Category Archives: Real Estate

Want Out? Prove It: Enforcing Termination Options in Massachusetts Commercial Leases

A recent Massachusetts Appeals Court decision made clear that the burden of proof relative to the operation of lease option clauses falls on the party seeking to exercise the option regardless of which party moves to enforce their rights pursuant to the lease. In Patriot Power, LLC v. New Rounder, LLC, et al. (2016), a commercial landlord initiated an action for declaratory judgment and breach of contract against a tenant alleging that the tenant did not properly exercise its contract option to terminate its tenancy.

At trial, the jury was instructed that the landlord bore the burden of proof relative to the claim that the tenant had not properly exercised the lease termination option. The landlord objected to the instruction and subsequently lost the case. On appeal, the court sided with the landlord and reversed the ruling on the grounds that the jury instruction regarding the burden of proof was erroneous and prejudicial.

The court held that the fact that the landlord initiated the action for declaratory relief did not shift the burden to the landlord on the underlying action. The court cited a line of cases supporting the proposition that, “one relying on a condition to avoid contractual obligation has the burden to prove the occurrence of the condition.” A proposition made stronger when the facts are such that, “the contractual obligation actually requires an affirmative act by the party seeking to end the obligation.”

As applied to the facts in Patriot Power it is clear that the tenant bore the burden of proof. The lease termination option required the tenant to mail timely notice of such termination in order to relieve the tenant of further contractual obligation. Thus, the tenant needed to prove it had, in fact, complied with the terms of the lease rather than the landlord needing to prove non-compliance. Lease termination option clauses are common in many Massachusetts commercial leases. Both commercial landlords and tenants should read their leases carefully in order to fully understand the obligations and provisions contained within.

Massachusetts Commercial Lease: Maintaining and Repairing Equipment

By:  Cole Young

Cole-YoungIt often comes as a surprise to commercial tenants that they are responsible for repairing and maintaining most of the equipment in their commercial space.  This can prove both frustrating and expensive when an outdated air conditioner breaks in the middle of summer.  To avoid these frustrations, tenants should (1) review the specific requirements in the lease, with an eye on some of the below specific applications; and (2) have a professional evaluate the life and value of each piece of equipment the tenant is required to maintain.

Servicing Exclusively the Premises

When a lease requires a tenant to repair and maintain equipment, the commercial leasing lawyers typically haggle over what specific equipment is required to be maintained.  The usual approach is to require the tenant to repair and maintain equipment that “exclusively serves” the rented space.  Meaning, the landlord is required to maintain equipment that serves the entire building (e.g. the building plumbing) but the tenant is required to maintain equipment that only serves the space (e.g. plumbing located in the tenant’s bathroom).  All buildings and all rental spaces are different, so it is imperative to negotiate, with as much detail as possible, what equipment truly “exclusively serves” the premises.  Often, as is usually the case with air conditioning and HVAC, the line between a building system and a premises-specific system is blurred. 

Air Conditioning and HVAC

Air conditioning and HVAC units are some of the more contested elements in maintenance/repairs provisions of leases.  These systems are critical because they can completely destroy a tenant’s ability to operate its business if they fail and they are often expensive.  Moreover, these systems are often tied to other systems within the building and therefore it is difficult to pinpoint who should absorb the cost.  As stated above, tenants should enlist a maintenance or engineering expert to determine (1) the life of the air conditioning and HVAC system; and (2) fully describe the interplay between the tenant’s systems and the building’s systems. 

Grease Traps

A grease trap, which is a plumbing apparatus used to collect cooking grease before it enters the wastewater system, is particularly important for restaurant commercial leases.  In every restaurant lease I have negotiated, the tenant is responsible for cleaning and maintaining the grease traps.  Leases typically state that tenants must “regularly” clean and maintain their traps, but sometimes a lease will provide for specific periodic cleanings (e.g. once a month) and even specify the contractor the restaurant owner must use.  The above language is fairly standard, but one important piece that is often overlooked is the location of the actual grease trap.  While ordinarily located within the restaurant, grease traps are sometimes located in separate areas, in other adjacent units, and even outside of the premises.  As such, tenants and landlords alike should discuss and agree to how and when grease traps should be cleaned.  Otherwise, tenants will have headaches in trying to access the very thing they agreed to clean, and landlords may have other tenants angry because the grease trap equipment is interfering with their business.    I once had a client whose grease trap was located in the basement of an adjoining unit, which happened to be a merchandise showroom.  Although my client cleaned the grease trap as required, they also inadvertently dragged grease throughout the showroom, much to the frustration of the other tenant.     

Operating Expenses

The confusing crossover between all repair and maintenance issues is when repair and maintenance are covered as part of operating expenses.  In larger buildings, tenants will have to pay, in addition to rent, a portion of the landlord’s operating expenses for the building.  This portion often covers some of the building’s overall maintenance and repair costs.  As such, even if something is not a direct tenant expense, the tenant may end up covering the cost (or a portion) through the payment of operating expenses.  It is therefore imperative that tenants ensure their maintenance and repair obligations are consistent with what is covered under operating expenses.   

The above is a simplified summary of different approaches to equipment maintenance for a commercial space. Each situation is different, and often different locations will have differing “standards” for how leases are structure. For example, in the Boston area, the standard provisions for commercial leases in Cambridge often differ from those in the City of Boston. In fact, the standards in different neighborhoods in Cambridge (e.g., Kendall Square) often deviate from other neighborhoods (e.g., Harvard Square). As such, it is critical that both landlords and tenants speak with a commercial real estate attorney before executing a commercial lease.

Purchasing At Foreclosure? Foreclosed owners may remain in possession longer under new Housing Court ruling

By Jennifer Lynn, Esq.,


     The required timeline for notice of eviction to holdover former homeowners was recently altered by the Southeastern Division of the Massachusetts Housing Court in Lenders Comm. Finance LLC v. Pestilli, et al., docket no. 16H83SP03779BR.  After obtaining title, Lenders Commercial Finance brought a summary process action against the former-mortgagor who refused to vacate after receiving a 30-day notice to quit.  The bank moved for summary judgment, requesting the court to enter judgment in its favor because no facts were disputed between the parties and it brought a valid action to evict. In a departure from long-standing practice, the court ruled that Section 12 of Massachusetts General Laws Chapter 186 requires service of a 90-day notice to quit in order to regain possession from the holdover former-mortgagor properly.  The court based the ruling on the fact that no agreement existed between the purchasing mortgagee and the former mortgagor to pay rent for any definite rental period. This ruling is a marked departure from the longstanding principle that a former-mortgagor, as tenant-at-sufferance, is only entitled to “reasonable” notice prior to eviction, and customary practice provided 30 days’ notice to the holdover occupant.

     The court’s ruling in Pestilli is an unpublished district court decision and stands only as persuasive authority for future summary process decisions. The ruling, however, may signal a shift in Massachusetts housing courts toward statutory interpretations that provide foreclosure occupants a longer period of notice before the mortgagee regains possession of foreclosed property. Should the standards set forth in this ruling be adopted widely, the timeline for eviction will be extended, creating additional burdens for the foreclosure purchaser and increased overall costs. In addition, the change will likely create an increase in “cash for keys” deals, under which the purchaser offers a deal to the former-mortgagor to vacate voluntarily and to forego challenging the right to possession. Evicting holdover tenants and former homeowners can be a complicated and fact-specific process. As such, you should contact an experienced attorney to ensure the proper timelines and grounds for eviction are present.

Massachusetts Commercial Lease: Acceleration Clause

By Cole M. Young


Unlike Massachusetts residential leases, under which a landlord is required by law to mitigate its damages, commercial lease provisions are more flexible and often contain a so-called “acceleration clause.”  An acceleration clause, in its most basic form, addresses whether a landlord may accelerate rent (i.e. demand all of the rent that is remaining due under the lease) if a tenant breaches the lease before the end of the term.  Generally speaking, commercial leases deal with acceleration in one of three ways:  (1) the lease is silent about acceleration; (2) the landlord can demand the full rent immediately upon the tenant’s default; or (3) the landlord can demand the full rent immediately upon the tenant’s default and demand that the tenant continues to pay the ongoing obligations under the lease.  Practically speaking, it is very rare that a lease is completely silent.  Thus, for purposes of this article, we will assume that the lease contains some form of an acceleration clause. 

Savvy tenants typically try to limit the landlord’s ability to accelerate rent.  Often, tenants will try to (1) negotiate longer cure periods (i.e. have a longer time period during which the tenant can remedy the default); (2) limit the landlord’s options to either (i) demanding full rent upon default or (ii) requiring the tenant to meet ongoing obligations; and/or (3) ask that the acceleration of rent is offset once the landlord secures a new tenant (i.e. the landlord must try to mitigate its damages).  Assuming the landlord is willing to make some of these concessions, landlords will want their own limitations: (1) landlords are generally not going to allow a cure period beyond thirty days; (2) if the landlord elects to take a one-time payment in lieu of ongoing rent payments, the landlord may require more money for the security deposit and/or require a personal guarantee; and (3) the landlord may allow an offset (i.e. the landlord gives the tenant a “credit” once the landlord secures a new tenant), but that offset usually factors in the landlord’s costs in doing so, like broker commissions, attorney fees, etc.  

Tenants have argued that acceleration clauses effectively allow landlords to “double-dip” their purported damages.  Said another way, a tenant may argue that it is unfair for a landlord to receive accelerated rent from the tenant and receive rent from a new tenant (assuming the landlord is able to obtain a new tenant).  Massachusetts courts, however, have continued to uphold acceleration clauses on the basis that accelerated rent is a valid form of “liquidated damages.”

In a seminal case on this topic, the Massachusetts Supreme Judicial Court (“SJC”) in Cummings Properties, LLC v. National Communications Corporation1 held that the acceleration clause at issue was a valid against the tenant.  In that case, the landlord asserted that it was entitled to accelerated rent on the remainder of the lease (more than two years) for and thus the landlord was entitled to more than $500,000.  Citing relevant cases from Massachusetts and other jurisdictions, the SJC agreed.  Subsequently, other tenants have fought unsuccessfully to void such provisions, making the argument that acceleration clauses effectively allow landlords to “double-dip” if they then find a suitable replacement tenant.  This argument was summarily dismissed in a recent federal court decision, Bridge Over Troubled Waters, Inc. v. Argo Tea, Inc.2, applying Massachusetts law.  Like the SJC in Cummings Properties, the Court in Argo ruled that the acceleration clause was enforceable as liquidated damages.

The above is a general summary of acceleration clause approaches in commercial leases. Each situation is different, and often different locations will have differing “standards” for how leases are structure. For example, in the Boston area, the standard provisions for commercial leases in Cambridge often differ from those in the South Boston. In fact, the standards in different neighborhoods in Cambridge (e.g., Kendall Square) often deviate from other neighborhoods (e.g., Central Square).  Moreover, acceleration clauses tend to vary depending upon whether the space is for a restaurant, laboratory, retail, office or warehouse).  As such, it is critical that both landlords and tenants speak with a commercial real estate attorney before executing a commercial lease.


FN1.  Cummings Properties, LLC v. National Communications Corporation, 449 Mass. 490 (2007)

FN2.  Bridge Over Troubled Waters, Inc. v. Argo Tea, Inc, 2016 WL 7238793

Massachusetts Court Holds That Strict Condominium Bylaws Preclude Lawsuit Against Trustees

By Andrea Jacobs, Esq.  

Massachusetts Court of Appeals recently affirmed the legal validity of a condo’s bylaws requiring the consent of eighty percent (80%) of unit owners as a prerequisite for owner standing in lawsuits against the trustees of the condominium’s board. The bylaw in question made it functionally impossible for unit owners to sue the trustees as, by virtue of the number of units and number of trustees, it necessitated at least partial trustee-owner consent to reach the eighty percent (80%) threshold. Bettencourt v. Trustees of Sassaquin Village Condo Trust, 59 N.E.3d 455 (Mass. App. 2016).

The Court held that the bylaw was neither unconscionable nor against public policy and thus concluded, “that the consent requirement is valid and the plaintiffs’ failure to comply with it mandates dismissal of their derivative claims.”  The Court reasoned that as the plaintiffs, “knowingly and voluntarily agreed to the consent requirement when they purchased their units,” and were not precluded from, “persuading other unit owners and one or more of the trustees to consent to a lawsuit,” that the bylaw was not unconscionable as the, “plaintiffs [had] not identified any aspect of the consent requirement that is substantively or procedurally unfair.”  Additionally, the Court noted the bylaw was not “one-sided” as the provision applied to all owners, included potentially aggrieved trustee-owners. The Court also held that  condominium trustees do not owe a fiduciary duty to individual condominiums owners, but rather that duty is limited to the board of trustees itself.

Functionally this ruling implies that even the most stringent of condominium bylaws may be read as valid so long as owners were aware of the bylaws at the time of purchase and the bylaws treat all owners the same (including trustee-owners). This ruling should serve as a reminder to current and potential Massachusetts condominium owners that heightened vigilance with regard to the contents of condominium bylaws and other condominium related documents is necessary and advantageous.

Proposed Legislation to Restrict Reasons for Evicting Tenants in Boston

By Attorney Jennifer Lynn.  

strangscott2015-6Mayor Walsh’s administration recently proposed a new bill aimed at limiting the available reasons to evict a residential tenant. The proposal, known as the “Jim Brooks Community Stabilization Act,” would eliminate no-fault evictions in many instances, a common practice used to remove tenants without listing a violation. Proponents of the act claim that it is designed to protect renters from “arbitrary” or unreasonable evictions, without unfairly restricting the landlord. Opponents cite concerns that it would deter further development and hinder private property rights.  

Under current law, landlords may evict tenants for a specific reason, or for no reason at all, depending on the type of rental agreement. For tenancies with an ongoing, written agreement, landlords may give notice to evict for nonpayment of rent or for a specific reason, including violation of a provision of the lease. For tenants who are at-will, meaning those who do not have a written lease for a specific term, landlords may give notice to evict for failure to pay rent or for no reason.

Should the proposed Act pass, the new law would severely restrict the “no-fault eviction,” and limit evictions to instances where the tenant has not paid rent, created a nuisance, used the unit for an illegal purpose, violated the lease agreement, refused to extend or renew the lease, refused to permit the landlord to make necessary repairs, or offered subtenants not approved by the landlord. Exceptions to these restrictions have been offered, but are narrow in scope, applying to sober homes, college housing, or buildings owed by a Massachusetts resident who has six or less residential units. For larger scale, commercial landlords, they would be stuck with a tenant until a material issue arises.

Moreover, if passed, the Act would prevent landlords from clearing an entire building for the purpose of selling, renovating, or converting the use of the building. Under the new law, landlords would have to renovate a building or unit while the tenants continue to reside in their unit or force the landlord to provide alternative housing to the tenant while construction is ongoing.

If you are a landlord renting residential units in Boston, make sure you continue to monitor the Jim Brooks Community Stabilization Act. If it becomes law, your ability to remove tenants from a unit may become dramatically restricted. Should you have questions about evicting a residential tenant, you should contact a Boston property management attorney.

Massachusetts Commercial Lease: Unenforceable Indemnification Provisions

Cole-YoungI will concede that discussing indemnification provisions in commercial leases is not the most riveting topic. However, this is a critical issue for landlords and tenants alike. Nearly every commercial lease I have reviewed, from small transactions (e.g. a boutique Boston restaurant) to larger, complex transactions (e.g. a state-of-the-art laboratory facility in Cambridge), has a provision discussing how and when a tenant or landlord must indemnify the other party. In layman’s terms, “indemnification” simply means that one party promises to pay the cost for possible future damages or claims. We discussed indemnification in the context of construction subcontracts and construction management contracts in our previous articles.  

In the commercial leasing context, leases often state that the tenant will indemnify the landlord for any claims, injuries or damages that occur on the leased property. They will often go further and require that the tenant indemnify the landlord even for the landlord’s own actions, inactions or negligence. While these provisions seemingly offer landlords protection, landlords should proceed with caution: some of these provisions are completely unenforceable in Massachusetts.

Massachusetts General Laws Chapter 186, Section 15 states:

Any provision of a lease or other rental agreement relating to real property whereby a lessee or tenant enters into a covenant, agreement or contract, by the use of any words whatsoever, the effect of which is to indemnify the lessor or landlord or hold the lessor or landlord harmless, or preclude or exonerate the lessor or landlord from any or all liability to the lessee or tenant, or to any other person, for any injury, loss, damage or liability arising from any omission, fault, negligence or other misconduct of the lessor or landlord on or about the leased or rented premises or on or about any elevators, stairways, hallways or other appurtenance used in connection therewith, shall be deemed to be against public policy and void.

Both Massachusetts and Federal Courts have held that the above statute applies equally to residential leases and commercial leases. The statute does not, however, preclude a landlord from requiring a tenant to obtain insurance protecting against the landlord’s own negligence. So what does this mean? In short, it means that commercial landlords cannot force tenants to indemnify or hold landlords harmless from the landlords’ wrongful actions. It does not prevent, however, landlords from requiring tenants to carry insurance to protect from such liability. As an example, imagine that a customer walking into a restaurant trips and falls in an entranceway. If the lease has language stating that the tenant has to indemnify the landlord from any injuries on the property, including those caused by the landlord, then the tenant would have to cover the customer’s injuries. Under Massachusetts law, however, such provisions are unenforceable and so the landlord may not escape liability (say, for example, the customer tripped because the landlord failed to fix the doorway). To protect against this liability, the landlord can obtain its own insurance and/or require the tenant to obtain insurance protecting the landlord.

The above is meant only as a brief summary. If you are a commercial tenant or landlord and have questions about your lease, you should contact a commercial real estate lawyer.

Massachusetts Commercial Lease: Additions and Alterations to a Leased Premises 

By Jennifer Lynn

     Tenants will often want to make alterations to the premises they have leased to fit their specific business needs. Before entering into a lease, the landlord and tenant must determine what kind of consent is needed for different types of alterations, how alterations or additions will be paid for and completed, and who retains the benefit of those improvements after the lease ends.

Prerequisite for Landlord Consent

      Sometimes commercial leases prohibit any change to the premises without the landlord’s express consent. A strict restriction may be desirable where the term of the lease is relatively short, the space has been recently renovated at the landlord’s expense, or the premises already contains specialized fixtures. However, landlords will often agree to a more relaxed level of oversight for changes to the premises. It can be burdensome for a landlord to strictly monitor any change to the premises and therefore practical for the tenant to be allowed to make minor changes (e.g., repainting the walls) without receiving the landlord’s express consent, while still requiring written consent for more robust changes (e.g., moving interior walls or relocating stairwells). For major additions or alterations, commercial leases often contain a provision requiring the parties to enter negotiations regarding the specific addition at the time the tenant desires to make the change.

     All good contracts avoid ambiguity, and a common way to separate minor alterations from major ones is to list distinguishing characteristics for when the landlord’s express permission is or is not needed. “Minor” alterations often includes changes that (1) do not significantly impact other tenants in the building, (2) do not adversely affect the value of the property or will not affect the landlord’s future ability to rent the premises, (3) do not require permits or variances to complete, (4) do not impact common areas or external portions of the building, (5) do not impact the structural integrity of the building, and (6) do not impact the usable square feet of the premises. Distinguishing between minor and major premises alterations relieves the landlord of some tenant oversight burden while still protecting the landlord’s property, while the tenant enjoys some level of freedom to customize their space without having to obtain the landlord’s consent.

    Determining whether a tenant may alter a rental property leads to a fundamentally important question: who is paying for the alteration?

Tenant Improvement Allowance

     One method of paying for premises alterations is a “tenant improvement allowance,” a set sum provided by the landlord for this purpose. Under this type of provision, the tenant is only responsible for costs that go beyond the stated limit. Limitations on the allowance are stated as either a cost per-foot or a flat cap for a certain dollar amount. When the tenant requests an improvement, the landlord will then directly pay the costs up to the predetermined limit.

     In addition to determining the amount of the allowance, the parties will need to negotiate how the tenant may use the allowance, including what types of work will be covered by the allowance and what happens in the event part of the allowance is left over after alterations are completed. The overall costs for the tenant can vary dramatically if the allowance is limited to use for only direct construction costs, or if it can be applied towards architect’s fees, permits, moving or storage costs, zoning variances, or related legal fees. Likewise, the parties should be aware if the provision calls for any unused portion of the allowance to be credited towards future rent.

Build-Out Allowance

     Build-out allowances are another type of incentive whereby the commercial landlord offers “building standard” fixtures or furnishings for the premises with the option for upgrades at the tenant’s expense. Build-out allowances are usually offered only for new buildings, as the landlord has easy access to the necessary materials and construction services at that time. When negotiating this type of provision, the parties should take notice of who is responsible for completing any upgrades, the landlord or the tenant. The tenant should weigh the convenience of having the landlord complete any upgrades against the overall cost of the project, as it may be more cost effective for the tenant to have their own contractor come in to complete the work, or the tenant may require or want upgrades the landlord is not offering. However, if the landlord is the party responsible for the upgraded finishes, the tenant can avoid cost overages and expenses due to time delays because the landlord would be responsible for completion of the work.

Expansion Rights

     A less common right that the parties may negotiate is the right of the tenant to expand their operation after entering into the lease. Tenants commonly seek this right in hopes that their business will succeed to the point of needing more space. In order to secure that right, the tenant will need to negotiate the right to build out their space so they have the option to expand when needed. This can be done by reserving other space owned by the landlord for a set period of time, in either the building the tenant is currently in or elsewhere. In order to be effective, expansion options should list an accurate description of the space the tenant wants to reserve a right in, the rental amount for that additional space, and the terms and dates under which the tenant may exercise the option. The option to expand only takes effect when the tenant affirmatively exercises the option; if that need does not arise, the tenant is not obligated to act on it.

     Use of this right is understandably limited. In competitive real estate markets, landlords are much less likely to agree to an expansion right because it reserves real estate and restricts the landlord’s ability to rent their buildings without restriction (i.e., being unable to rent reserved space during the time it is set aside under the expansion provision). Landlords must also be aware of inherent logistical concerns. In buildings with multiple units, giving even a few tenants expansion rights would create a confusing and inconsistent situation for the landlord.

Title to Improvements

    Landlords will generally want to retain title to all material additions or alterations within the premises. Where changes are made to floor plans, utility lines, equipment, or fixtures, the landlord will insist on retaining them after the tenancy terminates and the tenant vacates because those changes are considered material improvements to the premises that have become part of the premises and removal would be damaging or costly to the landlord. Tenants are often permitted to retain alterations which are more minor in nature, not considered fixtures, and represent the tenant’s personal property. Commercial leases will often specify the categories of alterations that are retained by each party. In addition to addressing the right to retain improvements, this provision will usually contain a clause requiring the tenant to keep all improvements and alterations free from any mortgage, lien, or other encumbrance. These restrictions ensure that construction of additions and alterations do not affect the landlord’s overall rights as the owner of the property.

The above is a simplified summary of different options for improving or altering a commercial premises under a written lease. Each commercial lease negotiation will present a unique situation and often different landlords and tenants will have differing “standards” for how a commercial lease should be structured. As such, it is critical for both landlords and tenants speak with a Massachusetts commercial real estate attorney before executing a commercial lease.


Massachusetts Commercial Lease: The Security Deposit and Letter of Credit

When negotiating the security deposit for a commercial lease, the parties often simply focus on the dollar amount required.   While this is important, and can vary wildly depending on several factors, the language of the security deposit provision is often overlooked.  This seemingly standard language, however, is important for both landlords and tenants.  Unlike residential landlord/tenant law, commercial security deposits are not governed by statute.  Thus, it is up to the parties to negotiate specific terms dictating the amount and process for using the security deposit.  

Security Deposit Amount

Security deposit requirements in the greater Boston area are sometimes as low as one month’s rent and as high as a full year’s rent.  Typically, the amount of the security deposit is based upon (1) the creditworthiness of the tenant; (2) the type of space being rented (a high-end laboratory will command a higher security deposit than a warehouse space); and (3) whether the lease is personally guaranteed.  Once the amount is determined, the parties next need to determine how the security deposit may be used, whether the security deposit may be reduced at a certain point, and whether the parties wish to use something in addition to, or in lieu of, the security deposit (e.g. letter of credit or Uniform Commercial Code lien). 

How the Security Deposit can be Used

Landlords often seek language stating that the security deposit can be upon any breach of the lease.  Written broadly, this would include the tenant’s failure to pay rent/utilities, damage to the leased premises, failure to open for business and, in some instances, penalties, costs and attorney fees.  Tenants usually push back on such provisions and look to limit the use of a security deposit for material breaches of the lease (e.g. failure to pay rent).  As a corollary, the landlord will also want language requiring the tenant to replenish any portion of the security deposit used by the landlord for the tenant’s default.  Regardless of the perspective, both tenants and landlords should also include language stating what happens to the security deposit at the end of the lease: tenants obviously want the security deposit back as quickly as possible (typically within 30 days of the termination of the lease) and landlords want to make sure there is language allowing the landlord to hold onto the security deposit until any and all remaining obligations have been fulfilled. 

Burndown Provisions

With larger security deposits, landlords will sometimes agree that after a certain period of time – say one year – the security deposit will decrease so long as the tenant is not in default.  While this can be helpful for a tenant’s cash flow, it is also usually dependent on whether a tenant has an uncured material default.  Thus, the tenant needs to ensure that a “default” under the terms of the lease is not so broad as to preclude a drop-down for a de minimis violation.  Although there is no set rule, security deposit burndown provisions usually allow for a reduction in the security deposit halfway through a lease (e.g. a ten-year lease may allow a burndown after five years of the lease).

Uniform Commercial Code: An Alternative to a Security Deposit

As a bargaining option for both landlords and tenants, landlords may be willing to decrease or eliminate the security deposit amount, or change the burndown provision, if the tenant gives the landlord a Uniform Commercial Code (“UCC”) lien against the tenant’s property.  A UCC lien works much like a mortgage:  the landlord effectively has a lien against the tenant’s personal property.  In office settings, this is often of little use to the landlord.  After all, desks, chairs and the like generally do not have large commercial value.  In higher-end uses, like restaurants, factories and laboratories, the onsite personal property likely has significant commercial value.  If the tenant defaults, the landlord can seek court-intervention to obtain and potentially sell the tenant’s property.  From a tenant’s perspective, this may help cash-flow by lowering the security deposit or incentivizing the landlord to provide a burndown provision.  One pitfall, however, is that, like a mortgage, a UCC lien acts as an encumbrance on the tenant’s property.  Meaning, it may be difficult to sell the equipment and/or use the equipment to obtain a loan from another source.  If the tenant is comfortable with this, the tenant can agree to a UCC lien but should ensure that the lease contains language requiring the landlord to remove the lien upon the termination of the lease.  This is simply an administrative process, but is critical for the tenant going forward. 

Letter of Credit:  An Alternative to a Security Deposit

A letter of credit is typically only used when the security deposit is a large dollar figure.  Instead of the tenant giving the landlord a cash security deposit, the tenant obtains a letter of credit from a financial institution that essentially says the institution promises to pay the security deposit in the event of a default.  Like a loan or line of credit, the issuer will charge a fee, which is often a percentage of the dollar amount of the line of credit.  From the tenant’s perspective, this would free up cash flow; from a landlord’s perspective, if the letter of credit is issued by a reputable institution (e.g. a large bank), the landlord has a deep pocket from which to collect funds if need-be.  The problem for landlords, however, is that letters of credit and security deposits are treated differently in bankruptcy.  Meaning, if a tenant files for bankruptcy protection during the lease, courts will treat letters of credit and security deposits differently and thus a landlord may lose its protection.  The implications of bankruptcy in the commercial lease context is quite complex and really deserves its own article.  This article provides a great summary explaining the potential implications..

The above is a simplified summary of different approaches to security deposits and letters of credit for a commercial lease. Each situation is different, and often different locations will have differing “standards” for how leases are structure. For example, in the Boston area, the standard provisions for commercial leases in Cambridge often differ from those in the City of Boston. In fact, the standards in different neighborhoods in Cambridge (e.g., Kendall Square) often deviate from other neighborhoods (e.g., Harvard Square). As such, it is critical that both landlords and tenants speak with a commercial real estate lawyer before executing a commercial lease.

By Cole M. Young, Esq.


Massachusetts Commercial Lease: The Term and Extensions

Our recent articles addressing commercial lease provisions included discussions about the parties’ relationship, rental provisions and important elements to understand about the “premises.” In this article we address the term of a commercial lease (i.e. the length of the lease), as well as how most landlords and tenants address extensions.

Initial Term of the Commercial Lease.

Although seemingly obvious, the “term” of a commercial lease is an important and sometimes complicated provision.  Many leases contain rent-escalations at certain points over the term of the lease and therefore it is important to know exactly when a lease begins and ends.  Moreover, because of the ever-changing rental market, it is critical for both tenants and landlords to understand how long a space will be rented by a particular tenant.  So, although the “term” of the lease seems like a simple proposition – it should, after all, just refer to a start date and an end date – it may prove more complicated if the parties are not perfectly clear about certain triggering events. 

Often, the lease will refer to a “Term Commencement Date” and a “Rent Commencement Date.”  The Term Commencement Date is the date upon which the lease actually starts (i.e. the tenant can begin occupying the space).  This date is usually triggered upon either (1) a fixed date; (2) a certain event (e.g. the landlord completes certain work); or (3) the date the commercial space is actually delivered to the tenant.  The Rent Commencement Date is the date upon which the tenant must start paying rent (and often CAM charges).  Usually, the Rent Commencement Date occurs a certain number of days after the Term Commencement Date.       

Lease provisions differ as to whether the Term Commencement Date or the Rent Commencement Date are used as the beginning date for determining the overall term of the lease.  It is important that while negotiating the lease from the onset, the parties clearly delineate which date is going to be used as the beginning date for the lease term.  This should also be clearly established for purposes of any lease extensions.  Ultimately, the consummation and termination of a lease will affect the overall length of the lease and, in some situations, may change how rent increases are applied throughout the lease. 

Extension of the Commercial Lease.

Toward the end of the initial term, commercial leases usually provide the tenant with the option to extend the lease for an additional term of years. The extension provision should set forth the (1) length of the extension; (2) number of available extensions; and (3) rental amount during the extension(s).  The tenant must elect to exercise their right to renew the lease within a specific time period, subject to specific prohibitions on renewal.  A common prohibition for renewal is that the tenant has been, or is currently, in default under the lease.  Generally, a tenant must give prior written notice of its decision to extend the lease; six to nine months are generally standard in the Boston area. 

In some instances, leases may set out a predetermined renewal rental rate. However, the parties commonly prefer to set the rate that the fair market value (“FMV”) to ensure that the future rental amount is reasonable when the extension period begins. Relying on the FMV allows the parties to delay negotiating the renewal rate until the time if/when the tenant elects to renew the lease. FMV may be determined with consideration to tenant improvement allowances or concessions allowed by either party.  See our previous article on FMV determination. Commonly, the provision also sets a base amount for minimum rent. For example, the lease may state that the renewal rental rate cannot be set at a rate less than the initial or current rental amount. Extension periods may also be broken up into more than one renewal provision. The initial term of a lease could be set for ten years, with two separate extensions, each for three to five years. This type of arrangement allows both the landlord and tenant to rely on the security of a long-term lease, while still having the option to re-evaluate the lease or end the relationship in a shorter period of time.  

Under most circumstances, commercial leases will contain “holdover provisions.”  In short, these clauses state that the tenant will pay a dramatic increase in rent (often between 150 and 200%) for the time during which the tenant does not actually renew the lease.  This works as an incentive for the tenant to either renew the lease or vacate.  Most landlords and tenants ignore this provision at the onset, thinking it is an unlikely scenario.  This is a misguided conclusion.  Often, landlords and tenants either forget to renew commercial leases or are locked into a dispute about the terms of such a renewal.  In either instance, it is advantageous for the landlord to have a clearly delineated increase for a holdover tenant. 

The length of a lease, and any options to extend its duration, have benefits and drawbacks for both parties. Landlords may wish to keep lease terms shorter, giving them the ability to move new tenants in at higher rates, particularly when they expect the area or neighborhood to see significant improvements over a short time period. Conversely, a landlord may be more interested in holding on to “anchor” tenants (those whose businesses will pull customers and attention to the building or area) or having the building occupied without the worry of finding new tenants or renegotiating leases. From the tenant’s perspective, they may view longer leases with extension provisions as added security because they cannot be pushed out of a space by another tenant who is willing to pay a higher rental rate or by larger tenants who are looking to expand. However, shorter lease terms may benefit a tenant by giving them flexibility to renegotiate their lease with the landlord or permit them to move to a more attractive location as their business expands. As always when negotiating a lease, the landlord and tenant must independently consider what provisions of the lease are of greatest importance to them and how they can negotiate the terms to work to their advantage.

The above is a simplified summary of different approaches to terms and extensions for a commercial space. Each situation is different, and often different locations will have differing “standards” for how leases are structure. For example, in the Boston area, the standard provisions for commercial leases in Cambridge often differ from those in the Boston. In fact, the standards in different neighborhoods in Cambridge (e.g., Kendall Square) often deviate from other neighborhoods (e.g., Harvard Square). As such, it is critical that both landlords and tenants speak with a commercial leasing attorney before executing a commercial lease.

By Jennifer Lynn and Cole Young