Tag Archives: Boston commercial lease lawyer

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

By on May 22, 2017

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 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. 

Massachusetts Commercial Lease: The Rent

By on March 5, 2016

Each commercial lease provision is important in its own right.  Nevertheless, clients, real estate brokers and real estate attorneys instinctively look for what is commonly considered the most important provision to both the landlord and tenant:  the rent.  Although seemingly straightforward, calculating rent in a particular commercial lease lease can be cumbersome and often varies depending on whether the space is used as office, retail, restaurant, laboratory or industrial.

Base Rent and Triple Net Provisions

Rent is typically set at a price per square foot per year (commonly referred to as “base rent”), which is usually based upon rentable square feet (“RSF”) instead of usable square feet (“USF”).  For example, if a lease base rent is $10 per square foot for 4,500 RSF, the tenant will pay $45,000 in base rent per year, or $3,750 per month.  In oversimplified terms, RSF is the entire area of the interior space of premises and may include certain “unusable” portions of the premises like utility closets, building columns and the like. USF contains the entire area of the interior space of premises, but subtracting out certain portions that cannot be used by the tenant (i.e. utility closets, building columns, etc).  

Lease rental provisions are usually one of two forms: rent is either “gross” or “net.”  A “gross” lease means that the tenant’s base rent covers all of the costs associated with the tenant’s occupancy, with some exceptions like separately-metered utilities.  A “net” lease (also known as a “triple net lease”) means the tenant’s base rent covers only a portion of the costs associated with the tenant’s occupancy.  Other costs, such as taxes, insurance and building maintenance costs, are billed separately to a tenant.  Because the tenant covers the additional costs under a “net” lease, the base rent charged is typically lower for a “net” lease than a “gross” lease.    

Percentage Rent — Natural vs. Artificial Breakpoints

Regardless of whether a lease is “gross” or “net,” some commercial leases contain a “percentage rent” provision.  “Percentage rent” is rent paid in addition to base rent and is based upon a percentage of the tenant’s sales.  This type of structure is common for restaurants, multi-tenant commercial spaces and shopping center kiosks.  Landlords request percentage rent on the theory that certain commercial enterprises, like shopping centers, are a natural draw for customers.  Under this analysis, because the landlord’s rental income will increase if the tenant meets certain sales goals, the landlord is incentivized to increase traffic to the tenant’s business. If the tenant fails to obtain the applicable sales goals, however, the tenant will not owe any additional percentage rent.   

The point at which percentage rent is paid is call a “breakpoint,” which can be a “natural” or “artificial breakpoint.”  Artificial breakpoints are created based on a predetermined dollar amount of gross sales.  Continuing with the above example, assume the parties agree that if the tenant’s gross sales exceed $1,000,000, the landlord is entitled to 5% of the amount over that breakpoint. Under this scenario, if the tenant generates $1,200,000 in gross sales, the tenant would pay the landlord $10,000, or 5% of the $200,000 over the $1,000,000 breakpoint.  Natural breakpoints are calculated based on dividing the base rent by the percentage to be paid to the landlord. Using the same example, if the parties agreed to a natural breakpoint, the annual rent, $45,000, would be divided by the agreed upon percentage, 5%, which equals a natural breakpoint at $900,000 in gross sales. The justification for a natural breakpoint is that the tenant should only pay the percentage rent on sales over and above what is required under base rent.  Meaning, the landlord only receives a percentage of the tenant’s gross sales after the base rental amount is covered.

Deciding between an artificial breakpoint and natural breakpoint can be difficult, particularly when a tenant does not have past sales to analyze.  In general terms, a tenant may prefer a higher base rent with a higher breakpoint, which would enable the tenant to profit at a lower sales level before having to pay the percentage rent. Conversely, a landlord may be interested in accepting a lower base rent with a lower breakpoint if the landlord is confident that the tenant’s business will be particularly popular in the space.

Rent Increases – Extensions

At the end of the term of a lease, the landlord and tenant may agree to extend the term of for an additional period of time (e.g. five additional years).  Upon such extension, most leases state that rent will have a fixed increase for that extension.  A fixed increase is simple: the rent increases annually based on a previously agreed upon amount or percentage.  More common, however is a provision that rent will be adjusted to the then fair-market-value (“FMV”). Rent adjusted for FMV is generally based on comparable leases of comparable space.

Whether a lease or space is “comparable” is generally determined using factors listed in the lease.  A “comparable space” involves a number of criteria, including the location and size of the space; the use of the space; prominence within the area; and the age of the building and its amenities. Determining the FMV, of course, can be subjective.  It is not uncommon for any three real estate appraisers to come up with three substantially different FMV valuations. As such, it is critical to draft lease extension provisions with as much detail as possible for the determination of FMV.   

The above is a simplified summary of different approaches to rent 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. 

Massachusetts Commercial Lease: The Parties

By on February 14, 2016

Over the next several months, we will be breaking down many of the standard provisions in a Massachusetts commercial lease.  Although every commercial lease is unique, many similar issues arise in every lease regardless of whether the space is used for office, retail, restaurant, laboratory or industrial.  As commercial real estate values continue to soar in Massachusetts – particularly Boston and Cambridge – the language in commercial leasing becomes all the more critical for both tenants and landlords.  Before exploring the intricacies of a particular lease, the first step is to understand the parties involved. 

Who Are the Parties?

Today, it is rare to see a commercial lease between individuals.  Instead, both landlords and tenants create legal entities (e.g. corporations, limited liability companies and trusts) for the purpose of executing a lease.  From a tenant’s perspective, it is imperative for the tenant to confirm that the landlord owns or has the right to lease the property, is a properly-formed entity and registered to do business in Massachusetts, and has sufficient assets and resources to uphold its end of the lease (e.g. maintain the building).  Similarly, a landlord must ensure that the tenant is a properly-formed entity registered to do business in Massachusetts and has assets sufficient to uphold its end of the lease (e.g. pay rent).   

The persons signing on behalf of the respective entities must have the power to do so.  This should be formalized in of corporate/company resolution stating that the person has the ability and authority to execute the lease on behalf of the entity.  Many times, parties are reluctant to ask for such proof, particularly when dealing with larger entities (it may seem odd to ask for proof that Mark Zuckerberg can sign on behalf of Facebook).  Nevertheless, for both parties’ protection, they should insist upon documentation showing that the person signing the lease has the actual authority to bind the entity.    

Personal Guarantee?

If a landlord is skeptical about the tenant’s ability to perform the lease, or has concerns that the tenant is uncollectible, a landlord may ask a tenant to provide a personal guarantee to a lease.  In short, this means that if the tenant breaches the lease, the landlord can look to an individual for recovery.  Landlords, of course, like personal guarantees because of the added protection.  Tenants, as well as their cautious real estate attorneys, are rightfully anxious of personal guarantees.  After all, the purpose of creating a legal entity is to avoid personal liability of owners.  From either perspective, a personal guarantee may be a walk-away issue for either party. 

If you are a tenant, the decision to provide a personal guarantee is both a personal and business decision.  Some landlord will refuse to move forward without one.  However, there are ways to limit the exposure of a personal guarantee.  First, the parties can agree to limit the scope of a personal guarantee.  For example, they could agree that the personal guarantor is only guaranteeing a certain dollar amount of the lease.  Similarly, the parties could agree that the personal guarantee only applies for a certain amount of time (e.g. if the tenant properly performs for two years, the personal guarantee dissolves).  The second approach to limiting the personal guarantee is to offer up something else of value like a larger security deposit or a lien interest in the tenant’s personal property.  Both of these subjects will be discussed in greater depth in a later article. 

The above is a simplified summary of the entities in a commercial lease transaction.  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. Inman Square).  As such, it is critical that both landlords and tenants speak with a Massachusetts commercial real estate attorney before executing a commercial lease.