strict adher-
Compliance with law provisions can shift liability to one party
for the costs of making the leased premises compliant with
govern ment-ordered alterations or repairs. Will not re-
sult in a complete and unintended loss of its contract rights if it later decides
that strict performance is desirable.” Rehoboth Mall Ltd. P’ship v. NPC mn.
Inc., 953 A.2d 702, 704 (Del. 2008) (quot-ing Viking Pump, Inc. v. Liberty Mut.
Ins. Co., No. Civ.A. 1465-VCS, 2007 WL 2752912, slip op. at 27 (Del. Ch. Apr. 13,
2007)). For example, when a restaurant tenant was entitled to seven successive
five-year renewal terms under a lease, the landlord could not prevent the ten-
ant from exercising its second five-year renewal term based on the tenant’s
defaults during the original term, when the landlord failed to enforce
its remedies during the original lease term. Rehoboth Mall, 953 A.2d at 704-05.
In Alaska, the landlord of a supermarket property was similarly precluded
from enforcing the use provision of the lease six years after the tenant’s
initial violation thereof. Carr-Gottstein Foods Co. v. Wasilla, LLC, 182 P.3d 1131,
1140 (Alaska 2008). In that instance, the tenant relocated an affiliate-owned
liquor store from a satellite location to a portion of the leased premises, and the
landlord not only knew about the move but helped to facilitate it. The Supreme
Court of Alaska held that the waiver clause preserved landlord’s right to
object to tenant’s future violations of the use provision of the lease but that
the landlord had effectively waived its right to object to the use of the premises
for the sale of liquor.
7. Compliance with Laws
Compliance with law provisions can shift liability to one party for the
costs of making the leased premises compliant with government-ordered
alterations or repairs. In addition, these provisions typically make a tenant’s
criminal or tortious use of the property an event of default.
In general, except when the party that has assumed responsibility for
legal compliance has much less bargaining power than the other party, in
a commercial lease a court is likely to enforce a provision shifting the risk and
expense of government-ordered alterations and repairs. Fresh Cut, Inc. v. Fazli,
650 N.E.2d 1126, 1130-32 (Ind. 1995). A common example of a government-or-
dered repair is asbestos abatement. See, e.g., Brown v. Green, 884 P.2d 55 (Cal.
1994) (lessees assumed responsibility for complying with asbestos abatement
order). A blanket requirement in the lease, however, stating that the tenant is
responsible for all government-ordered repairs and alterations may not be
effective to shield landlord from all liability. The California Supreme Court
has noted that when the parties seek to allocate to the tenant the burden
of legal compliance, “the legal and practical scope of that duty may well
be less, especially where a short-term commercial lease is at issue and the cost
of compliance is more than a small fraction of the aggregate rent reserved over
the life of the lease.” rd. at 57. Similarly, if the nature of the government-ordered
repair is not expressly addressed and, from the circumstances, it seems un-
likely to have been anticipated by the parties, the court is unlikely to hold that
the tenant is liable for it. For example, in California where a tenant paid $650
in monthly rent for a three-year term to operate a cabaret and bar on the leased
premises, despite a lease provision shifting to tenant all liability for compli-
ance with laws, the tenant was not held responsible for a city-mandated earth-
quake hazard reduction reconstruc- tion that would cost $34,000. Hadian v.
Schwartz, 884 P.2d 46 (Cal. 1994). Counsel must take care to define
precisely the respective obligations of the parties. The Indiana Supreme Court
has held that a compliance with laws provision is in the nature of an indem-
nity, which is “strictly construed and the intent to indemnify must be stated
in clear and unequivocal terms.” Fresh Cut, 650 N.E.2d at 1132 (citing Wilson
Leasing Co. v. Gadberry, 437 N.E.2d 500,501 (Ind. Ct. App. 1982)). In that case,
a fire destroyed a warehouse, and the court deemed ambiguous an allocation
of risk for maintaining a fire sprinkler system when the lease required the
tenant to maintain “electrical systems, heating and air conditioning systems,
and structural frame of the building” but also impliedly required the land-
lord to maintain the roof, exterior walls, and foundation. The court therefore
vacated the lower court decision granting summary judgment and remanded
the case to the trial court. A tenant may seek to curb its liabil-
ity by limiting its compliance with law requirements to orders that are related
to the tenant’s particular use. Brown, 884 P.2d at 59. Tenants should also
seek to have the landlord represent and warrant that the leased premises
do not violate applicable building codes, regulations, or ordinances in ef-
fect at the commencement of the lease term. See Hadian, 884 P.2d at 48.
8. Estoppel Certificates/Status Statements
Over the term of a lease, estoppel certificates will be required if the
landlord seeks to sell or refinance the property. Similarly, large commercial
tenants also may require estoppel certificates in the event of a transfer
or refinance. The party that seeks the estoppel certificates will want
assurances that the other party will promptly execute them, whereas the
other party will want to ensure that the form of certificate and turnaround
period are not onerous.

In view of the potential for significant monetary damages in the event a -party
is unable to complete a contemplated transfer or financing because it is unable
to produce the necessary estoppel certificate, the lease provisions requiring
that the other party furnish this detailed estoppel certificate are of paramount
importance. A cautionary tale from New York is illustrative. When a commercial
tenant attempted to refinance its leasehold mortgage, it requested an estoppel
certificate from the landlord, which the tenant was entitled to receive within
20 days. The landlord refused to issue the certificate on the grounds that the
certificate form was more extensive than required by the lease and that the tenant
did not send its request in accordance with the lease notice provision. The court
rejected the landlord’s arguments, stating that landlord” could have marked
up the certificate or supplied its own form of certification …. The fact that
plaintiff may have requested a certification of items not specifically identified in
the lease did not relieve defendant of its absolute obligation to issue an estoppel
certificate within 20 days of the request.” Juleah Co., L.P. v. Greenpoint-Coldman Corp.,
853 N.y.s.2d 313, 315 (App. Div.2008). As a result, the court held the landlord
liable for more than $450,000 in damages, which was the amount that tenant
would have saved had the contemplated refinancing been consummated.
Another consideration when drafting estoppel provisions is to avoid the po-
tential use of an estoppel certificate by one of the parties beyond the intended
purpose. In one New York case, a tenant inadvertently continued to pay rent on
a portion of the leased premises that it had actually vacated. The landlord
had actual knowledge of the tenant’s mistake and kept silent. When the ten-
ant refinanced, the landlord executed an estoppel certificate. The landlord then
attempted to use the estoppel certificate to prevent the tenant from recovering
its rent overpayments. The court applied equitable principles to permit the
tenant to recover, basing its decision on the fact that landlord had actual knowl-
edge of the mistake. NHS Nat’l Health Servs., Inc. v. Kaufman, 673 N’y’S.2d 129
(App. Div. 1998).

9. Holdover
When a tenant fails to vacate the leased premises at the end of the lease term
and the landlord continues to accept rental payments, the common law
presumption is that the parties have agreed to extend the lease on a month-
to-month basis, subject to the original terms of the underlying lease.
Because leases provide tenants with certain rights and remedies, an exten-
sion of the lease term is an extension of those protections to the tenant. In
general, lease holdover provisions can clarify that the tenant’s failure to vacate
the leased premises is not an extension of the original lease, but rather creates
a special, separate agreement. Lease holdover provisions also can delineate
distinctions from the otherwise applicable common law. Marsh-McLennan
Bldg., Inc. v. Clapp, 980 P.2d 311, 315-16 (Wash. Ct. App. 1999).
Unenforceable Penalties Regarding the rental rate during a hold-
over tenancy, it is important to consider whether the jurisdiction will regard a
double or triple holdover rental rate as an unenforceable penalty. In one such
case, the Tennessee Court of Appeals held that a double rental rate during
holdover was not an unenforceable penalty. Brooks v. Networks of Chattanoo-
ga, Inc., 946 S.W.2d 321, 324-25 (Tenn. Ct. App. 1996). The court also held the
tenant liable for the holdover rate even if the landlord initially accepted a lesser
amount. Id. at 326-27. The holdover tenant in that case initially continued
to pay only the regular rental rate applicable at the end of the lease term.
The tenant argued that, because it was negotiating a new lease with the land-
lord and not retaining possession of the  leased premises against the landlord’s
will, it was not a holdover tenant. Eight months later, when the parties’ negotia-
tion for a new lease broke down, the court permitted the landlord to collect
double rent for the holdover period retroactively.

10. Defining Common Areas and Facilities
Tenants typically pay as additional rent a proportionate share of the real estate
taxes, insurance, and maintenance costs for areas that are defined as com-
mon areas and facilities. Accordingly, the obligations of the tenant can vary
widely depending on whether areas are included as part of common areas or
part of the leased premises. Electrical and Telephone Closets: A common item that parties dispute
is the categorization of electrical and telephone closets. In one unreported
case in New York, the tenant claimed that its lease provided the tenant with
the right to use electrical and telephone closets for its telecommunication wires
and equipment. The landlord argued that tenant’s use of the closets was not
part of the leased premises and therefore that the tenant owed the landlord
licensing fees. Although the description of the leased premises specifically
excluded “electrical and telephone closets,” the definition of the common areas
did not expressly include them. Nonetheless, the court found the definition of
the “common areas” (which included “the pipes, ducts, conduits, wires and
appurtenant meters and equipment” serving the leased premises in com-
mon with other areas of the building), to be broad enough to encompass the
electrical and telephone closets. Marine Buffalo Assoc., L.P v. HSBC Bank USA,
781 N.YS.2d 625 (Sup. Ct. 2003). Control:  when a lease does not include a store’s
loading dock within the definitions of either common area or leased premises,
the parties’ liability for personal injuries from unsafe conditions on the loading
dock has been held to depend on the amount of control over the area respec-
tively exercised by the parties. Stalter v. Prudential Ins. Co. of Am., 632 N.Y.S.2d
602,603 (App. Div. 1995). Insurable Interests:  If not carefully defined, the distinction
between “leased premises” and “common areas” may produce unexpected outcomes. For example, a Michigan
shopping center lease required the tenant to obtain insurance covering its
leased premises and to pay a proportionate share of landlord’s cost of insuring the shopping center’s com-
mon areas. In addition, the parties intended for the tenant’s policy to cover
the sidewalks immediately outside of the tenant’s store. Therefore, the tenant
obtained a policy covering premises “owned or used by” the tenant. When a customer slipped and fell on
the icy sidewalk immediately outside of the tenant’s store, the customer brought
a suit against the tenant and the landlord. The landlord was held liable as
the record owner of the property. The landlord settled with the customer and
then attempted to recover from the tenant’s insurer. The tenant’s insurer denied coverage,
arguing that the phrase “owned or used by” the tenant was required to be interpreted in conjunc-
tion with the tenant’s lease, which provided that tenant must obtain insurance
covering “leased premises.” Because the lease definition of “leased prem-
ises” did not include the sidewalks, the insurer argued that the sidewalks were
not covered areas. The Sixth Circuit agreed with the insurer and upheld the
denial of coverage. Minges Creek, L.L.c. v. Royal Ins. Co. of Am., 442 F.3d 953 (6th
Cir. 2006); see also Zurich Am. Ins. Co., v. ABM Indus., Inc., 397 F.3d 158 (2d Cir.
2005). Accordingly, if a tenant assumes maintenance or insurance obligations
for a portion of the common area, the lease should expressly require the ten-
ant to maintain insurance covering the specific areas.

In the press to meet deadlines and be responsive to clients, lawyers can over-
look some of the “standard” or “boilerplate” provisions in a lease form. Also,
many of these provisions appear at the end of the document, where attention
spans seem to wane. Nevertheless, these provisions often address impor-
tant legal foundations that, if neglected, can have unintended consequences for
clients. To avoid embarrassing or costly surprises, attorneys should spend suf-
ficient time in reviewing these less than glamorous sections of the lease and
give these provisions the respect they deserve.

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