Tag Archives: boston commercial real estate attorney

Actions Speak Louder Than (Written) Words: When Strict Compliance is not a Defense to Actual Notice in Commercial Leasing

By on October 11, 2018

The Massachusetts Superior Court (Essex) recently held that failure to strictly comply with commercial lease notice requirements did not invalidate a tenant’s email and verbal notice of its intent to terminate a lease.  Specifically, the tenant wanted to avoid triggering the automatic extension clause in the lease but did not send notice in the manner required by the lease. In SpineFrontier v Cummings (2018), the Court held that the tenant’s email and verbal notice, although not in strict compliance with the lease, sufficiently conveyed to the landlord that the tenant did not intend to renew its lease.  

The Court went on to state that setting the sufficiency of actual rather than lease-prescribed notice aside, the landlord waived its right to assert the necessity of strict compliance with the written lease language. The landlord, by its own history of action, acted as though the Tenant’s Notice was sufficient notice to terminate the lease. The Court noted:

At no point following the [email or verbal notice] did Cummings notify SpineFrontier that its notice failed to comply with the requirements of SpineFrontier’s lease…Moreover, in the several months that followed, Cummings acted as if proper notice had been provided, repeatedly attempting to strike a deal with SpineFrontier on different terms for office space…

We consistently remind commercial tenants and landlords to strictly comply with their lease obligations.  If a lease states that notice must be given in a certain way (e.g. certified mail, overnight delivery, etc), then a landlord or tenant should always follow that, even if it seems unnecessary.  The “notice” provision is often overlooked at the beginning negotiations of a lease, but tenants and landlords should take the time to make sure it is workable.  Even so, SpineFrontier v Cummings makes it clear that strict compliance does not always win the day.  

Therefore, if you are a tenant that has failed to strictly follow your lease, you should speak with a commercial real estate attorney to determine if you may still have options.  Likewise, if you are a landlord and your tenant has not strictly followed the lease, do not assume that such failure is automatically in your favor.  You too should consult with a lawyer to determine your options. 

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 Lease: The Term and Extensions

By on July 12, 2016

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.