Category Archives: Real Estate

Massachusetts Commercial Lease: The Security Deposit and Letter of Credit

By on August 1, 2016

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.

SJC Rules In Favor of Condominium Associations’ Rights to Collect Fees

By on April 27, 2016

Given the growing popularity of the condominium market in Massachusetts and an awareness of not wanting to repeat the mistakes of the past, the Massachusetts Supreme Judicial Court (SJC) recently issued a ruling giving condominium associations the power to more easily collect withheld and overdue monthly condominium fees. Specifically, in Drummer Boy Homes Association, Inc. v. Britton, et al, the SJC held that condominium associations can file for multiple and successive super-priority liens, pursuant to G.L.c. 183A, §6,  that take precedence over the first mortgage for up to six months of unpaid fees.

The SJC’s holding largely rests on the Court’s interpretation of the legislative intent behind the statutory scheme encompassing G. L. c. 183A, § 6. The Court held that, “our interpretation of G. L. c. 183A, § 6, is consistent with the Legislature’s long-standing interest in improving the governance of condominiums and strengthening the ability of organizations of unit owners to collect common expenses, thereby avoiding a reemergence of the serious public emergency that developed in the early 1990s.”

This ruling effectively shifts the incentives of the interested parties in a manner to ensure that condominium associations are properly funded.  Where previously the first mortgage holder had little to no incentive to get involved in association fee disputes, as their priority was never at risk, now this ruling shifts the incentives of the parties to align with that of the individual condominium community and condominium industry more generally. By allowing a scheme whereby the first mortgage holder’s priority can be jeopardized by a condominium association’s rolling super-priority lien, the SJC’s holding effectively incentivizes the first mortgage holder to take its own action against an owner who is withholding condominium fees in order to produce such fees and protect that first mortgage holder’s priority status.  Proponents of this ruling argue that it prioritizes the long-term stability of the condominium industry in Massachusetts by making it easier for condominium associations to collect the fees necessary for the maintenance and upkeep of condominium communities.

Massachusetts Commercial Leasing: The Premises

By on April 19, 2016

We recently posted articles about rental provisions and the interplay of the parties in a commercial lease setting.  This week, we address common issues involving the description and usage of a commercial space. 

Commonly overlooked, but critically important to both tenants and landlords, are commercial lease provisions pertaining to the description of the premises, the condition of the premises and who must maintain it, and how the premises may be used.  Depending on the intended use and the size of the commercial space, these clauses often vary greatly depending on the location of the commercial property.  For example, leases in downtown Boston may restrict the use of the premises more than leases on the perimeter of Cambridge.  Regardless, the landlord and tenant should always consider how the tenant plans to operate within the premises to ensure that clauses relating to the premises carefully address any issues that may arise over time.

Contents of the Premises.

All commercial leases should contain a clause that, at a minimum, identifies the space the tenant will be occupying. This clause will commonly list the street address, property identification number and sometimes a legal description.  If the tenant is occupying a particular portion of the premises, a precise description of the portion of the building the tenant is leasing will also be identified. The premises clause should also set forth how the parties intend to address access to storage areas, common areas, conference rooms, parking, utility facilities, or other areas of the building for which the tenant would need access.

Condition and Maintenance of the Premises.

Typically, commercial leases will provide a description of the current condition of the premises and outline which party is responsible for maintenance and repairs throughout the duration of the lease.  Maintenance clauses will commonly place most of the responsibility for repairs and maintenance on the tenant, with exceptions for “reasonable wear and tear” and structural repairs. A “prudent” or “reasonable” tenant or landlord are commonly used standards for repair and maintenance obligations; “prudent” or “reasonable” meaning the tenant or landlord is obligated to operate in a way that would be sensibly expected in similar circumstances. Maintenance standards may also include references to industry standards (e.g. BOMA), to operation manuals, or direct the tenant to follow the recommendations of a qualified contractor. The lease may also set timelines for specific maintenance tasks, which can have dramatic implications if missed. 

“Repair” and “maintenance” are separate, but related, aspects of a commercial lease. “Maintenance” covers actions to avoid deterioration of the premises and its systems by taking preventative and corrective measures. Maintenance commonly includes painting, cleaning, servicing equipment, clearing drains and gutters, and replacing light bulbs. “Repair” work covers actions needed to fix a damaged portion of the premises. The tenant is commonly, and obviously, responsible to repair damage they or their agents cause, but a dispute may arise where equipment or portion of the premises wears out or is damaged without fault of any one party. It is important to carefully craft the lease provision addressing repair work in anticipation of such an event.

Landlords are commonly responsible for “reasonable wear and tear,” meaning the tenant is exempt from fixing components that wear out over the course of reasonable use, depending on the use of the premises. For example, reasonable wear and tear will vary greatly depending on whether the premises is leased for industrial use or for office use.  Furthermore, coverage by the landlord is generally contingent on the tenant maintaining proper maintenance of that component. Regardless, if further damage is likely to result from the wear and tear, the tenant, and not the landlord, is responsible for repairs to prevent further damage. The landlord’s obligation to cover structural repairs will depend on the type of structure involved. Unless a structural element is specifically identified in the lease, it will commonly be considered an element which is necessary to hold the building together (e.g., walls, foundation, roof, and floor structures). Elements that are necessary only for use of the building (e.g., non-load-bearing walls, windows, and stairwells), “decorative” aspects (e.g., flooring and fixtures), and mechanical systems (e.g., HVAC and plumbing) are generally not structural and will be an obligation of the tenant to maintain or repair.

Description of Use.

Commercial leases often contain a clause setting forth the “permitted use” of the premises. Depending on the intended use, this description may be simple and straightforward, or it may involve a lengthy and detailed list of requirements and limitations.

Use descriptions may be as straightforward and simple as a clause for “general office use” where the tenant will be operating an office. Conversely, use descriptions for industrial or retail leases may need to be more detailed and commonly describe specifically how the tenant may or may not use the premises as it may be necessary to address specific issues, such as the maximum weight the floor can support, hours of operation, storage capacities, sprinkler requirements, and other stipulations that must be met to comply with local code requirements.  In restaurant and other retail uses, the “permitted use” is often limited to the tenant’s business (e.g. if the tenant sells Italian food, it will only be permitted to use the premises as an Italian restaurant).  

Landlords of multi-use or shopping centers commonly grant certain tenants exclusive rights to operate their particular kind of business or sell their specific product. For example, tenants who will operate a sandwich shop or a watch repair center would not want other tenants to operate a competing business. If the landlord wants to grant an exclusive right to the sandwich shop tenant or the watch repair tenant, the lease must contain a clause granting them the sole right to operate their type of business. Additionally, the leases of every other tenant in that shopping center must contain a provision prohibiting them from operating a sandwich shop or a watch repair center. As you can imagine, such provisions can become very lengthy and detailed depending on the size of the shopping center. Moreover, the landlord and tenant need to carefully consider and draft the scope of the use prohibitions. Would a jewelry store that offers repairs for its products, including watches, interfere with the watch repair shop? Could a restaurant that offers a full service menu be permitted to sell sandwiches?

Use restrictions may also exist where the Landlord has concerns over the kind of business conducted by the tenant or has an aversion to certain kinds of business activities. For example, commercial buildings owned by a college may permit tenants to open a convenience store but may want to prohibit that tenant from selling alcohol or cigarettes. Rules and regulations for how the premises may or may not be used are commonly non-negotiable for the tenant. Nevertheless, it is important to make sure the rules are attached as an exhibit to the lease to ensure the tenant is on notice of the restrictions.

The above is a simplified summary of different approaches to “premises” provisions for a commercial space.  Each situation is different, and often different locations will have differing “standards” for how leases are structured.  For example, in the Boston area, the standard provisions for commercial leases in Cambridge often differ from those in 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 Boston commercial real estate attorney before executing a commercial lease. 

Money Matters: Making the Most of Investment Property in Massachusetts

By on February 1, 2016

It is no secret that investing in real estate is often a shrewd financial move, especially given the current Boston rental market. Whether you already own investment properties or you are thinking about purchasing your first, there are important considerations to make to ensure that you are maximizing your returns and making your money work for you in the most effective and efficient manner. While investing is easy, investing wisely is imperative.

One simple way to invest wisely is to consider transferring ownership of any investment property from the actual individual who purchased the property to a Limited Liability Company (LLC) created for the express purpose of holding real estate.  This maneuver, in many circumstances, is a simple way to protect yourself, your assets, and your investments.

There are three basic steps required to create a LLC for the purpose of holding investment properties. The first is to create and register the LLC with the state.  In Massachusetts, this requires the filing of Certificate of Organization with the Massachusetts Secretary of State.  Additionally, although not technically required, it is a best practice to simultaneously create an Operating Agreement for the new LLC dictating how the LLC will operate, who owns the LLC, and other important powers and restrictions. The second step is to apply to the IRS for an Employer Identification Number (EIN), which is necessary for tax and banking purposes. Finally, the third step is to formally transfer the deed from the individual who purchased the investment property to the LLC.  Massachusetts, unlike most other states, tracks its real estate titles in two separate systems:  recorded land and registered land. This duel title system can complicate the proper completion of step three. Therefore, it is important to understand how your particular property was originally recorded/registered in order to ensure that it is successfully deeded into the LLC.  Once these three steps are completed, the LLC owns the property.

This transfer of ownership has the potential to insulate the individual owner from personal liability stemming from legal claims relating to the property as well as to allow the individual owner to keep the investment property separate from other personal assets. However, every individual owner, investment property, and real estate deal is different and circumstance often dictates what constitutes a wise investment move on a case-by-case basis.  Moreover, incorrectly establishing a LLC, failing to follow the formalities of owning and operating a LLC, or failing to properly transfer the property into the newly-formed LLC may have unintended and unfortunate consequences. 

Transferring ownership from an individual to a LLC is just one option, among many, to ensure that you are making the most of your real estate investments.  Building and structuring an investment property portfolio can seem daunting but with proper guidance it can be a rewarding and profitable venture. Thus, the wisest move any investor can make is to seek the counsel of a Massachusetts lawyer who specializes in real estate transactions to ensure that all options are properly considered and all investments and maneuvers are above-board and executed correctly.

By Andrea Jacobs, Esq.

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When Should Property Management Companies Contact An Attorney?

By on July 7, 2015

For most property management companies, picking up the phone to contact a lawyer is usually done with a sigh. If you are reaching out to an attorney, that often means that something has gone wrong and you need help in a difficult situation.  So when should property management companies contact an attorney?  The below topics are those most typically encountered by our property management clients. When these issues are addressed early with an attorney, a property management company will save substantial time, money and unnecessary aggravation.

Corporate Matters

Every property management company has some form of company structure (e.g. sole proprietorship, limited liability company or corporation). At the inception of a company, many owners simply ignore their structure while focusing on their expanding business. As the business grows, however, company owners need to look at their company structure and make sure it still makes sense. After all, internal disputes do not arise until there is real money at stake. When a dispute does occur, if the company structure is lacking, the ensuing litigation is going to become expensive very quickly. As such, company owners should ask themselves these three questions: (1) what happens if there is a falling out between the owners or someone passes away; (2) what happens if the company wants to expand; and (3) what happens when another company wants to purchase the existing company? Your company documents, such as your operating agreement, should contain the answers to these questions. If not, you should contact your attorney to make sure these items are addressed before they become an actual issue.

Document Drafting

Running a successful property management company requires careful compliance with a lot of different local, state and federal law. Although there are many “standard” lease and property management agreements available on the Internet, the drafters of those agreements are usually not aware of the local nuances that may govern those documents. For example, unlike most states, it is illegal in Massachusetts to charge tenants certain upfront fees such as application fees and pet deposits. A standard lease from another state like New Hampshire may be unenforceable in Massachusetts. As such, it is important that you have a professional review your tenant lease documents. The same caution is applicable to property management agreements (i.e. agreements between you and your owner-client). Given the nature of their business, property managers are exposed to liability from several parties. Therefore, make sure you review your property management agreement with your lawyer and periodically update it as circumstances change.

Employment Issues

Whether your company is a small operation or a Fortune 500 company, you will likely have employment issues at some point. Property management companies deal with unemployment claims, wrongful termination lawsuits and employee-misclassification. As mentioned in one of our recent articles, simply improperly classifying an employee as an “independent contractor” can be a costly mistake. If a suit is brought under the Massachusetts Wage Act, a company may be liable for triple damages, attorney fees and, in some cases, owners of the company may be personally liable. Unfortunately, many clients contact their attorney after one of these issues arise. To avoid unnecessary litigation, it is best to contact your attorney early to establish best practices for employment-related issues. When set up correctly, proper policies (e.g. employee handbooks, social media policies, etc.) and other preventative measures can minimize the exposure for employment claims.

Evictions

The eviction process, particularly in Massachusetts, is very tenant-friendly. Nevertheless, acting early can greatly increase a property manager’s potential for recovery and reduce the amount of rent loss. The key to an expeditious eviction is ensuring that the eviction notice is sent as soon as possible. In Massachusetts, you generally need to send either a 14-day notice or a 30-day notice, depending on the situation. It is important to remember that the eviction process does not begin until the correct notice is sent. If you fail to send the right notice, your case may be dismissed and you will be forced to start the process from the beginning. The other important aspect of evictions is making sure you have good information about your tenant. Setting up a proper screening process is critical. Too often, we have clients who do not have key information about their tenants (e.g. social security number, employment information and references). Without these critical items, collecting from a delinquent tenant is next to impossible. You should contact your attorney if you are unsure whether your screening process is adequate, or want to confirm that you are following the proper procedures for starting an eviction.

Vendor Disputes

Property management companies of all sizes have multiple trades and vendors at their disposal. In fact, many have multiple vendors for the same services so that they can remain competitive and ensure they are receiving the best service for the best price. Often, these vendors have either (1) their own contract; or (2) no contract at all. Under either circumstance, if a dispute arises, the property management company is at an immediate disadvantage. If the contract was drafted by the vendor, it likely is one-sided. If no contract exists, the parties will be stuck piecing together what they believe to be their agreement. Therefore, make sure you review each and every contract with your vendors to make sure your interests are protected. If you do not have a contract with a certain vendor, contact your property management lawyer to draft one for you.

Property Managers – Ensure The Property Owner Indemnifies You

By on March 23, 2015

Most property management companies focus their efforts on maintaining the day-to-day operations of their properties and really do try to address their tenants’ requests. Often times, it is a thankless job. A quick Google search of many property management companies will reveal horror stories about tenants’ negative experiences. When something goes wrong at a property, the tenant will make demands on the property manager, often times without including the property owner in those discussions. I have been guilty of this myself. If such a problem ultimately leads to litigation, the tenant will often sue both the property management company and the owner. If the property management company does not have adequate indemnification from the property owner, the property manager may have to defend the tenants’ claims, even if the owner actually caused the problem (e.g. a defect in the building).

As a Boston property management attorney, I recently had a large property management company that had to unnecessarily litigate a mold issue with one of its tenants. Obviously, an allegation of “mold” is very serious. The problem is that most mold is black in color and therefore many people may think they have “black mold” (Stachybotrys) even if they do not. Even so, an allegation of “black mold” is enough to give most people pause and can lead to very lengthy litigation. In my client’s particular case, the tenant sued both the property management company and the property owner when mold was discovered shortly after a flood. Prior to commencing litigation, the tenant gave notice to the property owner who attempted to remediate the mold. Unfortunately, our client did not have any sort of indemnification clause in its agreement with the property owner and, as such, the client was stuck litigating the case for years until it ultimately settled.

Generally speaking, an indemnification clause in the property management context states that an owner will indemnify a property management company (that is, step into their shoes and/or defend the property management company) for damages that are beyond the property manager’s control. Typical situations involve defects in the property, natural disasters and work undertaken by the owner. To be clear, a simple indemnification clause will not relieve property managers of all liability. For example, a property manager cannot refuse to act or to address property issues. In our client’s case, however, the owner was admittedly responsible for the damage as well as the remediation. As such, had our client had a comprehensive indemnification clause in its management agreement, it could have recouped its litigation costs from the owner. Instead, the case dragged on for over a year, several depositions were taken, and it actually reached the point where the parties hired their own professional experts.

An indemnification clause is not a cure-all, but it is a crucial starting point. A clause that is too broad (e.g. one that includes indemnification for gross negligence) may not be enforceable. So, if you are a property management company and do not have an indemnification clause with your clients, change that immediately. If you do have one, make sure you have your lawyer review it to ensure that it offers you adequate coverage and is enforceable. This seemingly simple process could save you thousands of dollars in unnecessary litigation costs.