Don’t Ask, Don’t Add?

Should you add or suggest a modification to a contract or lease when it is not to your client’s best interest? No? Never? The answer is Yes and here’s why.

Competing Motivations and Goals

In the process of negotiating a business transaction, many attorneys are left to ponder why their opposing counsel or his or her client did not suggest (or even demand) a contract term that is clearly to that side’s advantage, or even failed to discuss an important concept that affects all parties to the agreement. As an advocate for the client, one might stay silent in order to preserve the benefit of the absence of such matters. Certainly it is a “win” for  your client?  And it won’t hurt your relationship with them to happily announce that the opposing party and his lawyer “left one out that will hurt them and help us!”

However, as an adviser to your client, and for their long term benefit, there are many instances where leaving out a key substantive or procedural term will end up causing more problems than raising the subject and negotiating terms that both sides can agree to.

For the purposes of this post, I am not talking about core terms such as consideration, proper identification of the property location, the term of the agreement, notice addresses etc. No one benefits if those are left out or are hopelessly ambiguous as the enforceability of the agreement is put in direct peril.

When Does This Make Sense?

Suppose you are negotiating a 10-year triple net retail lease which includes boilerplate language for common area maintenance charges to be paid on a monthly basis by the tenant. However, what if the form lease is silent AND the tenant does not request language that provides procedural and substantive guidance for reconciliations and/or review rights?  That is no skin off the Landlord’s back, right?  As landlord’s counsel, remain quiet on that term and move on to the next negotiation point. Big win for the owner, right?  Arguably not.

When the tenant wakes up after year 1 of the lease and determines that it has not received an accounting of CAM charges and the net owed by or due back to them,they will likely demand that landlord provide this information. Landlord then points to the lease and shows there is no obligation to provide any reconciliation. Tenant disagrees and their counsel says landlord has a common law (or in some States statutory) duty to provide an accounting and return any over paid CAM fees per the tenant’s pro rata share of the total square footage of the shopping center.

At that point, there is at best a dispute, if not a threatened lawsuit against landlord for unjust enrichment and potentially other claims. Sure, landlord may prevail in litigation.  But what if they don’t? And what if the Court deems the entire CAM obligation unenforceable? What about the relationship status of the parties for the next 9 years?

What happened to your big win?

Other Examples Where Lack of Terminology or Silence Can be Harmful

  1. Relocation Rights and Obligations – what happens when the landlord has no mechanism (outside of eviction) to move a struggling or holdover tenant to a vacant space to make way for a replacement tenant who is paying 200% higher rent and taking more term?
  2. Rules Regarding Recording of the Lease – if nothing is stated what happens when the tenant records landlord’s full lease in the public record?
  3. Parking Rules – how many spaces is tenant allowed? what if they fill up the parking lot with a special event?
  4. Holdover Status and Increased Rent – landlord may be at the mercy of the common law as to what type of tenant they are dealing with and how much rent tenant owes per month is anyone’s best guess? How long will it take to evict them when the replacement tenant comes along?
  5. Right To Accelerate Rent – as landlord, do you want to be left with the right to seek only past due rent as a remedy? where does landlord’s leverage go if the amount owed is accruing one month at a time?
  6. Landlord Breach and Tenant Remedies – if not spelled out, both parties may be at the mercy of that State’s law on the issue instead of what the parties intended.

Conclusion

Think carefully before you advise your client to ignore these issues even where there might be a short term gain. The long term effects of such an action may be painful and costly!

“I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” – Abraham H. Maslow

 

Due diligence in commercial real estate contracts – how much is enough or too much?

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In purchase and sale contracts as well as some long-term leases, the scope and timing of due diligence is often a hotly negotiated topic.

From the seller/landlord’s perspective, the time for due diligence should be short and tie in neatly to closing. In addition, the scope of due diligence should be as narrow as possible.  Likewise, any representations and warranties related to items defined by the parties should be limited to the effective date of closing or as close to as possible to that time.

From the buyer/tenant’s standpoint, the timing should align with their financing goals for the property, coordination of operations, up fit as well as satisfaction as to what they are buying – i.e. clean title, no hazardous waste problems, proper zoning approval, building inspections, lease evaluation AND and that the seller/landlord stands behind its representations.

What to Look For

Let’s step back a bit and look at what items customarily fall within due diligence for commercial real estate contracts. Although there are differences depending on the type of property, the existing and intended use, age of buildings etc., generally most parties to these transactions should expect the following to be discussed and investigated:

  1. Title  (including  easements, encumbrances, restrictions and covenants, current title policy);
  2. Survey;
  3. Zoning and governmental restrictions, licenses and rules;
  4. Existing and Intended Use of the Property;
  5. Buyer Financing (if not a cash deal);
  6. Inspection of Improvements;
  7. Environmental Inspections and tests;
  8. Existing Leases or other Third Party Property Rights;
  9. Legal Status and Authority of the Parties; and
  10. Representations and Warranties.

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Key Factors

One could post 1500 words on any of these topics (maybe later), but let’s focus on the issues that could develop when the contract is in play.  As an Owner or Buyer what should you watch out for, prepare for, and deal with in these transactions?

  1. Is this  a 1031 Exchange? – if so, expect the  buyer to want to move quickly and thoroughly to avoid the tax consequences that come from not hitting the closing deadline.
  2. Is this a cash deal? – if so, expect the buyer to want to accelerate the due diligence period to get the $$ into the asset as soon as practicable.
  3. If not, is the sale/purchase subject to conventional or non-conventional financing? – As a seller, you will want to have a back-up plan if the contract is terminated either way, but especially if buyer is pulling funds from sources that may have challenges on closing day.
  4. Is this transaction a stand alone deal or tied to bundling properties for a portfolio? – if the latter, be sure as a seller you are aware of the buyer’s plan and contingencies relating to the other properties.
  5. Is this a long term investment for the buyer or a flip? – this could significantly increase or decrease the scope of due diligence and the importance of those terms in the contract.

 

Takeaways

When the parties negotiate due diligence terms and go through the investigation process, all should be aware of the particulars of the asset, the factors lying within and outside the transaction, the motivations of the buyer/tenant AND seller/landlord, and any other relevant factors relating to the property, process and parties. Perhaps “a little dab will do ya”, but sometimes the situation may require multiple rounds of review and analysis.

Maximizing Results in Real Estate Transactions: How To Plan, Where to Save and Where to Spend? (PART 1)

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How many times have you or your company looked back at a transaction and winced at some of the expenses and fees paid to close the deal? Wondered aloud whether the performance of your team and associated vendors and other professionals was properly analyzed and carried out? Thought about how the deal could have been structured more efficiently and each step discussed more thoroughly?

These are just some of the questions commercial real estate professionals struggle with as they try to become more productive, efficient and profitable. As with any business transaction there is no magic answer or manual for how to get the most out of every project while controlling costs and staying true to the goals originally set for the sale, purchase, lease or other transfer of real estate interests. However, these issues arise in every economic cycle, transaction and business regardless of the circumstances.

This will be the first in a series of posts analyzing how real estate companies and related businesses can work together to achieve the goals for each project, while controlling costs and maximizing results. This week we focus on the front end ideas, goals, initial planning and lining up the team to best work on the deal. Continue reading

Leases or Licenses – Careful What You Wish For!

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Just as we have previously reviewed and analyzed the differences between certain aspects of  sharing property rights, landlords and owners are often met with the challenge of whether to enter into lease or a license agreements when allowing businesses or individuals to use their real property. Although these contractual arrangements resemble each other in many structural ways, they have important legal and practical differences that should be considered before choosing one path or the other. Read on for five important differences… Continue reading

SPECIFICITY IN LEASES: When is too much detail a problem for the parties (or even in this article)?

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No one wants too much or too little. But where is the Goldilocks’ solution? Err on the side of too much rather than too little?  Stick to the amount determined by local business standards? Somewhere in the middle? Enough to get the deal the deal done?  Hmmmmmm….

In order to analyze this situation, let’s imagine subpoenas were issued for a representative of each of following players in a lease negotiation to given confidential testimony on this question, including their overriding goals. Each representative is given pure anonymity and the prompt to be as forthright and open as possible. The investigator interviews each person and then reviews his notes. A clear answer does not appear. Rubbing his eyes, he looks at the testimony again: Continue reading

You Mean I Cannot Evict A Tenant If It Is Unfair?

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Yes, this seems strange doesn’t it.

However, the North Carolina Supreme Court has determined this can be the result in certain circumstances.  In Eastern Carolina Regional Authority v. Lofton (No. COAA14-212), the N.C. Supreme Court found that in an eviction case based upon criminal activity of the tenant’s guest, the tenant could not be evicted because it was her involvement in the basis for the eviction would be “shockingly unfair of unjust” or “excessive” and “unreasonable.”  One could easily argue this was limited to the residential nature of the case (domicile), but the N.C. Supreme Court based its ruling on the basic four criteria that serve as a basis for ALL evictions, commercial or residential. Continue reading

Just Work With Me! – Best Intentions and “Waiver Creep”

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When is it a good idea to keep working with a defaulting tenant?

How many times (even during a robust market) have landlords considered and perhaps acted on a tenant’s request to grant them abatement, deferrals and other concessions in order to preserve the relationship, avoid vacancy, make their lender happy and keep the rent coming in? More often than you might imagine.

Although there is clearly self-interests on both sides in the decision to allow the tenant to pay partial rent or defer overdue amounts under the lease, often landlords and tenants enter into such discussions with the best intentions for all involved.

Yet, even the most benevolent agreements can lead to negative consequences down the road. Continue reading

Growing Pains – Issues Surrounding the Construction or Re-Devolopment of Commercial Properties

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Let’s face it.  In the post recession market, Developers and Owners are ready to look for opportunities to build, expand, alter and modify their properties.  Although likely not as robustly as to pre-2008, there is retail, office and industrial re-development and expansion happening as we  read these words.  And with this change in the market comes an inevitable challenge between Landlords and Tenants as to their rights and obligations as new development moves forward and existing product is modified, altered and expanded.  The focus of this post is to delve into the issues relating to what these parties should discuss, plan for,  and work through during the growing pains.  One of the struggles is to determine the rights and responsibilities of the owner and the tenant when a dormant or unimproved property experiences growth and (yikes!) prosperity. As reflected below, change may not ultimately be a problem for either party.  Although there is a lot of advice for tenants, landlords can certainly benefit from this discussion. Continue reading

CAM Reconciliation Time – 10 Things To Remember!

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It’s that season again. The owner and vendor costs have been received. Next, time to work through the Common Area Maintenance (CAM) costs, calculate allocations, send notices and so on…. What are 10 things that owners/property managers and tenants should remember and act on? Continue reading

What’s Ahead For CRE in 2015? – Predictions, Predicaments and Predilections

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2015 is here and the real estate market is back! Or is it? The beginning of the year is always a good time for reflection and planning for what may lie ahead for retail, industrial, office and multifamily properties;  lending; the economy; construction; investment;  and development. Here are some thoughts on what 2015 could look like. My local lens is Charlotte N.C., but I would be interested in feedback from others areas of the country as well.

Certainly this list is not scientific or the result of past reflection on future time travel, so weigh in!  Continue reading