Tag Archives: Massachusetts 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: Unenforceable Indemnification Provisions

By on October 21, 2016

I will concede that discussing indemnification provisions in commercial leases is not the most riveting topic. However, this is a critical issue for landlords and tenants alike. Nearly every commercial lease I have reviewed, from small transactions (e.g. a boutique Boston restaurant) to larger, complex transactions (e.g. a state-of-the-art laboratory facility in Cambridge), has a provision discussing how and when a tenant or landlord must indemnify the other party. In layman’s terms, “indemnification” simply means that one party promises to pay the cost for possible future damages or claims. We discussed indemnification in the context of construction subcontracts and construction management contracts in our previous articles.  

In the commercial leasing context, leases often state that the tenant will indemnify the landlord for any claims, injuries or damages that occur on the leased property. They will often go further and require that the tenant indemnify the landlord even for the landlord’s own actions, inactions or negligence. While these provisions seemingly offer landlords protection, landlords should proceed with caution: some of these provisions are completely unenforceable in Massachusetts.

Massachusetts General Laws Chapter 186, Section 15 states:

Any provision of a lease or other rental agreement relating to real property whereby a lessee or tenant enters into a covenant, agreement or contract, by the use of any words whatsoever, the effect of which is to indemnify the lessor or landlord or hold the lessor or landlord harmless, or preclude or exonerate the lessor or landlord from any or all liability to the lessee or tenant, or to any other person, for any injury, loss, damage or liability arising from any omission, fault, negligence or other misconduct of the lessor or landlord on or about the leased or rented premises or on or about any elevators, stairways, hallways or other appurtenance used in connection therewith, shall be deemed to be against public policy and void.

Both Massachusetts and Federal Courts have held that the above statute applies equally to residential leases and commercial leases. The statute does not, however, preclude a landlord from requiring a tenant to obtain insurance protecting against the landlord’s own negligence. So what does this mean? In short, it means that commercial landlords cannot force tenants to indemnify or hold landlords harmless from the landlords’ wrongful actions. It does not prevent, however, landlords from requiring tenants to carry insurance to protect from such liability. As an example, imagine that a customer walking into a restaurant trips and falls in an entranceway. If the lease has language stating that the tenant has to indemnify the landlord from any injuries on the property, including those caused by the landlord, then the tenant would have to cover the customer’s injuries. Under Massachusetts law, however, such provisions are unenforceable and so the landlord may not escape liability (say, for example, the customer tripped because the landlord failed to fix the doorway). To protect against this liability, the landlord can obtain its own insurance and/or require the tenant to obtain insurance protecting the landlord.

The above is meant only as a brief summary. If you are a commercial tenant or landlord and have questions about your lease, you should contact a commercial real estate lawyer.

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 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.