Tag Archives: Boston commercial lease

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 Lease: Maintaining and Repairing Equipment

By on April 28, 2017

It 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.

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.

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.