Best Wishes For The Holiday Season And Some Things To Think About….

For this part of the year, REDD is celebrating with some trepidation (mostly caused by attorneys and accountants) the end of  2014 and  a bit of food for thought. To begin with, my apologies for the strained rhyming  below and if I have may have left some folks out.  But now, without further ado…

working during holiday 2

Twas’ the last days before the end of the year and all through every Landlord and Tenant house, people were tucked in their beds, not stirring and there was no mouse – or at least one that didn’t work without IT help:

1.  The budgets for 2015 were finished (we think) and put away with care,  for all of us to tussle over next year!

2.   The Tenants were flush with optimism over Black Friday and Cyber Week profits without dread; while Landlords dreamed of big Tenant gross sales like lollipops in their heads;

3.   The vendors were paid in full in hopes that all  begin fresh in the New Year, we think….Did we settle up with everyone and iron out all the kinks?

4.   TICAM estimates had been sent with care to every Tenant everywhere, for them to open and hopefully not despair.

5.    The accountants and tax folks have been presented with every necessary document and reporting (P.S. they work all week with keyboards a’ clicking!).

6.   Everyone was joyful for the year that had passed and 2015 to follow with great promises to last?   Landlord said : “I hope sales get you to the place you pledged you would be.”  Tenant replied: “how can I have a successful year with internet sales and no fee!”

7.   And as the Landlord lay a finger across his nose, the Tenants exclaimed  percentage rent ratios were too low!

8.   Franchisors sat in their command centers ready to react to their Franchisee’s reports on customer traffic and year end sales. By the way, do not forget your franchise fee and please, please no tall tales!

9.   Assignors sat back with good tidings to all,  hoping that their Assignees were kings of each mall.

10.  Brokers were huddled with their plans for next year; to make every transaction work perfectly clear.  Meanwhile as they looked at holiday meals, a fat man landed down the chimney with new deals!

11.    The Contractors opened presents with glee, hoping new construction or TI would be what they would see; or at least a major upfit.

12.  The Developers were also asleep in their beds, as new projects danced in their heads!

13.    The Investors were last ones to bed, no sense of magic stuck in their heads.  P&L statements were the main concern, so large profits could be earned!

And to all a good night, let none of you have a fright. May the New Year bring you good cheer and a prosperous year…..

Best Wishes and see you in 2015!

CO-TENANCY – What’s In Your Crystal Ball? (PART 2: Key Issues and Related Dilemmas)

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In the last post, we discussed the basic concepts and procedures involving  co-tenancy in commercial leases. We also threw out some questions about how all of this plays out in the current real estate environment.  This week, we will delve further into important issues for landlords, tenants and their lenders to consider when grappling with co-tenancy at the drafting stage and after the lease is signed. In addition, we will suggest some answers to the questions from last week…. Continue reading

CO-TENANCY – What’s In Your Crystal Ball? (PART 1: the basics)

crystal ball 5basic rules 2

As the retail shopping experience has become more complicated and intertwined between Landlords, Tenants, Lenders and Consumers, so too has the use, scope and shape of “Co-Tenancy”. This is the first of two posts that will examine the ins and outs of the Co-Tenancy concept. We will examine: (1) the meaning of the term and its three generally recognized forms; and (2) key concerns Landlords and Tenants have with this animal. Continue reading

Eyes On The Prize – Five Important Questions To Ask Before a Small Business Signs a Lease

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A small business considering leasing commercial space AND a landlord in pursuit of filling vacant space have some interesting, and surprisingly similar issues to consider in hammering out a deal.  In most cases, experienced landlords know that certain rights will be requested,  and knowledgeable small business  tenants will know how to ask these questions.  Before diving into the minutiae of default provisions, environmental issues, indemnity rights and other essential terms, the parties should consider some basic, but essential issues. This article will examine five such “game changers”, although by no means is this an exhaustive list.

 

  1. Whole or Partial Exclusives – Small businesses need the protection and security that enables them to sell their products and provide services without running afoul of exclusives that bigger tenants in the center, business park or office space may have relating to their business operations.   In addition, small businesses also need affirmative exclusive rights in their leases to prevent the landlord from leasing to a competing business in the future.  An example is where a bakery shop wants to lease a space where the grocer anchor tenant may already have an exclusive on selling “bread and baked goods”. Since most smaller tenants do not have the negotiating leverage to demand complete exclusives, alternatives could include carve outs for specialty goods and services (e.g. birthday cakes)and/or caps on sales of certain items (e.g. bagel sales cannot exceed 20% of total gross sales).

 

  1. Flexibility to Assign or Transfer the Lease – Small business will need the ability to easily assign or transfer/sublease in the event of ownership or business operation changes. This is especially true with franchised companies who may start off as a corporate store and then want to assign or transfer the lease to a local franchisee. Landlords often resist these requests because of the uncertainty that could result from an unknown assignee taking control of the shop.  Perhaps the best way to deal with this concern is to provide the landlord with additional security in the event of an assignment,  such as the tenant remaining liable for a certain amount of time after the assignment is complete or a corporate or personal guaranty that was not part of the original lease terms.

 

  1. Restrictions on Relocation within the Center – One of the biggest problems for small operators in multi-tenant properties is where the lease allows the landlord to relocate them to anywhere on the property. This situation creates moving costs, lost profits and potentially extended  reductions in sales as a result of being placed in a less visible or accessible part of the development.  Small businesses need to ask for tight restrictions on relocation and build in protections in the lease that require the landlord to provide adequate notice, as well as reimbursement for moving, new upfit and business interruption.  Tenants should also ask that they not be moved to areas of low visibility or access within the property (such as the end cap, next to a competitor or behind the major storefronts).

 

  1. Limitations and Alternatives to Personal Guaranties – Landlords will almost always require that small businesses provide a person guaranty of the Lease.  In order to protect themselves, tenants should ask their landlord for a “sunset” provision on the scope of the guaranty that either limits the duration or the amount of liability.  This way, the tenant has a chance to show its landlord the business can grow and remain viable, while limiting the overall exposure of its principals.  Other forms of security can also be offered to landlords in lieu of personal guaranties such as security interests in business assets or other real property, letters of credit or corporate parent guaranties.  The goal here is to strike a balance between providing adequate assurance of performance to the landlord and constraining the liability of the persons operating the tenant business.

 

  1. Define Option Rental Rates Up Front! – Many times small businesses receive a lease from their landlord that grants option rights to extend the term of the lease “at rates to be determined by the parties at a later date” or “at the prevailing market rate at the time of the exercise of the option to extend the lease.”  The first of these is an agreement to agree, which may be unenforceable in many states. The second  is an invitation to a future disagreement.  Both of these clauses will often cause discord between the parties when trying to determine “market rent” years into the future.  By requesting that the option rental rates be specifically defined or tied to a known formula at the time the lease is executed, tenants can remove this uncertainty and the attendant costs and consternation involved with determining the rental amount at a later date.

Enough the REDD views though:  What are your top 5?

Personal and Corporate Guaranties: WHEN, WHO, WHAT and HOW ?

Binding Agreement

Landlords seek them. Tenants shudder at the prospect of signing them.  And the financial status of the tenant and the economy….well they help to gauge the amount of them. Sort of.

In the absence of a letter of credit, mortgage/deed of trust or a very large  security deposit, the guaranty may also be the only method a commercial tenant has to help secure its obligations under a lease. The corporate or personal guaranty is also a source of independent recovery in situations where the tenant has filed bankruptcy. This post discusses the ins and outs of personal and corporate guaranties, as well as factors to consider in drafting these agreements. Continue reading

Tenant Personal Property – CHAPTER 3 – Time’s Up and Cut The Scene!

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SCENE 1:   Whether the Tenant has defaulted or is holding over, Landlord is in the process of taking possession of the premises. Even assuming an amicable termination of the leasehold interest, Landlord and Tenant have to deal with the issues created by a move-out.

In the best of all worlds,  Landlord would employ its trusty pre-Lease checklist and go through the premises with Tenant and check off all items and review any personal property that remains as well as wear and tear, damage to structure, systems and so on and so on.  The happy Tenant contractors are standing by as well, ready to counter check all items and remove all personal property, repair any damage and be out of the space in a  jiffy. Landlord then returns the next day to a broom swept premises free of all blemishes and a final rent check in certified funds from the Tenant who is waving good-bye and giving well wishes to the owner and all neighboring tenants.

Hopefully you have experienced this series of events, but we must now leave Oz to examine what most folks encounter in real life.

CUT to SCENE 2 (MOST REALITIES): The Tenant is nowhere to be found and the Landlord’s Property Manager (“PM”) is forced to have a locksmith create access to the premises.  As the door creaks open, the vermin scatter and garbage, debris and water on the floor are the first thing that greet this brave soul.  As the PM has been advised, the broker for the property has already signed a lease with a new tenant who needs the space in five days in vanilla shell condition and ready for custom upfits.  As the PM walks slowly into the space,  and it becomes apparent there is a large amount of remaining personal property, alterations and improvements (most of which are malfunctioning) still in the premises.  What to do?

 

1. Review and analyze the situation.

The best tool for this situation is a camera/phone/video record of the space and a witness to corroborate the conditions that are encountered.  Despite any pre-Lease list, the current condition of the premises is paramount to analyzing what to do regarding Tenant’s personal property, fixtures and third party property that may be located in the space.  Your witness is important, especially if there is substantial personal property left behind  or major damage to the premises, or BOTH.  Make sure to check for all evidence of property that may be owned, leased or liened by third parties (see below for a further discussion this issue!).  Secure the premises. Return to your office and check for any UCC-1s that have been filed against the tenant and its specific list of collateral.  Also note any obvious third party property (and hopefully) an address and phone number for a leasing or financing company.

 

2. Take A Deep Breath and Review.

If there is any property owned or leased or liened by third parties, contact them ASAP and tell them what is there and that you need it removed quickly.  Once that is done you are hopefully dealing with only tenant owned personal property.  If the third parties do not respond to you, your state law may require you to give certain notice to the owners before selling it, giving it to the new tenant or tossing it in the trash.  If these folks fail to respond to you, give them an ultimatum; i.e.  “take it soon or we will throw it away or sell it.”   Careful though: a perfected secured interest in personal property may restrict your rights in this regard. Those rights (as well as the fee ownership rights of third parties) are protected by law even if the collateral is located beyond the boundaries of the premises.  Here is your best weapon: let them know you have their property and give them a deadline to retrieve it.  If they don’t respond, state clearly you will charge them for storage fees. Depending upon state law this may equal a “reasonable” storage fee or an amount close to the rent owed by the Tenant.

Special Note:  If your Tenant is a franchisee, consult your lease and any related documents. Most franchisors will have protections built into the lease or associated agreements which not only prevent the Landlord from disposing of the personal property, but also give the franchisor the right (after appropriate notice) to step into the shoes of the franchisee, put a substitute franchisee in place in the premises, or otherwise have rights to retrieve the personal property.  There are also likely procedures built into a default scenario that allow the franchisor the ability to analyze the situation before making a decision.

 

3. Come Up With A Plan.

Once the personal property has been inventoried, identified, scrutinized and related third parties given any required notice,  the PM and the Landlord will need to decide what rights and remedies they wish to invoke to deal with the items left behind. These usually fall into a number of categories:

A.  Lien Rights

State law and the Lease Agreement may provide for a security interest in the personal property that the Landlord can enforce by means of public or private sale or both. Certainly when the Landlord holds a first priority UCC this will be a north star to guide your decision making.  Time to call the broker who so quickly promised the leftovers to the new tenant he has signed up to take possession of the premises!  Most states recognize both statutory and common law lien rights for Landlords in the collateral.  In NC, Landlords have the ability under many cases of enforcing a mechanic’s lien (see N.C. Gen. Stat. Section 44A) or even a post eviction lien (see N.C. Gen. Stat. 42-36.1 et. seq.).   Wherever you may be located though, this should be your first avenue of inquiry !

B. What Can You Use Or Sell Or Trade Out

Assuming the there are no third party rights in the personal property,  the PM and his or her Owner should evaluate what is a fixture (as a result of  alterations or improvements) and what is not. Fixtures under most state laws and the terms of most commercial leases become the “property” of the landlord upon installation and/or abandonment.  Some are obvious (new walls, brick oven, plumbing systems), some are on the border (hoods, shelving, cabling, lighting) and some are obviously not (carts, furniture, pallets, TVs, rugs, inventory and movable equipment) – For more on this topic See REAL ESTATE DRILL DOWN Post entitled  “Fixtures – A Group Arrangement Or Entanglement.”

C. What Should You Just Throw Away

Garbage, useless inventory, broken equipment and debris. The biggest issue here is the cost of removal and cleaning. Demand should be made upon the Tenant to pay for this cost. However, many times the tenant is absent or not willing to cooperate or insolvent.  Result then = cost of doing business. Just don’t try to pass it along in your CAM expenses !

D. What Should You Require Others To Retrieve

Third Party Property, Government Records and Hazardous Waste (“HW”). The first item is discussed above. The second is something the Tenant should be notified of and required to retrieve.  The latter is a situation one hopes to never be involved with.  However, if a PM encounters HW at the premises, due care should be given to determine the contractual and legal requirements that the Landlord and the Tenant have with regard to remediation.  Depending on the type of HW, this can be a nuisance (oil cans, ink buckets) or a very serious problem (PCB s, toxic chemicals, sludge).  A whole article could be written about how to deal with the problem items/waste, but the key point is always, document, analyze (with experts) and act expeditiously to resolve the situation. A final note: take care to observe the rules and regulations regarding tax and medical documents. Even a Landlord may have independent responsibilities to take steps to get these items into the hands of the appropriate agency(s).

At the end of the day whether you lease retail, industrial or office space, you will encounter these issues again and again. The hope is that you work your way through them more like Scene 1, than Scene 2.  However, keep these words in mind:

 

“You Just Can’t Lose What You Never Had….”

– Muddy Waters

 

Tenant Personal Property – CHAPTER 2 – Close Eye

watching eye 2So, the Lease is underway. As Landlord, you are gliding along with the Tenant paying rent and not causing trouble. Here are a few reasons to keep an eye on things:

1.  Alterations – Tenants, especially successful tenants, will want to amplify their space with additional changes. This also is a natural result of a sublease or assignment.  Make sure as a landlord you know exactly what is contemplated and when (and who) will make the upfits. Your lease could be the best in the world at creating hoops for tenants to jump through to report and properly construct alterations before construction begins. However, in practice, due diligence is still the key. The worst of all worlds is to approve alterations to the premises and not follow-up on their progress, especially when it may alter the structure or cause problems with other tenants. A two-way dialogue is best throughout the process, may be three ways if a franchisor and contractor are involved.

2.  Improvements – This is a good sign that the Tenant is doing well and wants to solidify or expand its presence in the Center, Park or Building.  However, the key issue is whether the requested improvements will (or might) become fixtures that are attached to the Premises and may be property of the Landlord, depending on how the Lease is worded.  Hopefully the Lease calls for the Tenant to disclose the plan for the improvements the same as the alterations to the Premises. If not, trouble.  If so, Landlord do not fall asleep  on these modifications to the Premises.  Many tenants will also reserve the right to remove the “improvements” upon termination or earlier vacating of the space.  If so, landlords need to make sure they agree as such before the improvements are constructed to avoid a showdown upon vacating (and thereafter). A true tenant fixture (tables, chairs, shelving etc.) should be distinguished from  a fixture (hood, walk in cooler, new doorway etc.). This is never easy, but getting ahead of it is key to later disputes.

3.   Assignment – So the Landlord and the Tenant have agreed to assign the lease to a separate entity/business. Among the many issues should be who takes what, why,  and  what is the status of what is left behind.  Beyond the agreement between the tenant/assignor and the new tenant/assignee, the Landlord should be concerned about several things. First, what is taken out of the premises in the transition. Any fixtures? Any damage? Second, what will the assignee add to the premises (or take away). This is important.  Third, is this a true assignment or just a sublease in disguise (see below)?  Fourth, is the assignor still liable for personal property issues?

4.   Subletting – A true sublease will require the Tenant to be required to watch over and be responsible for the Sublessee.  As landlords, be sure this is the case. In may jurisdictions, it is easy to allow the sublease to become an assignment by the language of the lease.  Aside from that issue, the Sulessee should be required to follow and abide by the terms of the Lease. Consent Requirements are key here. As Landlord, the owner will want to make sure they are made aware of the Sublesse’s activities in the Premises. Not only the use, but also any additional activities of the Sublesee, despite the language of the Lease and the Sublease.

5.   Maintenance and Financial Status – Sure. This is essential to any agreement to sublease or assignment of the Premises to another entity or even to monitor the Tenant. Most landlords protect themselves well with the language of the Lease.  But that is only the foundation.  Follow-up  and supervision through property management is the key here. Does the Tenant have the financial wherewithal to run its business and pay vendors including the Landlord.  And, is the HVAC maintenance contract still in force. Is the Tenant or its Sublessee/Assignee following the plan and requirements for maintaining the Premises?

Keep a close eye on the occupant and the premises!

 

 

Tenant Personal Property – CHAPTER 1 – The Project May be The Lion, but the List is your North Star*

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So you’ve got your lease signed and are ready to go with your new tenant. Everything is in place – or is it?

Getting the deal done is paramount, but the demon is is in the details for a lot of lease issues including tenant personal property and trade fixtures.  This is the first in several articles about what the tenant brings to the premises and how that plays out during the lease term.

Understanding what the tenant is bringing (or may add later) to the premises is key to getting ahead of the situations that may result from what is installed, stored, used, rented, financed or otherwise placed in the premises by the lessee.

Here are some due diligence items:

1.  Initial Inventory of Items – Ask your tenant what they plan to do with space and what they will be stocking and installing in the premises.  Sounds simple but sometimes it is only inquired of in the general sense. In addition, sometimes the response is vague or “to be determined.” If there is significant TI involved, this may appear more difficult, but should not be if the tenant quizzes their contractor and equipment/inventory vendor(s).  Is this too much to ask the tenant?  I would say no, especially if they are going to be in a long-term relationship with the landlord. Better to get off on a fresh and straight start than not.

2. Lists and Photographs – Another task that will pay dividends at the end of the lease (or sometimes before). Hopefully the tenant will provide its FF&E list upon request. Video or pictures of the finished space are crucial too. Although sometimes not a usual item on most DD lists, this can be essential when the doo doo hits the fan.

3.  Initial Walk Through and Inspection of the Premises – absolutely key to the process. Tenant approval in writing should be a premium.  Delivery of this document can be coupled with the tenant’s requirement to execute and return the estoppel and/or the Commencement Date Agreement.  Note as much as can be viewed and analyzed and if it cannot be determined (age of roof, walls, foundation, structural issues etc.) then note that as well.  The more detail the better the result later if there is a dispute. In other words, you can put disputes to bed up front and hopefully not have to revisit them later in the tenancy.

4. What Is Owned By The Tenant And what is not? – Require the tenant to provide documentation of all personal property they own, any encumbrances on that property, and any lease contracts or finance agreements that cover any items or trade fixtures in the premises. As we will see later, this step will often prevent a investigatory nightmare if the tenant leaves property in the space and is not around (or willing) to aid the landlord in identifying the proper owners or lien holders of the items.

4.  Contractual Lien In Lease – In NC and most other states, the landlord can create a security interest in all property owned by the tenant by inserting the proper language in the lease. This step should also be accompanied by a UCC-1 filing to perfect the landlord’s interest. Some tenants may resist allowing this term in the lease because it will put them in default of a business or vendor loan agreement. Even so, landlords should discuss this issue with the tenant and also complete an independent UCC lien search to determine the rights of any third parties in the property.

 

NEXT TIME: During the lease term….
*Quote by Adam Savage

My Tenant’s Subcontractor Just Liened My Whole Property ! What Do I Do?

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The last REDD Post discussed some of the dangers of speeding through a commercial closing without reviewing key documents. Let’s switch gears this week and discuss the situation of the landlord who has done thorough due diligence, reviewed all of its tenants’ leases and is carefully managing the asset and the activities at the shopping center, office building or business park….

SITUATION:  As Landlord, you have made absolutely sure that all leases have strict alteration/modification provisions that prohibit your lessees from making any more than small repairs to their premises without written approval AFTER advance written notice. In addition, your form lease has an absolute prohibition against a tenant, sublessee or assignee allowing a lien to be placed on the space for any reason. This provision also includes strict penalties if a claim of lien is filed including indemnification and automatic default.

Tenant Q (who has always been a model corporate citizen) provided proper notice of a request to upfit a portion of his premises and attached specific documentation about what, who, where and how the work is to be done.  The contractor and subs appear to be solid folks who have a good reputation in the community. You approve the work and your property manager visits the premises regularly to check on the progress of the project. All appears fine, from the comments of the tenant and contractor and visual inspection of the work.

Three days later though, you receive a claim of lien from Subcontractor X (who was not on the list of companies who would be working on the project). Close examination reveals that Sub X has not only placed a lien for $25,000 on the premises, but has in fact liened the  entire fee by using the legal description copied from the deed found on-line.

Trying to calm down, you contact Tenant Q and ask about the lien claim.  Q has just received his copy of the same lien and is bewildered because they have paid the Contractor in full and on time as progress payments were received. A quick call to Sub X gets you nothing but a direct referral to the attorney who filed the lien.  He is indignant and “offended” that you question what he has done for his client. He refuses to modify or remove the lien until sub X is paid the $25K plus all his attorneys and costs.  As you are taking all of this in, your partner hands you your loan documents from Special Servicer Z (who bought the loan for a 40% discount).   The documents state that any lien placed on the property is an automatic incurable default of your loan agreement.

What Do You Do Now?

No doubt the initial reaction of most landlords would be to seek recovery from Tenant Q and have the lien bonded off immediately or removed by receipt of full payment from Tenant Q to the contractor or subcontractor combined with a signed lien waiver.  But what happens if the Tenant claims that some of the upfit is actually composed of fixtures that improve the value of the real estate?

SOME THOUGHTS ON SOLUTIONS:

1.  If contacted by its lender, landlord should be proactive in letting them know the matter will be dealt with right away and keep a dialogue going on progress in that regard.  Although the special servicer may be less likely than the original lender to be willing work through this matter to resolution without defaulting the landlord, the key is to keep the dialogue going while the lien is being removed.

2.  If the sub refuses to amend or re-file their lien to remove the fee interest and insert only the “leasehold interest” (which in most states is all that contractors can lien if their agreement is with the tenant), landlord may need to consider an aggressive response, including asking a court of appropriate jurisdiction for injunctive relief ASAP. That will also help with the issue in #1 above.

3.  Any lawsuit that is filed or even a discussion of claims and defenses will likely include Sub X claiming that Landlord has been unjustly enriched and therefore they are entitled to seek recovery from the owner.  The question of whether the improvements are “fixtures” or “trade fixtures” could be a whole article/debate in itself. Perhaps a better way for a landlord to attack this claim is to show there was no agreement between it and the contractor or the sub; and thus there is not a reasonable expectation of payment by sub under the circumstances.

4.  Cooperation by Tenant Q in this scenario is key. If there are problems between their contractor and the subs, the quicker they at least bond off the lien the better for all involved.  The rub here may be that they don’t have the financial ability or desire to get into a contractor/subcontractor battle.  That again may trigger the need for the landlord to act aggressively to begin the process of resolving the situation.

Inheriting Leases Upon Purchase of an Asset – Rip Van Winkle’s Revenge!

Rip Van 2

So you’ve just closed on the purchase of that wonderful business park that you and your investors have looked at, examined and fully determined will be the best investment that the group has purchased in years.  And to boot, the seller caved on the price when he realized he needed the cash from the proceeds to cover an old debt that was being called during the negotiaitions. You have reviewed rent rolls, survey, zoning status (which looks great for expansion and modification of the park for additional development) and the usual quick review of enviromental reports, etc.  In fact, the adjacent landowner is also interested in selling his cleared 5 acres to you soon since it needs to be sold to settle his parents’ estate. He is anxious to settle on a price that is 30% below market.

You had your attorney review the closing statement and the summary of leases of the tenants in the park as well as the recorded documents.  You close on the transaction, take a lap around the track and send a notice to local business papers about the transaction.

You are in the clear, right?

Right?

NOT.

One of the most overlooked aspects of this type of purchase is a thorough lease review and evaluation.   Because here is what may happen….

Jones & Company LLC has been a gracious 20 year tenant who pays rent on time and in full. Mr. Jones and his staff are model tenants who run their business and never cause trouble. He has approximately 60% of the leaseable area in the park.  Four months after closing, Jones exercises his right to assign his lease after a life of making nuts and bolts for vehicles of all types.

When you get notice of his actions, you look at his lease and see he had the right to assign it to anyone who “operates a business that does not violate exisiting law.”  Worse – there is no requirement of Landlord consent – a term he negotiated with the predecessor’s predecssor in fee interest. However, his lease was ratified by your seller years before the sale of the property.

…. And the assignee has a right to operate for the remainder of the term and has additional rights to extend the lease for three – 5 year terms without landlord approval as long as they are not in default. They also neglected to sign or otherwise agree to abide by any SNDA – including your own lender’s requirements.  They have explored the use of the space as a music venue which was previously allowed by state law and local ordinance, but now prohibited. They are also exploring the use of the space as a musical instrument distributor.  MIC&CO, LLC has also recently contacted you to remind you they have the exclusive on musical instrument sales in the park.  To top things off, today you have received notice from your lender that the assignment of leases without approval violates your loan agreement.

 

Uh-oh….

 

TIPS TO AVOID THIS PROBLEM:

1.  Make sure that you or your attorney reviews all leases, amendments and related documents to determine the length, breadth and width of the lease terms, allowable uses, options to extend the lease, options to purchase and other terms which will directly affect you if you take a direct assignment of leases;

2.  Never close unless all tenants provide you with estoppels showing no known defaults;

3.  Insure that all exisitng tenants and leases are acceptable and have been approved by your lender;

4.  Examine the extent of all tenants’ rights to sublet and assign their premises and what consent by landlord is required;

5.  Also make sure that the use clauses in each lease do not allow for operations that are not in congruence with other uses in the park, violate laws or ordinances, or are detrimental to the beneficial use of the park for operational, legal and business oppotunity of the landlord; and

6. Determine if the use language would violate any exisiting exclusives held by other tenants in the park.

 

You are the master of  your domain. Be careful and you will be better prepared to own, manage and sell your new asset!