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Negotiating a Commercial Lease? Be Sure to Address These Issues
When it comes time for your business to move into a new commercial space, make sure you consider the terms of your lease agreement from both business and legal perspectives. While there are some common terms and clauses in many commercial leases, many landlords and property managers incorporate complicated and sometimes unusual terms and conditions. As you review your commercial lease, pay special attention to the following issues, which can greatly affect your legal rights and obligations.
The Lease Commencement Date
Commercial leases typically will provide a rent commencement date, which may be the same as the lease commencement date. Or not. If the landlord is performing improvements to ready the space for your arrival, a specific date for the commencement of rent payments could become a problem if that date arrives and you do not yet have possession of the premises because the landlord’s contractors are still working in your space. Nobody wants to be on the hook for rent payments for a space that cannot yet be occupied. A better approach is to avoid including in the lease a specific date for commencement, and instead state that the commencement date will be the date the landlord actually delivers possession of the premises to you. Alternatively, you can negotiate a provision that triggers penalties for the landlord or additional benefits for you, should the property not be available to you on the anticipated rent commencement date due to the fault of landlord’s contractors.
Your initial lease term will likely be a period of three to five years, or perhaps longer. Instead, you may be able to negotiate a shorter initial term, with the option to extend at a later date. This will afford you the right, but not the obligation to continue with the lease for an additional period of years. Be sure that any notice required to terminate the lease or exercise your option to extend at the end of the initial lease term is clear and not subject to an unfavorable interpretation. Carefully calendar the dates on which to exercise your option to extend the lease.
Subletting and AssignmentIf you are locked into a long-term lease, you will likely want to preserve some flexibility in the event you outgrow the space or need to vacate the premises for other reasons. Be careful to review the limitations and procedures applicable to requesting the landlord’s permission to assign or sublet the space. Assigning or subletting your leased space without complying with the exact terms required by the lease often will result in an un-curable default of the lease and give the landlord the right to terminate the lease.
Subordination and Non-disturbance Rights
What if the landlord fails to comply with the terms of the lease? If a lender forecloses on your landlord, your commercial lease agreement could be at risk because the landlord’s mortgage agreement can supersede your lease. If the property you are negotiating to rent is subject to claims that will be superior to your lease agreement, consider negotiating a “non-disturbance agreement” stating that if a superior rights holder forecloses the property, your lease agreement will be recognized and honored as long as you fulfill your obligations according to the lease.
These represent just a few of the myriad provisions in a standard commercial lease that require special attention and care in review. If you are considering leasing commercial space for your business, please contact one of the expert real estate attorneys at Schneiders & Associates, L.L.P. to review your lease, make you aware of potential costs and pitfalls, and assist you with negotiations.
There are three primary different types of commercial leases: gross leases, modified gross leases and net leases. One variation of the net lease is a “triple net” lease, in which the tenant is liable for a net amount of property taxes, insurance and common area maintenance relating to the property they are possessing. Most of the time, additional fees in the form of common area maintenance expenses come up in the context of a triple net lease. Landlords ask tenants to pay these fees so that tenants contribute to the cost of maintaining common areas such as entranceways, walkways, parking lots and elevators, as well as services enjoyed by the tenants such as janitors, security and landscapers. These fees are in addition to a rental payment and can be substantial depending upon the situation. These fees are typically charged on a pro rata basis, based upon the square footage of each tenant’s premises, as compared to the square footage of the project as a whole.
It is essential that a business owner be informed about the terms of the lease they are entering into, especially if these terms have the potential to cost them money. As common area expenses can be a significant cost they are often controversial and hotly negotiated. Most of the disagreements over these terms relate to the distinction between costs for the maintenance of common areas, and expenses that should be the landlord’s responsibility, such as significant upgrades to common area infrastructure or capital improvements. Generally, the test is who will benefit most from the expense, the tenant or the landlord. For example, it can be argued that tenants should not be paying for improvements that are being done to increase the overall value of the property because the landlord will be the primary beneficiary of these improvements.
When negotiating common area expenses, the business owner should inquire as to the purpose of the payments. In some instances, the tenant is only responsible for increases in common area expenses over a defined base year. Prospective tenants should also ask whether they will be able to review what the landlord is spending the money on at any given time, and whether the landlord is adding an administration or overhead fee for managing the common area. Business owners should seek the advice of an attorney, who will be able to explain many of the options available to them. For example, there might be an opportunity to ask for a cap on common area expenses, or a fixed rate. Most importantly, tenants should be informed about their legal options in the event of a dispute.
If you are contemplating signing a commercial lease and you will be responsible for common area expenses, it is in your best interest to consult with a real estate attorney to ensure you understand your potential liability before signing on the dotted line.
The real estate attorneys at Schneiders & Associates, L.L.P. are expert in interpreting and negotiating commercial leases, and would be happy to guide any prospective tenants through the process.
By Roy Schneider, Esq.
You are purchasing a home, and the escrow officer asks, "How do you want to hold title to the property?" In the context of your overall home purchase, this may seem like a small, inconsequential detail; however nothing could be further from the truth. A property can be owned by the same people, yet the manner in which title is held can drastically affect each owner’s rights during their lifetime and upon their death. Below is an overview of the common ways to hold title to real estate:
Tenancy in Common
Tenants in common are two or more owners, who may own equal or unequal percentages of the property as specified on the deed. Any co-owner may transfer his or her interest in the property to another individual. Upon a co-owner’s death, his or her interest in the property passes to the heirs or beneficiaries of that co-owner; the remaining co-owners retain their same percentage of ownership. Transferring property upon the death of a co-tenant requires a probate proceeding or another post-death transfer.
Tenancy in common is generally appropriate when the co-owners want to leave their share of the property to someone other than the other co-tenants, or want to own the property in unequal shares.
Joint tenants are two or more owners who must own equal shares of the property. Upon a co-owner’s death, the decedent’s share of the property transfers to the surviving joint tenants, not to his or her heirs or beneficiaries. Transferring property upon the death of a joint tenant does not require a probate proceeding, but will require certain forms to be filed and a new deed to be recorded.
Joint tenancy is generally favored when owners want the property to transfer automatically to the remaining co-owners upon death, and want to own the property in equal shares.
Community property exists for married couples or registered domestic partners, and only exists in some states. With community property, the surviving spouse receives a “step-up in basis” when the first spouse dies. This means that the basis value of the property is raised to the fair market value on the date of death of the first spouse. This can be a huge advantage to couples who may have bought their property for a much lower value than present values.
Holding property as community property does not guarantee the property to be distributed to the surviving spouse or partner however. A person can transfer their half of community property to someone else. To avoid that, property can be held as "Community Property With Right of Survivorship", which not only allows for a step-up in basis, but also acts like a joint tenancy with an automatic right of survivorship between spouses or partners.
Community property is only accumulated after the date of marriage, therefore all property acquired after marriage is presumed to be community property in California. All property acquired by a spouse before marriage is the separate property of that spouse. If a spouse owning separate property wants to keep it as separate property, a Prenuptial Agreement would be best. The Prenuptial Agreement can set forth the couple’s property and what will stay separate property during, or after, the marriage. Alternatively, a couple can execute a Marital Property Agreement, which transmutes property from separate property to community property. Either way, a written agreement with the property details, signed by both spouses, is the best way to make sure that the couple’s property is treated correctly.
The above methods of taking title apply to properties with multiple owners. However, even sole owners, for whom the above methods are inapplicable, face an important choice when purchasing property. Whether a sole owner, or multiple co-owners, everyone has the option of holding title through a living trust, which avoids probate upon the property owner’s death. Once your living trust is established, the property can be transferred to you, as trustee of the living trust. The trust document names the successor trustee, who will manage your affairs upon your death, and beneficiaries who will receive the property. With a living trust, the property can be transferred to your beneficiaries quickly and economically, by avoiding the probate courts altogether. Because you remain as trustee of your living trust during your lifetime, you retain sole control of your property.
Use of LLCs for Property
Holding title to a property within a Limited Liability Company can provide an extra layer of liability protection for the owners. When combined with proper insurance, such an entity can prove very beneficial for property owners with multiple assets.
LLCs can be especially helpful for non-married persons owning property together for other reasons. The LLC Operating Agreement can set forth a sort of “tenancy agreement” for the parties, including agreements concerning paying for repairs, choosing to do maintenance, and determining what happens if one of the owners passes away. These agreements – whether within an LLC or just a written agreement between owners – are very advantageous, as they can avoid arguments between the owners and can save time and money down the road.
How you hold title has lasting ramifications on you, your family and the co-owners of the property. Title transfers can affect property taxes, capital gains taxes and estate taxes. If the property is not titled in such a way that probate can be avoided, your heirs will be subject to a lengthy, costly, and very public probate court proceeding. By consulting an experienced real estate attorney, you can ensure your rights – and those of your loved ones – are fully protected.
By Roy Schneider, Esq.
Historically, tenant in common (TIC) projects were owned by a relatively small group of investors who knew each other, such as long-time friends, business partners or family members. Strategies to maximize tax savings and preserve equity typically guided investors to this type of structure, rather than creating a limited liability company or partnership to own the property.
In the late 1990s, real estate sales in the form of tax-deferred 1031 exchanges created a new industry. Promoters began soliciting and pooling funds from investors to purchase real estate. Participation in the pool helped investors find replacement property to guarantee their capital gains tax deferment continued.
In 2002, the IRS clarified when this type of pooling is considered a partnership interest as opposed to a TIC interest, a critical distinction for investors using funds from a 1031 exchange transaction. Following that, investments in TIC interests grew considerably due to the numerous advantages. For those who needed a place to invest their 1031 exchange funds quickly, TIC interests provide a relatively simple way to ensure the funds are spent within 180 days of the sale of the previous property, without the hassle of researching, investigating, negotiating and financing a property in less than six months. TIC investors do not have to burden themselves with the day-to-day management of their investment property. Finally, TIC investors can pool their resources to purchase fractional shares of investment-grade property which would otherwise be out of reach.
With all of its advantages, the TIC interest also carries its share of risks. For example, many TIC promoters charged fees that were excessive, or sold the property to the investors for more than it was worth. If property values decline or purchase loans mature, it may be difficult to refinance, forcing the property into foreclosure and taking the entire investment with it.
Other promoters failed to maintain reserve funds separate for each property. If a promoter filed for bankruptcy and did not properly use the reserve funds, TIC investors were left with no recourse and were forced to cover the reserves out of their own pockets or risk losing their investment.
Further risks are caused by the investors themselves and the nature of their relationship to one another – or lack thereof. Owners of TIC typically do not know each other. Decisions regarding TIC governance often require unanimous agreement by all owners, and just one objection can grind the action to a halt. When owners don’t know each other, or are spread across many states, it can be difficult to communicate and obtain a unanimous agreement.
Despite the risks, TIC interests can still be a good place to park your money – but you must be a cautious, diligent purchaser. Visit the property, seek information from sources other than the promoter, and thoroughly evaluate the past and projected financial data. Ask questions and seek the advice of your professional advisors.
The real estate attorneys at Schneiders & Associates, L.L.P. are available to assist you in the review of proposed investments in TIC projects.