Tag Archives: commercial leasing

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. 

Commercial Leasing Series: Decoding SNDAs

By on March 12, 2018

Subordination Non Disturbance and Attornment Agreements (SNDAs) often seem like afterthoughts in commercial leasing as they govern the potential future relationship between a tenant and the landlord’s lender rather than the current relationship between the tenant and landlord. SNDA’s, however, should not be overlooked, as they are crucial to protecting a tenant’s interests in the event that a landlord is foreclosed upon and its lender takes over in its place. In the absence of an SNDA, a tenant may find itself at the mercy of a new landlord that has little obligation to honor the terms of tenant’s original lease. Thus, commercial tenants should be aware that SNDA’s exist to protect their rights and should have a basic understanding of how they operate.

As a quick overview, SNDA’s are comprised of three (3) main components, the:

Subordination: Where the Tenant agrees that Lender’s interest in the leased property takes precedence over Tenant’s lease interest in the event of a foreclosure;

Non-Disturbance: Where the Lender agrees to honor Tenant’s lease in the event Lender takes over for Landlord; and

Attornment: Where the Tenant agrees to recognize Lender as its new Landlord.

While most SNDA’s contain largely standard language, there is almost always room for some negotiation. This could be as simple as negotiating for clear tenant protections relative to potential lease defaults, or as complicated as negotiating for protections with regard to promised funding per the lease between a tenant and original landlord. Regardless, it is important that tenants take the time to understand SNDAs in their entirety in order to ensure that their rights are sufficiently protected. Thus, commercial tenants, particularly those seeking long term leases, would be well advised to consult with a knowledgeable real estate attorney both when deciding whether to seek an SNDA and when negotiating the same.

Massachusetts Commercial Lease: Additions and Alterations to a Leased Premises 

By on October 5, 2016

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 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.