Article blog – Part 10

7. Repair, maintenance and alterations: Every lease will address maintenance and repair of the leased premises and common areas, and should also address alterations to the premises. Typically, the tenant will maintain the premises (except the structure) and the landlord will maintain the structure, the remainder of the building (not occupied by a tenant) and any common areas. For alterations to the premises, the lease will allocate responsibility between the parties to provide appropriate controls over the types of acceptable changes. The tenant wants flexibility to accommodate its business, while the landlord wants control over any changes, especially involving the structure, exterior elements and building systems (such as HVAC, plumbing and electrical).

8. Compliance with laws: Compliance with applicable laws and ordinances is usually a boilerplate provision, but can be very costly if not properly negotiated. The lease should address who is responsible for making capital expenditures for structural alterations required by laws enacted during the term of the lease (e.g. installation of sprinkler systems or improvements providing access for the disabled). These matters can be substantial and, if they are required to be made by the tenant, may end up being of relatively little utility.

Compliance with laws relating to the specific business conducted from the premises should be the responsibility of the tenant, and should not be included in common area maintenance expenses. ADA improvements necessary within the interior of the premises resulting from tenant’s work should be the responsibility of the tenant. On the other hand, improvements to the common areas necessary for access by of disabled individuals should be the landlord’s responsibility.

Further, compliance with environmental laws is quite significant because of the extensive nature of improvements and attendant costs, which could include the potential for removal of asbestos or lead, responsibility for insuring compliance with environmental laws and indemnification for non-compliance. Leases typically include lengthy representations, warranties and covenants regarding tenant’s compliance with applicable environmental laws.  However,  the tenant should limit responsibility to noncompliance by the tenant, its agents, contractors and agents, as well as ask for the same limitations and rights as granted to landlord (landlord should be responsible for compliance unless caused by a tenant). The definition of “hazardous materials” should ensure that common business materials (e.g. copier toner, batteries, etc.) and normal cleaning supplies are excluded.

Article blog – Part 9

6. Assignment and subleasing: Landlords want to restrict tenant transfers to control the use of the property, to eliminate harmful competition between tenants (avoid disadvantageous mix and violation of exclusives), and to maintain the landlord’s right to negotiate the lease. The issue of “control” is usually the focal point on assignment and subleasing rights. This is particularly important to retail tenants, who need to assure compatibility with other tenants. The landlord may also argue that, in a project that is not fully occupied, a tenant remarketing its premises is a direct competitor.

The most common compromise is to prohibit the landlord from “unreasonably” withholding, delaying or conditioning its consent to a sublease or assignment. The law often implies a good faith standard, and provisions that purport to allow the landlord to withhold consent in its “sole, absolute, and unfettered discretion,” may be unenforceable. Tenants sometimes require the landlord to specify the reason for withholding approval and include corrective actions that can be taken to make the transfer acceptable. The landlord may be required to respond within a specified period of time following request for consent, with landlord’s failure to respond timely deemed to be consent. Another variation is to define all factors the landlord may consider to determine if it has acted reasonably.

Another landlord approach is to reserve a recapture right if consent is requested, which allows the landlord to exclude an unacceptable tenant, control competition with existing tenants and capture any upside in rents. The landlord may also recapture the upside potential by requiring that some or all of the “net profits” from the transfer to be paid to the landlord, and then the challenge is to define “net.” Typically, direct costs, such as brokerage commissions and tenant improvements, are recoverable, but sunken costs usually are not. A provision requiring the tenant to disgorge “all profits” may not be optimal, since the tenant would have no incentive to realize profits.

7. Repair, maintenance and alterations: Every lease will address maintenance and repair of the leased premises and common areas, and should also address alterations to the premises. Typically, the tenant will maintain the premises (except the structure) and the landlord will maintain the structure, the remainder of the building (not occupied by a tenant) and any common areas. For alterations to the premises, the lease will allocate responsibility between the parties to provide appropriate controls over the types of acceptable changes. The tenant wants flexibility to accommodate its business, while the landlord wants control over any changes, especially involving the structure, exterior elements and building systems (such as HVAC, plumbing and electrical).