Monday, September 30, 1996
Leases May Trap Law Office Tenants
Lawyers seeking new space should hire
commercial leasing attorneys to help avoid pitfalls.
CHRISTOPHER J. GULOTTA
SPECIAL TO THE NATIONAL
TRANSITION in the legal community during the past 10 years has
caused more attorneys and law firms of all sizes to negotiate or
re-negotiate the commercial leases on their office spaces. While the
majority of these leases in the 1980s covered traditional law
offices for independent law firms, more lessors and entrepreneurial
attorneys now are marketing law office "suites" in
response to law firm downsizing, spinoffs, the re-emergence of sole
practitioners and the resulting need for turn-key space.
One of the
hottest trends is the leasing of law office suites, which typically
provide offices, secretarial stations and conference rooms. Small
firms and sole practitioners are attracted to these suites because
of the reduced initial capital outlay, such as limited costs
regarding construction, installing phone, modem and fax lines and
office equipment, the provision of receptionist services and access,
on a "variable cost" basis, to support staff.
of whether a firm seeks a traditional office or a suite with all the
amenities, it would be foolhardy to assume all lawyers are equipped
to undertake this task without the expertise of a commercial leasing
attorney. Commercial leases are complex legal documents, and real
estate brokers often create a sense of urgency and may rush a
prospective tenant to sign a lease before adequate due diligence can
be performed and the lease is properly reviewed and negotiated by an
attorney experienced in this area.
commercial lease is one of the most essential contracts underlying a
law firm, it can also become a firm's--or its principals'--greatest
liability. More particularly, because a commercial lease defines the
parameters of the firm's home, problems with the lease can affect a
firm's profitability, growth potential or the ability to appear
stable to clients.
attorneys and firms contemplating acquiring new space or
re-negotiating an existing commercial lease, should carefully
consider the following factors.
"use" provision is one of the first provisions in
commercial leases. Landlords typically attempt to narrowly define
the permissible uses of the premises by allowing only the current
business of a tenant.
provision should be negotiated broadly in order to cover law office
uses and any related or ancillary uses which may later become
desirable. Thus, instead of limiting the use to "law office
uses," a tenant's attorney should consider negotiating instead
for: "use for general office purposes, including, but not
limited to law office uses" (with no limitations as to the type
of "office use").
expanded-use provision affords a firm the opportunity to provide a
major client with use of a portion of its space and to sublet or
assign the lease to a broader spectrum of potential subtenants or
assignees--presumably, subject to landlord consent. Further, the
tenant should obtain a representation from the landlord that the
agreed permissible use will not violate any laws, regulations,
contracts or leases. Given the cadence of transition and the
uncertain economic climate of the 1990s, this flexibility in
permissible uses is crucial.
term, one of the most essential provisions in the lease, at the very
least, should be long enough to allow tenants to recoup their
capital and intangible outlays for moving, alterations, furnishings,
administrative matters, such as notices to clients and vendors, and
lost billable hours. The option to extend the length of the term
should have no openings--as open terms are an invitation to a
dispute with the landlord.
should confirm that such options are true tenant options and are
conditioned only upon the tenant being in substantial compliance
with the lease at the time of exercise. Also, the following
provisions should be considered: options or rights of first refusal
regarding contiguous space for expansion purposes and a right of
first refusal to purchase the premises.
tenants foolishly tend to focus on the initial base rent for the
premises, often losing sight of the method by which this charge,
typically the largest financial component of the lease, shall be
increased over time.
many firms place a premium on predictability of expenses for
budgeting purposes, fixed-scheduled rent increases are frequently
preferred. But if an index, such as the Consumer Price Index, or
CPI, is the means of determining increases (commonly used in
long-term leases or in options), the following provisions should be
negotiated: a favorable base year, which may not necessarily be the
most recent year, and limits on increases--e.g., to exceed neither a
given percentage in any one year nor an average of annual increases
over a given percentage during the lease term.
should beware of "catch-up" CPI provisions designed to
allow the landlord to catch up for years when the scheduled
increases were less than the CPI increases. Tenants should identify,
with precision, the actual CPI formula to be employed.
low base rent will attract a tenant's initial interest, though
additional items, such as real estate tax increases; common area
maintenance, or CAM, charges; sprinkler charges; electric usage; and
porters' wage, may not be apparent at first. These additional items
can significantly increase the total rent.
prospective tenant should have the landlord: enumerate all such
items, as well as quantify initial amounts and previous schedules of
increases; confirm that the tenant's percentage share regarding such
items will not be excessive; budget for the bottom-line rent
expense, i.e., the total base plus additional rent; and provide the
method of calculation of any such increases. The tenant should
negotiate for limits--annual and/or over-the-lease term--regarding
now contain both apparent and not-so-apparent restrictions,
procedures and fees, for assignment or subletting. The ability to
assign or sublet is essential, and any provision which allows the
landlord to withhold, delay or require additional compensation for
this right could adversely affect a tenant.
the surprise "landlord-partner" scenario--when the
landlord has so much leverage over the tenant that the landlord
becomes, in effect, the tenant's partner--tenants should initially
negotiate for clearly defined approval standards, limits on approval
fees; short "landlord approval/review periods," i.e., 15
business days; and releases of the tenant from post-assignment
lessees also should be wary of provisions that require tenants to
deliver to the landlord a percentage of the consideration received
for assignment. If such a fee is exacted by the landlord, the
lessees should consider a liquidated amount, because ascertaining
the precise consideration can be problematic.
should also determine which nonfinancial obligations are the
tenant's and which are the landlord's. Tenants should avoid
accepting responsibility for physical-plant type items such as
heating-ventilation-air-conditioning systems, or HVAC, power supply
and structural maintenance.
should beware of additional rent "pass-throughs," in which
tenants are required to pay a share of expenses normally absorbed by
the landlord, such as capital improvements to the premises.
As with any
other legal matter, early and extensive research into the essential
and underlying considerations is vital.
prospective tenant should conduct a title search of the premises to
determine: that the chain of title confirms that the landlord is, in
fact, the owner and not a mere net or ground lessee; the existence
of any violations of record, such as municipal, building department
or board of health, which could affect the tenancy; that the
building is properly zoned for the tenant's use; that the
certificate of occupancy is current and there are no outstanding
violations; and that the landlord has a mortgage on the premises.
lease traditional law offices should consider obtaining a leasehold
title policy. This policy insures the tenants' right to possession
of the subject premises for the term described in the lease, subject
to any limitations contained in the lease, such as subordination
provisions, and compensates tenants for certain financial losses.
These losses would typically include reasonable costs of relocation
and, in New York for example, 10 years of aggregate rents, or all
monetary obligations, payable by tenant pursuant to the lease.
commercial leases and many law office suite lease/occupancy
agreements provide that the tenant's leasehold estate is subordinate
to the landlord's mortgage(s), net leases or ground leases. In the
event the landlord defaults with respect to any of these underlying
agreements, a tenant's leasehold estate will be adversely affected
and, in some instances, terminated.
that have invested a significant amount of time and capital in the
space, or when the appearance of stability is essential, consider
negotiating for a nondisturbance provision, subject to approval by
any mortgagees, net or ground lessors, which ideally would provide
that in the event of a breach by the landlord of any agreement to
which a lease is subordinate, the firm's leasehold estate and the
lease's terms and provisions, such as base rent, additional rent
items, escalations, term and options, will remain unchanged.
often require the firm's principals to assume personal liability for
the lease. In this event, tenants should consider: having a
corporate tenant execute as tenant and the principals execute as
guarantor (in separate agreements); and
Familiarity with key
clauses in commercial leases can help prospective tenants obtain
separate "good guy" guaranty in which the principals would
incur personal liability only in the event that the corporate tenant
has breached the lease, not cured the breach within the applicable
grace period and the guarantors have not vacated the premises by the
end of such grace-cure period.
should negotiate to specifically limit the exposure of the
principals to base rent and certain ascertainable monetary
obligations, such as real property tax increases, CAM charges,
sprinkler charge, electric usage or porters' wage, for the period
starting from the date of the tenant's uncured breach (not from the
beginning of the lease to date); and only then, if the tenant and
guarantors have not vacated by the end of the grace-cure period.
other relevant considerations. If a broker is involved, tenants need
to consider who is responsible for the broker's fee, including
renewals. Further, if the lease provides for written notice from the
landlord of any alleged breach, the provision also should provide
the tenant with sufficient time to either cure or to take
affirmative measures to cure.
landlord is giving the tenant a rent concession, the tenant should
determine whether the concession includes the additional rent
charges and whether the concession is contingent upon the tenant's
compliance with the lease over its entire term.
should also ascertain the specific services provided by the
landlord, and the limitations of such services, such as overtime
charges for weekend use of the elevator or HVAC. Also adequate
parking for employees is a consideration, including whether parking
is provided free of charge.
landlord will be performing work on the premises prior to
commencement of the lease, a detailed description of the work should
be attached to the lease, together with damage provisions for
landlord's failure to timely complete.
the rent and/or additional rent items are based upon square footage,
this measurement should be reasonably accurate.
tenant is making alterations to the space, the tenant should
consider submitting the proposed plans to the landlord for
pre-review and approval concurrent with the lease execution. This
will reduce delays and avert additional expense for landlord's
professionals to review the proposed plans.
should be included in the lease that covers all instances in which
the landlord's consent or approval is required, establishing
"reasonableness" as a standard and further requiring the
landlord to promptly respond to any such requests.
tenants should be wary of provisions which limit a tenant's remedy
exclusively to the landlord's consent or approval. When a landlord
unreasonably withholds consent, this provision has the practical
significance of undermining the effectiveness of requiring the
landlord to be reasonable.
the tenant should be sure to obtain sufficient listings in the
conducting thorough due diligence and engaging counsel experienced
in commercial leasing, independent attorneys and firms alike can
avoid numerous pitfalls and obtain an advantageous lease during
these uncertain times of transition.