| LEASES
GENERALLY
Every
lease grants to the tenant the exclusive use of all or a portion
of real property for a certain period of time. In doing so, the
lease does two separate things:
1. It grants an interest in real property; and
2. It governs the relationship between the landlord and the
tenant.
The
landlord needs to protect its investment in the property and earn
income for its use, while the commercial tenant needs sufficient
flexibility to run their business as they deem necessary to earn
a profit.The
type of lease depends on what is leased. The most common types
of commercial leases are:
- Ground
leases
- Commercial
Occupancy Leases
- Retail
leases
GROUND
LEASES
In
a ground lease arrangement, the landlord leases land to the tenant.
The tenant usually agrees to construct buildings or make substantial
improvements to existing buildings. Since the tenant usually invests
a large amount of money in improving the property, ground lease
terms tend to be long (30 to 99 years plus optional extension
periods) so that the tenant will have time to recoup its investment.Ground
leases are almost always net leases, meaning the tenant pays rent,
plus all expenses relating to the property, such as operating
costs, utilities, insurance and property taxes. These are typically
called "triple net" leases.The
distinguishing characteristics of a ground lease are:
- an
extended term of thirty years or more
- unrestricted
use of the leased premises
- rent
is net to the landlord and guarantees a certain return for the
entire term of the ground lease
- the
ground tenant obtains control over the leased premises,
including
improvements, with only limited rights retained by the landlord
- insurance
proceeds and condemnation awards relating to the building generally
are made available to the tenant for repair and restoration
- the
tenant obtains the right to mortgage the leasehold estate
- the
tenant generally constructs, owns, and operates the improvements
placed
on the land during the term of the ground lease
- the
lease is usually freely assignable
KEY
ISSUES IN GROUND LEASES
There
are 3 key areas of negotiation in ground leases and they all tend
to be worst-case scenario driven:
- application
and use of insurance proceeds in the event of damage to the
improvements
- division
and required application of condemnation awards
- effect
of eminent domain condemnation takings of a substantial portion
of the property
COMMERCIAL
OCCUPANCY LEASES
Commercial
occupancy leases grant to a tenant the right to occupy an office
or industrial building, sometimes with the additional inclusion
of surrounding land. The issues to deal with in each proposed
lease depend entirely on the particular parties involved, the
lease agreement used by the landlord, and the use intended by
the tenant. The
use clause of a lease is very important. If the use includes special
equipment or chemicals, such as medical offices or dry cleaning
establishments, most likely special provisions will have to be
included in the form lease to allow the tenant to carry on its
business.Financial
provisions, such as calculation of common area maintenance charges
and any rent increases tied to an index, are also critical. They
should be definite and understandable.In
the Dallas/Fort Worth area there are several standard form commercial
occupancy leases that are typically used by landlords most often.
These tend to be outdated and amenable to negotiated changes.
RETAIL
OCCUPANCY LEASES
Retail
leases present additional challenges. In this environment, all
parties want the shopping center to succeed, and so tenants are
interdependent on each other as well as with the landlord. The
success or failure of each store in the center has an impact on
the other tenants, and on the success or failure of the retail
center as whole. At the same time, each tenant will likely have
unique requirements.
ISSUES
COMMON TO ALL COMMERCIAL OCCUPANCY LEASES
All
commercial occupancy leases include the following issues, most
of which are open to some negotiation:
- Offset:
the ability of a lessee to offset monies paid to perform tasks
required by the landlord, but which the landlord fails to do,
such as repairs
- Repairs:
allocation of which party is responsible for which repairs
- Habitability:
in Texas there is a warranty of habitability, which the landlord
typically tries to waive in its lease. In certain uses, such
as medical, however, habitability is generally necessary to
being able to use the premises.
- Insurance
Coverage Requirements: this provision is usually negotiable.
Be careful of leases requiring any unusual insurance policies,
such as workers compensation policies.
- Apportionment
of Condemnation Proceeds: if a tenant is going to make substantial
improvements to the property, it should make sure that it has
the opportunity, should the property be taken in condemnation,
to receive the portion of the condemnation award allocable to
those improvements.
- Notice
and Opportunity to Cure: tenants should make sure the landlord
is required to advise them in writing of any alleged default
before declaring a default and exercising any remedies.
- Coordination
with Ground Lease: Lessees of a ground lease must make sure
their occupancy leases coordinate with their ground leases.
Commercial tenants must understand that some issues are non-negotiable
because of the terms of a ground lease and a landlord's lender's
requirements.
TELECOMMUNICATIONS
TOWER LEASES
We
have developed particular experience in representing landowners
with telecommunications towers situated on their property, having
successfully closed leases with AT&T, Verizon, and Nextel.
These are typically 5 year term leases with optional terms of
up to 30 years in the aggregate. They are usually drawn very loosely
and to benefit the lessee telecom entity. It is important to understand
that in most cases, the lessee is not the nationally known, financially
strong company with the recognized name, such as "AT&T"
or "Nextel." Instead, the proposed lessee is usually
a subsidiary that does not put the assets of the parent at risk.Key
issues in telecom tower leases include:
- access-whether
by easement or license (compare these below), and any ability
of the owner to change the access as development requires
- definite
description of the tract of land to be leased
- requiring
the telecom lessee to be current in all lease obligations before
it can exercise any options to extend the term
- prohibition
on subleases without lessor approval, so that the landowner
will not end up with an eyesore of a tower
- requiring
the lessee to completely remove the structure, including the
foundation, upon the termination of the lease, and providing
remedies in the event the lessee fails to do so
- apportionment
of condemnation proceeds, if any
- insurance
requirements and application of insurance proceeds
EASEMENTS
An
easement is a non-possessory interest in land granted to a person,
either personally or by virtue of a specified parcel of land,
to use another's land for a limited purpose. They may be exclusive
or non-exclusive. Easements
have a vocabulary all their own.
- The
parcel of land benefitting from the easement is the "dominant"
estate. The estate burdened with the easement is the "servient"
estate. An
"easement appurtenant" is an easement that benefits
a particular tract of land no matter who owns it, such as an
easement for a driveway from a road to a tract of land. An "easement
in gross" is an irrevocable personal interest in land held
by a person and land ownership is irrelevant.
- An
"affirmative easement" gives the holder of the dominant
estate the right to do some act on the servient estate. A "negative
easement" prevents the owner of the servient estate from
doing something on the servient estate in order to benefit the
dominant estate.
- An
"express easement" is a written easement granted by
the owner of the servient estate. An "implied easement"
arises by operation of law or is inferred from written conveyances,
usually based on policy considerations that favor the productive
use of land and the inferred intent of the parties regarding
such land. An "easement by prescription" arises by
adverse use of another's land.
KEY
EASEMENT ISSUES
When
considering an easement the servient estate owner is most at risk.
They will want the easement premises as small as possible or other
very narrow restrictions, and in both instances they will want
the easement area described very specifically. At a minimum, they
should also specify the purpose of the easement and provide for
its termination.The
owner of the dominant estate, on the other hand, will want to
make sure the easement grants enough rights to achieve the goal
of obtaining the easement, and that it is drafted with some flexibility
to allow for future changes.
LICENSES
A
license is permission to do a particular act or series of acts
upon another's land that, absent such permission, would be a trespass.
A license is not an interest in land but merely a privilege to
enter and use another's land. Licenses are usually revocable at
the will of the grantor, and are non-exclusive. They are non-transferrable.
An example is a license to allow trucks to dump clean landfill
in connection with a floodway reclamation project.The
scope of the license is determined by the extent of the privilege
granted by the licensor. Since licenses are not interests in land,
they do not have to be in writing. They can be express or implied.
Licenses can be very flexible and beneficial to all involved.
However, because of the many possible variations, they should
be reduced to writing and signed by all parties.
FOR
MORE INFORMATION
Please
visit The McTexLaw Commercial Real Estate
Resource Center for more information, articles and cases,
and E-mail us if we can be of service to you in connection with
a commercial lease, easements, licenses or other real estate matters. |
