Representations As Part Of Proper Due Diligence

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Last week, we Ruminated about what “AS-IS” might mean in an agreement and when it might be an appropriate “agreement.” You can see that posting by clicking HERE. Basically, we think that the contracting party in the “best position to know” should “take the risk.” Sometimes, however, the one with the “lesser” knowledge may not need to rely on the one with the “best” knowledge. For example, Someone who owns a car for all five years of its life is in the “best” position to know if it leaks oil, but if it only takes ten seconds to look under the car, then it wouldn’t be unreasonable to ask a buyer to take the risk that the car leaks oil. Of course, if the seller fraudulently hid the leak or refused to allow inspection, that’s separately actionable.

Today (and in next week’s blog postings) we’re going to cover “AS-IS,” but in the context of a property purchase agreement and only as to how accepting a property in its “AS-IS” condition bears on the kind of representations a buyer might want to get from the seller. That’s a long and awkward way to say we are writing about representations a seller might be asked to make in a property purchase agreement. [Read more…]

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What, Me Worry? “AS-IS,” Whyfor?

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When you come across a contract provision that shouts out “AS-IS,” do you have a complete understanding about what is involved or just a general one? For the most part, when you take something “AS-IS,” you are taking it without any warranty. That means the landlord or seller doesn’t have to “make it right” – the risk of something being wrong falls on YOU. Unless you find a sympathetic judge, it means you are taking the “whatever” with all faults – those you can see AND (even, maybe) those you couldn’t have seen.

Basically, “AS-IS” has to do with your expectations. If you buy a boxed radio from an electronics chain store at something close to a “real” selling price, you expect (and have the right to expect) that it will function as a radio should function. If you fish the same kind of radio from the bottom of the barrel at a flea market and pay “two bucks,” you get it “AS-IS” even if there was no sign to that effect on the barrel. [Read more…]

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A Management Fee Puzzle For Tenants

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It appears to be generally accepted, though we don’t know why, that management fees are validly included within common area costs (a.k.a. “operating expenses”). We take comfort in something that John Stuart Mill wrote in On Liberty: “It is as certain that many opinions, now general, will be rejected by future ages, as it is that many, once general, are rejected by the present.”

To Ruminations, management fees should be treated as a cost of ownership, not an expense for items that benefit a tenant. The property owner can choose to self-manage what it owns or, in the alternative, it can do little or no work and treat its shopping center or other property as if it was a share of stock in General Motors. It is one thing to seek recovery for the administrative overhead cost of managing the common areas, but quite something else to seek recovery for the cost of managing tenants, working on leasing of the property, dealing with financing issues, bookkeeping, preparing tax returns, and for the performance of similar tasks. [Read more…]

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What’s So Gross About Sales?

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If the term “Gross Sales” had an intuitive meaning, we wouldn’t have had grist for today’s mill. And, thousands and thousands of us wouldn’t have the opportunity to write our own definition for that term. What a sad world that would make!

Percentage rent provisions are common and almost always rely on the starting concept of “gross rent.” But, while “gross rent” might have a generally understood meaning outside of the leasing community, that certainly isn’t the case inside the leasing community. If it had a common meaning, it would be an undefined term just as are most of the words and terms found in leases (and other agreements). Just think of this: we don’t define every word in our agreements (such as leases and mortgages); we rely on common understanding. That’s true even where words succumb to a choice of definitions. In those cases, many as they are, we understand those words and phrases in the context where found.

We’re not talking about “gross sales” as the number to which the “percentage” is applied because, at the end of the day, no one applies the “percentage” to “gross sales.” We apply it to an “adjusted” sales figure. Wherever we start as “gross,” you can be sure you’ll find a list of deductions or exclusions. These are two different “don’t count these” concepts, though, at the end of the day, their effect is the same. The “number” against which the “percentage” is applied is reduced by deductions and exclusions. [Read more…]

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How To Make One Lease Form Fit Every Deal

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Should leases match the deal or should the deal match the lease? Where is Ruminations leading to today? How many times, too many we think, is a single lease form used as the basis for every deal coming out of the “shop”? And, does it seem that the most common lease form distorted, twisted, and reshaped for every deal began as one written for a multi-tenant property?

Today’s posting deals with another facet of what we wrote two weeks ago  ̶  “Who does it? Who pays for it?” The only way to know is by reading the lease. Now, in a lease for a multi-tenanted property, the landlord does a lot, but the tenant pays for almost all of that. For example, the landlord mows the lawn and its tenants share the cost. At a single tenant property where the leased space includes the grounds as well, it is almost always the case that the tenant mows the lawn and pays directly for the mowing. The way you can tell who mows the lawn is to read the lease. The way you can tell who pays for the mowing is by reading the lease. [Read more…]

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A Word Is Not A Crystal, Transparent And Unchanged

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“If the law supposes that,” said Mr. Bumble,… “the law is a ass—a idiot. If that’s the eye of the law, the law is a bachelor; and the worst I wish the law is that his eye may be opened by experience—by experience.” [Charles Dickens, Oliver Twist.] Ruminations doesn’t exactly know what all of that means, but it hasn’t been our experience. The law is not “a[n] ass, a[n] idiot.” None of us should think that we can draft documents (lease, mortgages or other agreements) and then decide later what they mean. We can’t expect courts to go along with what we wished the document said or what we want the document to say. They are pretty good, though not perfect, when it comes to “calling ‘em right.”

Today’s blog posting is informed by a July 17 Opinion from the North Carolina Court of Justice, Superior Court Division. To see it, click HERE.

Here’s a snippet of common boilerplate, most often found in releases, but commonly found elsewhere in other agreements, whether using these very words or ones very close to them:

… and its predecessors, successors, directors, officers, managers, members, and their respective heirs, executors and designees…

Yes, your list may be different. It may be longer. It may be shorter. But, you have such a list. [Read more…]

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What’s In A Name? Gross? Net? Does It Make A Difference?

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Other than giving a general sense of the way the lease deals with variable costs of operating a rental property, the labels, “gross lease” and “net lease” give no usable information. A good rule when it comes to preparing a lease or when reviewing a lease is to look at each obligation and ask two questions: “Who does it? Who pays for it?” In the truest of “net” leases, the tenant does both. You’ll see that most often for a single tenant property where the leased premises include all of the land as well as the building. That can come about in a number of ways, most often when the tenant developed the property and then sold it to an investor (a sale-leaseback). It is also common when a developer does a build-to-suit project for the tenant. Less often, but not rare, is where an existing single-tenant property is leased. In each of those cases, the overwhelming “rule” is that the tenant will do all of the work at its own expense. A very common, though limited exception, is when it comes to the building’s structure and, less often, the building’s roof. A “smart” exception would be that the landlord maintains the property insurance, though the tenant pays that cost. Such a lease is rightly called “triple net,” “net” or, as Ruminations prefers, ‘absolute net.” [Read more…]

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Estoppels – Why? What? How A Red Light Becomes A Green Light

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What is the legal effect of an estoppel certificate or, in “shorthand,” an “estoppel”? “Estoppel” is a strange word. To understand its effect, try this non-defining, circular statement: “One who issues an estoppel certificate is then ‘estopped.’” Basically, the certifying person (or entity) is “stopped” from denying that what is said in the certificate is a fact. If one issues an estoppel saying that the traffic light was red, those reasonably relying on that certificate can act as if the light was red even if it wasn’t. In “leasing” terms, if a tenant delivers an estoppel in favor of a prospective successor landlord and that certificate says that the tenant has received all of the tenant improvement money due under the lease, the successor landlord can rely on that statement even if the tenant was mistaken. The tenant is “estopped” or “barred” from making a claim against the successor landlord for that money. The tenant, not the successor landlord, takes the risk of being wrong. [Read more…]

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