Many business owners would like to believe their offices are in Class A buildings, the highest-status buildings in the real estate market.
from Philadelphia Business Journal, August 18, 2006
Commercial real estate firms continually research building classifications to understand what determines top of the market and rate office buildings using several criteria.
As new properties are developed and the market changes, classifications can be a moving target.
Most experts agree Class A space typically makes up the top 10 percent of the market. What experts cannot agree on is what factors are used to determine that top 10 percent.
The benchmark rental rates for any office market are found in the top-performing Class A projects, and those rents set the tone for rates in new Class A projects under development.
To see how your building and others measure up, consider the following elements.
§ Location -- There typically are one or two key
intersections or thoroughfares in every metropolitan area that everyone agrees are Class A locations that consist of Main Street concentrations of developments. All real estate decisions typically revolve around location. Is the property highly visible? Is there easy access? Is the neighborhood conducive to a professional office environment?
And, the most important locational consideration is whether this is the place where your enterprise will achieve the greatest success.
§ Design -- The industry generally agrees that today's Class
A office building has large, column-free floor plans that provide 25,000 to 50,000 contiguous square feet per floor. A central lobby readily guides visitors to their destination; and the building complies with governmental regulations, current zoning and the Americans with Disabilities Act.
While various architectural styles and construction methods may be employed, the building design and materials must have an element of timelessness to be considered among the best in the market. It cannot look old in five or 10 years. At the same time, a building does not qualify as Class A simply because it is new construction.
§ Infrastructure -- Some of the most important physical
features of a Class A building include telecommunications and information technology infrastructure necessary to adapt to modern technology, as well as up-to-date electrical, mechanical and plumbing systems.
§ Building operations and management -- Building operations
and management may be the most obvious factor in determining if a building fits into the upper echelon of the market. Is there an on-site management and engineering presence? Are common areas and exteriors well-maintained? Most people can sense this by just walking through the building lobby, speaking with tenants or using the washroom.
Class A office buildings should feature an on-site, readily identifiable management staff with daily, ongoing maintenance and cleaning services.
Systems should be in place to quickly and professionally address tenant needs. If the building owner is the person who changes light bulbs and unclogs toilets, the building is probably not Class A.
§ Amenities -- A long list of popular building amenities
exist in Class A buildings, and firms have their preferences. Most agree that on-site or proximate food and sundry services are important, but some also want a health club, valet parking, concierge service, child care, shoe shine, upscale retail, auto detailing and repair services.
What is realistic? Is your ideal environment a trophy office project, a shopping center or a mixed-use project?
Look closely at your company. Class A amenities have a positive impact on employee productivity and enhance the experience your clients have when visiting your office. Amenities also should simplify and improve life for you and your company.
Ultimately, there is only one judge -- the tenant. Office tenants seek Class A office space for many reasons, including upgrading or maintaining their firm's image, providing clients and employees with better amenities or to justify rents at an existing location.
Create your own definition of Class A and find a building that facilitates the success of your business. Speak with your real estate agent and determine the amenities and features that are essential to attract employees, serve your customers and build your business. The companies who pay rent have the power to define a building's class through their checkbooks and tenancy."
FOR MORE INFORMATION SEE WWW:HOUSTONREALTYADVISORS.NET
OR www.houstonrealtyadvisor.com
Monday, June 25, 2007
ESTOPPEL CERTIFICATE INFO.
Estoppel certificates are typically utilized when a landlord desires to sell a building or refinance it. When purchasing a building or making a loan with a building as collateral, the purchaser and lender want to confirm certain facts that could influence their decision:
Is the tenant:
a. Current in rent?
b. In default under the lease?
c. Claiming that landlord is in breach or default under the
lease?
Does the tenant:
a. Purchase the building?
b. Renew or extend the lease?
c. Expand its space?
d. Terminate the lease?
e. Contract its space?
What is the rental rate?
Has there been any prepaid rent?
Is there any remaining free rental periods?
Confirm:
a. Commencement date of the lease,
b. Expiration date of the lease, and
c. Length of the lease term.
While it is typically the landlord that initiates the request for an estoppel certificate to be signed by a tenant, sophisticated tenants bargain for a reciprocal right to obtain an estoppel certificate from the landlord. By bargaining for the right to require the landlord to provide an estoppel certificate, the tenant will be in a position to provide prospective merger partners, assignees, subtenants, and major lenders the level of comfort of knowing that a lease remains in a pace and confirmation of the material facts of the lease. The ability to require a landlord to also fill out and submit an estoppel certificate aids the tenant in negotiating what is contained in an estoppel certificate. For example, once a landlord knows that it too will be required to submit an estoppel certificate, the landlord is much more realistic about the time periods for responding to a request for an estoppel certificate.
Illegitimate Intended Purpose
Frequently, in connection with a potential purchase of a building or in connection with making a loan on a building, the purchaser or lender will review the existing leases and find that there are certain provisions that the purchaser or lender would have preferred to have been included in the lease. These typically will include provisions pertaining to:
ü Extended cure rights for the landlord,
ü Terrorist insurance requirements,
ü Telecommunications.
ü Use of insurance proceeds, and
ü Condemnation proceeds.
Most lawyers believe that it is not appropriate to seek modifications to a lease in connection with an estoppel certificate.
The purpose of the estoppel certificate is to confirm the existence or certain rights and obligations, not to change such rights and obligations. Nevertheless, there are a few landlords, probably at the urging of their lenders or purchasers, who cannot resist the temptation to utilize the request for an estoppel certificate as a disguised attempt to modify the rights and obligations of the terms under the lease. Sophisticated tenants are aware of this tactic and simply delete provisions that constitute a modification and a waiver of significant rights of the tenant.
Do not assume that the initial draft of the estoppel certificate has been carefully drafted or is correct.
Responding correctly to the estoppel certificate:
The only way to property review an estoppel certificate is simply to take each item in the estoppel certificate that is set forth as a fact and look to the lease (and all amendments) to find where each fact is set forth in the lease.
Resist the temptation to vent or get even.
The only purpose of an estoppel certificate is to allow the sender to confirm the existence of the lease and the essential provisions of the lease. Occasionally, a tenant with a vivid imagination or a hidden agenda (e.g. too much space at above market rents) will try to gain leverage with the landlord by responding to the estoppel certificate with statements that are either not factual or embellished.
Do not procrastinate.
Most leases have a time period to respond to an estoppel certificate."
FOR MORE INFORMATION SEE: WWW.HOUSTONREALTYADVISORS.NET
OR www.houstonrealtyadvisor.com
Is the tenant:
a. Current in rent?
b. In default under the lease?
c. Claiming that landlord is in breach or default under the
lease?
Does the tenant:
a. Purchase the building?
b. Renew or extend the lease?
c. Expand its space?
d. Terminate the lease?
e. Contract its space?
What is the rental rate?
Has there been any prepaid rent?
Is there any remaining free rental periods?
Confirm:
a. Commencement date of the lease,
b. Expiration date of the lease, and
c. Length of the lease term.
While it is typically the landlord that initiates the request for an estoppel certificate to be signed by a tenant, sophisticated tenants bargain for a reciprocal right to obtain an estoppel certificate from the landlord. By bargaining for the right to require the landlord to provide an estoppel certificate, the tenant will be in a position to provide prospective merger partners, assignees, subtenants, and major lenders the level of comfort of knowing that a lease remains in a pace and confirmation of the material facts of the lease. The ability to require a landlord to also fill out and submit an estoppel certificate aids the tenant in negotiating what is contained in an estoppel certificate. For example, once a landlord knows that it too will be required to submit an estoppel certificate, the landlord is much more realistic about the time periods for responding to a request for an estoppel certificate.
Illegitimate Intended Purpose
Frequently, in connection with a potential purchase of a building or in connection with making a loan on a building, the purchaser or lender will review the existing leases and find that there are certain provisions that the purchaser or lender would have preferred to have been included in the lease. These typically will include provisions pertaining to:
ü Extended cure rights for the landlord,
ü Terrorist insurance requirements,
ü Telecommunications.
ü Use of insurance proceeds, and
ü Condemnation proceeds.
Most lawyers believe that it is not appropriate to seek modifications to a lease in connection with an estoppel certificate.
The purpose of the estoppel certificate is to confirm the existence or certain rights and obligations, not to change such rights and obligations. Nevertheless, there are a few landlords, probably at the urging of their lenders or purchasers, who cannot resist the temptation to utilize the request for an estoppel certificate as a disguised attempt to modify the rights and obligations of the terms under the lease. Sophisticated tenants are aware of this tactic and simply delete provisions that constitute a modification and a waiver of significant rights of the tenant.
Do not assume that the initial draft of the estoppel certificate has been carefully drafted or is correct.
Responding correctly to the estoppel certificate:
The only way to property review an estoppel certificate is simply to take each item in the estoppel certificate that is set forth as a fact and look to the lease (and all amendments) to find where each fact is set forth in the lease.
Resist the temptation to vent or get even.
The only purpose of an estoppel certificate is to allow the sender to confirm the existence of the lease and the essential provisions of the lease. Occasionally, a tenant with a vivid imagination or a hidden agenda (e.g. too much space at above market rents) will try to gain leverage with the landlord by responding to the estoppel certificate with statements that are either not factual or embellished.
Do not procrastinate.
Most leases have a time period to respond to an estoppel certificate."
FOR MORE INFORMATION SEE: WWW.HOUSTONREALTYADVISORS.NET
OR www.houstonrealtyadvisor.com
Friday, June 22, 2007
Continued: Tenant reps tout lack of conflicts
For background, I am a co-author of the Code of Ethical Principles and
Standards of Professional Practice of the Society of Industrial and Office
REALTORS. As well, I am a co-author of the Society's four hour ethics
program entitled "What Makes A Professional". My term of service as an
industrial and office broker is now thirty three years. My study of
brokerage in a legal and ethical framework is now approaching thirty years.
I have chaired ethics and professional standards committees at the local and
national levels as well.
I can say without reservation that the best way to serve a real estate
client is as a single agent, providing advocacy only for that client. In
that, all other situations that may arise will present conflicts of interest
or perceptions of conflicts of interest to the client base. All one needs
to do is follow the money!
It has always been interesting to me how full service people believe that
disclosures and disclaimers provide the necessary shield against the
opportunity to play both sides of a transaction. This issue gets worse when
you throw in dual agency or dual representation concepts into the
discussion. Full service brokers use various inducements to a client to win
an assignment to be their representative, only to have to ask the client to
waive the brokers' responsibility when a dual agent situation arises. The
client is suddenly left with no representation at all. Bullhonkey! It
doesn't pass the smell test.
As the brokerage model of the past fifty or so years continues to devolve,
however, most of these kinds of discussions will fade into that past. In
spite of the industry's cling to the status quo, technological advances,
standardization of data and documentation, opening up of data into the
public domain and other efficiencies not presently being employed (but
available) will replace the tried and true, list and sell, be all and do all
broker of the present.
Clients will still need advocates with a solid knowledge base. Those who
make the transition to single client advocacy and can provide the necessary
support will be labeled ethical technicians. It is this kind of creature
who will still be standing in wake of the coming fallout of traditional,
head in the sand brokers.
Vic Bruno, CRA ;President . Qualifying Broker
Vic Bruno Co.
For more information see : www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
Standards of Professional Practice of the Society of Industrial and Office
REALTORS. As well, I am a co-author of the Society's four hour ethics
program entitled "What Makes A Professional". My term of service as an
industrial and office broker is now thirty three years. My study of
brokerage in a legal and ethical framework is now approaching thirty years.
I have chaired ethics and professional standards committees at the local and
national levels as well.
I can say without reservation that the best way to serve a real estate
client is as a single agent, providing advocacy only for that client. In
that, all other situations that may arise will present conflicts of interest
or perceptions of conflicts of interest to the client base. All one needs
to do is follow the money!
It has always been interesting to me how full service people believe that
disclosures and disclaimers provide the necessary shield against the
opportunity to play both sides of a transaction. This issue gets worse when
you throw in dual agency or dual representation concepts into the
discussion. Full service brokers use various inducements to a client to win
an assignment to be their representative, only to have to ask the client to
waive the brokers' responsibility when a dual agent situation arises. The
client is suddenly left with no representation at all. Bullhonkey! It
doesn't pass the smell test.
As the brokerage model of the past fifty or so years continues to devolve,
however, most of these kinds of discussions will fade into that past. In
spite of the industry's cling to the status quo, technological advances,
standardization of data and documentation, opening up of data into the
public domain and other efficiencies not presently being employed (but
available) will replace the tried and true, list and sell, be all and do all
broker of the present.
Clients will still need advocates with a solid knowledge base. Those who
make the transition to single client advocacy and can provide the necessary
support will be labeled ethical technicians. It is this kind of creature
who will still be standing in wake of the coming fallout of traditional,
head in the sand brokers.
Vic Bruno, CRA ;President . Qualifying Broker
Vic Bruno Co.
For more information see : www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
30 Year Broker weight in CONTINUE:Tenant reps tout lack of conflicts
Re: Tenant reps tout lack of conflicts
For background, I am a co-author of the Code of Ethical Principles and
Standards of Professional Practice of the Society of Industrial and Office
REALTORS. As well, I am a co-author of the Society's four hour ethics
program entitled "What Makes A Professional". My term of service as an
industrial and office broker is now thirty three years. My study of
brokerage in a legal and ethical framework is now approaching thirty years.
I have chaired ethics and professional standards committees at the local and
national levels as well.
I can say without reservation that the best way to serve a real estate
client is as a single agent, providing advocacy only for that client. In
that, all other situations that may arise will present conflicts of interest
or perceptions of conflicts of interest to the client base. All one needs
to do is follow the money!
It has always been interesting to me how full service people believe that
disclosures and disclaimers provide the necessary shield against the
opportunity to play both sides of a transaction. This issue gets worse when
you throw in dual agency or dual representation concepts into the
discussion. Full service brokers use various inducements to a client to win
an assignment to be their representative, only to have to ask the client to
waive the brokers' responsibility when a dual agent situation arises. The
client is suddenly left with no representation at all. Bullhonkey! It
doesn't pass the smell test.
As the brokerage model of the past fifty or so years continues to devolve,
however, most of these kinds of discussions will fade into that past. In
spite of the industry's cling to the status quo, technological advances,
standardization of data and documentation, opening up of data into the
public domain and other efficiencies not presently being employed (but
available) will replace the tried and true, list and sell, be all and do all
broker of the present.
Clients will still need advocates with a solid knowledge base. Those who
make the transition to single client advocacy and can provide the necessary
support will be labeled ethical technicians. It is this kind of creature
who will still be standing in wake of the coming fallout of traditional,
head in the sand brokers.
Vic Bruno, CRA
President . Qualifying Broker
Vic Bruno Co.
P.O. Drawer 20460
Albuquerque, NM USA 87154
For background, I am a co-author of the Code of Ethical Principles and
Standards of Professional Practice of the Society of Industrial and Office
REALTORS. As well, I am a co-author of the Society's four hour ethics
program entitled "What Makes A Professional". My term of service as an
industrial and office broker is now thirty three years. My study of
brokerage in a legal and ethical framework is now approaching thirty years.
I have chaired ethics and professional standards committees at the local and
national levels as well.
I can say without reservation that the best way to serve a real estate
client is as a single agent, providing advocacy only for that client. In
that, all other situations that may arise will present conflicts of interest
or perceptions of conflicts of interest to the client base. All one needs
to do is follow the money!
It has always been interesting to me how full service people believe that
disclosures and disclaimers provide the necessary shield against the
opportunity to play both sides of a transaction. This issue gets worse when
you throw in dual agency or dual representation concepts into the
discussion. Full service brokers use various inducements to a client to win
an assignment to be their representative, only to have to ask the client to
waive the brokers' responsibility when a dual agent situation arises. The
client is suddenly left with no representation at all. Bullhonkey! It
doesn't pass the smell test.
As the brokerage model of the past fifty or so years continues to devolve,
however, most of these kinds of discussions will fade into that past. In
spite of the industry's cling to the status quo, technological advances,
standardization of data and documentation, opening up of data into the
public domain and other efficiencies not presently being employed (but
available) will replace the tried and true, list and sell, be all and do all
broker of the present.
Clients will still need advocates with a solid knowledge base. Those who
make the transition to single client advocacy and can provide the necessary
support will be labeled ethical technicians. It is this kind of creature
who will still be standing in wake of the coming fallout of traditional,
head in the sand brokers.
Vic Bruno, CRA
President . Qualifying Broker
Vic Bruno Co.
P.O. Drawer 20460
Albuquerque, NM USA 87154
Wednesday, June 20, 2007
Tenant reps tout lack of conflicts
Should tenants hire firms focusing on them or those serving landlords as well?
from The Wall Street Journal, August 9, 2006
"There are two sides of a debate over representation of tenants in commercial real estate transactions.
Tenant representative firms say:
* Full service brokerages serve two masters, landlord and tenant.
* Full service brokerages have incentive to seek higher rent and lower vacancies.
* Tenant rep firms have more incentive to innovate to lower occupancy costs.
* Tenant rep firms have made the biggest inroads for law firms.
Full service brokerages say:
* Their disclosure of potential conflicts is rigorous and mitigates conflicts.
* Working for landlords gives them better access to data and space that is not public yet.
* Some tenant rep firms have their own conflicts, such as property management arms.
Real estate is still a relationship driven business."
for more information see www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
from The Wall Street Journal, August 9, 2006
"There are two sides of a debate over representation of tenants in commercial real estate transactions.
Tenant representative firms say:
* Full service brokerages serve two masters, landlord and tenant.
* Full service brokerages have incentive to seek higher rent and lower vacancies.
* Tenant rep firms have more incentive to innovate to lower occupancy costs.
* Tenant rep firms have made the biggest inroads for law firms.
Full service brokerages say:
* Their disclosure of potential conflicts is rigorous and mitigates conflicts.
* Working for landlords gives them better access to data and space that is not public yet.
* Some tenant rep firms have their own conflicts, such as property management arms.
Real estate is still a relationship driven business."
for more information see www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
Wednesday, June 6, 2007
Sublease and Assignment
fter a tenant has assigned a lease, the tenant remains liable as a guarantor, and not as a principal obligor.
from: DIRT - Real Estate Lawyers Listserv, August 18, 2006
"Consequently, the tenant remains liable for rent not paid by the assignee until the lease is terminated, even if termination occurs through merger. But landlord's release of the assignee from liability under the lease will also be a release of the original tenant/assignor.
CO Lemon, LLC v. Host Marriott Corp., 2006 Westlaw 1485235 (Ohio App.
5/31/06)
Marriott was the original tenant under a long term lease with CLM. CLM approved an assignment of the lease to Elias in 1985. Elias agreed to indemnify Marriott for any liability it incurred for Elias' breach of the lease, but CLM did not release Marriott from the lease.
In 1999, Elias defaulted on the lease, and in 2000 Elias filed for bankruptcy. Elias attempted to reject the lease, but finally, in a court approved settlement, the court vacated Elias' rejection of the lease, authorized Elias (presumably Elias' bankruptcy estate) to assume the lease and approved the assignment of the lease to CLM, which in turn agreed to waive any and all claims against Elias.
A year later, CLM filed suit against Marriott for the unpaid rentals accruing before and after the assumption of the lease by CLM. It argued that the assumption had no impact on Marriott's continuing liability for unpaid rent.
The court ruled, quite properly, that the assumption by CLM led to a merger of the lease and a termination of any further liability of any party for performance of the lease. But the court held that the merger, in and of itself, did not release Marriott from its obligations under the lease prior to the merger. Those obligations included potential liability for the lease payments that Elias had not paid.
But the court then turned the case around on CLM by holding that more than the merger was at stake. In addition, CLM had released Elias from any liability, both past and future, at the time of the bankruptcy settlement.
The court characterized Marriott's liability under the lease, post assignment as that of a guarantor, and invoked the usual rule that a guarantor is released when the principle debtor is released.
Thus, Marriott was out completely.
Comment 1: Typically, an original lessee is said to continue in liability under an assigned lease because the lessee remains in privity of contract with the landlord. This is an interesting jurisprudential concept. Under the ordinary law of real covenants, a party transferring real estate does not remain liable for the performance of the covenants.
Thus, an intervening assignee, who did not sign the original lease nor assume the lease, and later reassigned it to another, would not be in privity of contract or privity of estate, and would escape liability for post assignment defaults. But the original lessee is stuck.
Thus, the court was correct in concluding that Marriott has potential liability here and also correct in concluding that the liability would be terminated when the lease was terminated by merger.
What is curious here, however, is the court's characterization of Marriott as a guarantor. Most theorists would describe Marriott's status as that of a surety, and not a guarantor. The [DIRT] editor suspects that the distinction doesn't matter much. Sureties also normally get released when the principle debtor is released. But there may be an argument that a creditor could release the principle debtor but reserve rights against the surety. This would make it possible for the surety to have a subrogated claim back against the principle if it were ever forced to pay the creditor. The editor isn't sure that these same concepts of suretyship apply to all guarantors.
Comment 2: In any event, the court suggests that language that often appears in boiler plate in commercial leases would have solved the landlord's problem. This court's recommended language language (taken from another Ohio case) reads as follows:
[Tenant] may at any time assign this Lease... but no assignment or
sublease shall reduce or affect in any way any of the obligations of
[tenant] hereunder, and all such obligations shall continue in full
effect as obligations of the principal and not as obligations of a
guarantor or surety, to the same extent as though no assignment or
subletting had been made…
The [DIRT] editor has always wondered whether this language really added
anything. According to the Ohio court, it does, and one would assume
that any Ohio landlord's lawyer ought to be adding this language to
every lease at peril of malpractice.
Incidentally, the lease was not silent on the subject of Marriott's
continuing liability. It stated
Tenant shall have the right to assign this Lease... provided Tenant
continues to be liable for the prompt and full payments of the rentals
and other payments required hereunder…
In light of the fact that, even if the lease were silent, Marriott would
have been liable as a surety, is it really that clear that this language
wasn't also an attempt to impose non-surety liability on Marriott?
The court thought so."
For more information seee: www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
from: DIRT - Real Estate Lawyers Listserv, August 18, 2006
"Consequently, the tenant remains liable for rent not paid by the assignee until the lease is terminated, even if termination occurs through merger. But landlord's release of the assignee from liability under the lease will also be a release of the original tenant/assignor.
CO Lemon, LLC v. Host Marriott Corp., 2006 Westlaw 1485235 (Ohio App.
5/31/06)
Marriott was the original tenant under a long term lease with CLM. CLM approved an assignment of the lease to Elias in 1985. Elias agreed to indemnify Marriott for any liability it incurred for Elias' breach of the lease, but CLM did not release Marriott from the lease.
In 1999, Elias defaulted on the lease, and in 2000 Elias filed for bankruptcy. Elias attempted to reject the lease, but finally, in a court approved settlement, the court vacated Elias' rejection of the lease, authorized Elias (presumably Elias' bankruptcy estate) to assume the lease and approved the assignment of the lease to CLM, which in turn agreed to waive any and all claims against Elias.
A year later, CLM filed suit against Marriott for the unpaid rentals accruing before and after the assumption of the lease by CLM. It argued that the assumption had no impact on Marriott's continuing liability for unpaid rent.
The court ruled, quite properly, that the assumption by CLM led to a merger of the lease and a termination of any further liability of any party for performance of the lease. But the court held that the merger, in and of itself, did not release Marriott from its obligations under the lease prior to the merger. Those obligations included potential liability for the lease payments that Elias had not paid.
But the court then turned the case around on CLM by holding that more than the merger was at stake. In addition, CLM had released Elias from any liability, both past and future, at the time of the bankruptcy settlement.
The court characterized Marriott's liability under the lease, post assignment as that of a guarantor, and invoked the usual rule that a guarantor is released when the principle debtor is released.
Thus, Marriott was out completely.
Comment 1: Typically, an original lessee is said to continue in liability under an assigned lease because the lessee remains in privity of contract with the landlord. This is an interesting jurisprudential concept. Under the ordinary law of real covenants, a party transferring real estate does not remain liable for the performance of the covenants.
Thus, an intervening assignee, who did not sign the original lease nor assume the lease, and later reassigned it to another, would not be in privity of contract or privity of estate, and would escape liability for post assignment defaults. But the original lessee is stuck.
Thus, the court was correct in concluding that Marriott has potential liability here and also correct in concluding that the liability would be terminated when the lease was terminated by merger.
What is curious here, however, is the court's characterization of Marriott as a guarantor. Most theorists would describe Marriott's status as that of a surety, and not a guarantor. The [DIRT] editor suspects that the distinction doesn't matter much. Sureties also normally get released when the principle debtor is released. But there may be an argument that a creditor could release the principle debtor but reserve rights against the surety. This would make it possible for the surety to have a subrogated claim back against the principle if it were ever forced to pay the creditor. The editor isn't sure that these same concepts of suretyship apply to all guarantors.
Comment 2: In any event, the court suggests that language that often appears in boiler plate in commercial leases would have solved the landlord's problem. This court's recommended language language (taken from another Ohio case) reads as follows:
[Tenant] may at any time assign this Lease... but no assignment or
sublease shall reduce or affect in any way any of the obligations of
[tenant] hereunder, and all such obligations shall continue in full
effect as obligations of the principal and not as obligations of a
guarantor or surety, to the same extent as though no assignment or
subletting had been made…
The [DIRT] editor has always wondered whether this language really added
anything. According to the Ohio court, it does, and one would assume
that any Ohio landlord's lawyer ought to be adding this language to
every lease at peril of malpractice.
Incidentally, the lease was not silent on the subject of Marriott's
continuing liability. It stated
Tenant shall have the right to assign this Lease... provided Tenant
continues to be liable for the prompt and full payments of the rentals
and other payments required hereunder…
In light of the fact that, even if the lease were silent, Marriott would
have been liable as a surety, is it really that clear that this language
wasn't also an attempt to impose non-surety liability on Marriott?
The court thought so."
For more information seee: www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com
Tuesday, June 5, 2007
Landlords are limiting Exclusives uses
There are lease strategies that a landlord can use to reduce the scope and impact of an exclusive and so reduce the number of problems an exclusive can create.
from Commercial Leasing & Management Toolkit, June 2004
"A landlord giving an exclusive to a tenant doesn't have to be an all-or-nothing proposition or create many problems. These lease strategies include:
* Setting four limits on the scope of the exclusive;
* Exempting seven types of tenants from the scope of the exclusive; and
* Voiding the exclusive in eight circumstances.
Exempt 7 types of tenants:
The exclusive will apply only to a competing business. So the landlord can reduce the impact of the exclusive by exempting the following tenants from the definition of a competing business:
(1) Existing Tenants
Exclude all existing tenants from the exclusive, whether they currently engage in the business covered by the exclusive or not. This is important because an existing tenant's lease may be vague in detailing how the tenant can use its space. So the existing tenant may be able to change its product line in the future and sell the same product as the exclusive tenant-thereby violating the exclusive.
The landlord may also want all existing tenants' spaces to remain exempt from the exclusive even if they decide to relet their spaces when the current lease term ends. It doesn't matter whether or not they have a renewal option in their leases. Otherwise, the exclusive could prevent the landlord from keeping a desirable tenant in its space.
(2) Assignee or Subtenant of Existing Tenant
The landlord should exempt all existing tenants' assignees or subtenants from the exclusive, even if they're in a different business from the existing tenant. This allows an existing tenant who doesn't engage in the exclusive use to assign or sublet its lease to someone who may compete with the exclusive tenant. If the landlord does not do this, it would have to police existing tenants to limit their assignment or sublet rights. If the landlord tries to do this unilaterally, the existing tenant could claim that the landlord is violating its lease by cutting back its existing rights.
(3) Replacement for Existing Tenant that's No Longer a Competitor
The landlord may have an existing tenant that uses its space primarily for the exclusive use that was granted the newer tenant. If the space occupied by the existing tenant is no longer being used primarily for that exclusive use (because the existing tenant changed its use, moved out, or closed down), the landlord will want the flexibility to maintain the center's current tenant mix. So say that in these circumstances, one new tenant will be exempt from the exclusive and can use its space (which may be located anywhere in the center) for the exclusive use.
To make this exemption acceptable to the exclusive tenant, agree to replace the exempt tenant with a smaller new tenant. For instance, a 10,000-squarefoot exclusive tenant may not feel threatened if a 2,000-square-foot existing tenant is replaced by a tenant of a similar size or smaller.
(4) Anchor Tenants
The landlord should exclude any anchor, variety, specialty or other large store above a certain size (in square feet) from the exclusive.
Since these stores typically are unwilling to limit the wide variety of products they sell, an existing exclusive may prevent landlord from adding a new big store to the center.
(5) Small Tenants
The landlord should exempt tenants below a certain size (in square feet) from the exclusive. Small spaces are typically the toughest spaces to rent in shopping centers. And tenants in these spaces shouldn't pose a competitive threat to larger tenants.
(6) Tenants for Whom Exclusive Use Is Incidental
Like small tenants, tenants that engage in the use prohibited by the exclusive on an incidental basis should be exempted from the exclusive.
These tenants shouldn't pose a competitive threat to the exclusive tenant because their volume for that use is small scale. Without this exemption, landlord could have trouble renting space to tenants who engage in the exclusive tenant's use only as an incidental sideline to their businesses but consider the use important. Define an incidental use on the basis of a percentage of gross sales or space dedicated to the use, or a combination of both.
(7) Rogue Tenants
Some tenants may violate the use restrictions in their own leases as well as another tenant's exclusive. Landlord should exempt these rogue tenants from the exclusive. Otherwise, even though the landlord is not at fault, the exclusive tenant can still resort to its remedy against the landlord. A savvy tenant may balk at this exemption unless the landlord agrees in the lease to try to stop the rogue tenant from continuing to violate the exclusive."
For more information see: www.houstonrealtyadvisors.net
or
www. houstonrealtyadvisor.com
from Commercial Leasing & Management Toolkit, June 2004
"A landlord giving an exclusive to a tenant doesn't have to be an all-or-nothing proposition or create many problems. These lease strategies include:
* Setting four limits on the scope of the exclusive;
* Exempting seven types of tenants from the scope of the exclusive; and
* Voiding the exclusive in eight circumstances.
Exempt 7 types of tenants:
The exclusive will apply only to a competing business. So the landlord can reduce the impact of the exclusive by exempting the following tenants from the definition of a competing business:
(1) Existing Tenants
Exclude all existing tenants from the exclusive, whether they currently engage in the business covered by the exclusive or not. This is important because an existing tenant's lease may be vague in detailing how the tenant can use its space. So the existing tenant may be able to change its product line in the future and sell the same product as the exclusive tenant-thereby violating the exclusive.
The landlord may also want all existing tenants' spaces to remain exempt from the exclusive even if they decide to relet their spaces when the current lease term ends. It doesn't matter whether or not they have a renewal option in their leases. Otherwise, the exclusive could prevent the landlord from keeping a desirable tenant in its space.
(2) Assignee or Subtenant of Existing Tenant
The landlord should exempt all existing tenants' assignees or subtenants from the exclusive, even if they're in a different business from the existing tenant. This allows an existing tenant who doesn't engage in the exclusive use to assign or sublet its lease to someone who may compete with the exclusive tenant. If the landlord does not do this, it would have to police existing tenants to limit their assignment or sublet rights. If the landlord tries to do this unilaterally, the existing tenant could claim that the landlord is violating its lease by cutting back its existing rights.
(3) Replacement for Existing Tenant that's No Longer a Competitor
The landlord may have an existing tenant that uses its space primarily for the exclusive use that was granted the newer tenant. If the space occupied by the existing tenant is no longer being used primarily for that exclusive use (because the existing tenant changed its use, moved out, or closed down), the landlord will want the flexibility to maintain the center's current tenant mix. So say that in these circumstances, one new tenant will be exempt from the exclusive and can use its space (which may be located anywhere in the center) for the exclusive use.
To make this exemption acceptable to the exclusive tenant, agree to replace the exempt tenant with a smaller new tenant. For instance, a 10,000-squarefoot exclusive tenant may not feel threatened if a 2,000-square-foot existing tenant is replaced by a tenant of a similar size or smaller.
(4) Anchor Tenants
The landlord should exclude any anchor, variety, specialty or other large store above a certain size (in square feet) from the exclusive.
Since these stores typically are unwilling to limit the wide variety of products they sell, an existing exclusive may prevent landlord from adding a new big store to the center.
(5) Small Tenants
The landlord should exempt tenants below a certain size (in square feet) from the exclusive. Small spaces are typically the toughest spaces to rent in shopping centers. And tenants in these spaces shouldn't pose a competitive threat to larger tenants.
(6) Tenants for Whom Exclusive Use Is Incidental
Like small tenants, tenants that engage in the use prohibited by the exclusive on an incidental basis should be exempted from the exclusive.
These tenants shouldn't pose a competitive threat to the exclusive tenant because their volume for that use is small scale. Without this exemption, landlord could have trouble renting space to tenants who engage in the exclusive tenant's use only as an incidental sideline to their businesses but consider the use important. Define an incidental use on the basis of a percentage of gross sales or space dedicated to the use, or a combination of both.
(7) Rogue Tenants
Some tenants may violate the use restrictions in their own leases as well as another tenant's exclusive. Landlord should exempt these rogue tenants from the exclusive. Otherwise, even though the landlord is not at fault, the exclusive tenant can still resort to its remedy against the landlord. A savvy tenant may balk at this exemption unless the landlord agrees in the lease to try to stop the rogue tenant from continuing to violate the exclusive."
For more information see: www.houstonrealtyadvisors.net
or
www. houstonrealtyadvisor.com
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