If The Lease Is Going To Wind Up This Way Anyway, Why Not Start Out This Way?

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Last week, though it might not have been clear (which would be entirely our fault), we were suggesting that the lease negotiating process would be quicker and more effective if the parties started with a form a lot closer to the finish line than has become the custom. We were surprised by how much support we received for our suggestion that the “default” approach in a lease should not call for a landlord’s approval of every detail of a tenant’s fit-up or other alteration work. Certainly, there were detractors, but we thought there would only be detractors. That turned out to be far from the case.

This got us to thinking about some other common clauses that seem to be more suited for inclusion in The Dance of the Seven Sisters (An Iroquois tale adapted by Amy Friedman). Today, our thoughts turn to the default clauses in the typical lease.

We’ll start “easy.” Everyone knows that the lease will give the tenant 30 days to cure an alleged breach. So, why do a measurable minority of landlord’s leases start with “20”? We’ve never seen more than 30, even where the first lease draft started with 30. That’s because everyone knows that 30 is the accepted number. So, why should a tenant ask for 60?

Similarly, why should the starting draft “forget” to include a provision that recognizes that not all breaches can be cured within 30 days? There is a pretty standard approach here, virtually always available for the asking. All experienced readers know that the finished lease will allow a tenant as much time as is reasonably needed so long as the tenant begins its cure in the first 30 days and diligently prosecutes the cure thereafter. [This might be the place to suggest that the initial 30 day period and any extension thereafter should only apply to curable breaches. But, that’s for another day.] If that’s the way almost everyone knows the final lease will read, why do we see first drafts that say otherwise?

While we’re at it, why are we seeing more and more leases say that no matter how long it might take to cure a particular non-monetary breach, the tenant can only have 60 or 90 days in all? [We could say the same thing about recent mortgages.] We assume that the landlord really wants to see the breach cured and if the tenant can’t get the “special” repair part in the allotted time, why does the landlord think it can do better? Sure, we can conjure up some hypothetical situations where the landlord legitimately needs to throw its tenant out because the breach is imperiling the landlord’s business even if the tenant is diligently trying to effectuate its cure. But that’s really a narrow exception, a tail trying to wag the dog. If there are some situations like that, spell them out in the lease. And, if that were really the concern, why shouldn’t the tenant be able to avoid eviction if it eventually cures the breach before the judge signs a “get out” order?

By the way, all of this should also apply when a tenant wants to place its landlord in “default.” Tenant-form leases should start also where they are going to end up – 30 days for the landlord to cure, and an extension if the breach reasonably can’t be cured in 30 days.

While on the subject of non-monetary defaults, why do leases ever start out by saying that the aggrieved party can use self-help immediately, even before the allegedly breaching party has had its own opportunity to address the situation? Other than in the case of an emergency that threatens imminent harm to persons or property, the aggrieved party shouldn’t have the right to both send a notice of breach and to immediately try to cure the breach on its own.

Tenants are supposed to pay rent. If a tenant doesn’t pay the rent, it deserves to lose its lease. Yes, failure to pay rent is, and should be, a material breach of the lease. That, however, doesn’t address the issue of “pay by when?” Here is where theory and practice part company. In theory, when the rent is due by the first day of the month, the tenant should send it a few days before the end of the prior month. So, there really isn’t any need for a grace period. A tenant can send the rent as far in advance of the due date as it wishes. The practice, however, has seemed to become: rent, even when timely paid, is mailed on the first day of the month. That means it never shows up when due. And, the world seems to say – “what’s the big deal.”

While we don’t understand why everyone has accepted that the “due date” has turned into the “mailing date,” we do understand why it’s not a big deal so long as the rent gets paid someplace close to the first of the month, but more importantly, each and every month. If the rent comes every 30 days or so, the landlord’s life is pretty uncomplicated. It really doesn’t seem to matter if that means the rent comes on time each month, by the first, or exactly 8 days late each month, on the eighth.

The problem is really when the rent isn’t coming and the landlord doesn’t know if it will be coming. What a landlord needs to do is to ask for the rent. With a large tenant, the payment was probably “messed up.” After all, if the tenant has stopped paying everyone, sending a default message will be unavailing because the tenant’s response will be from the Bankruptcy Court. If the landlord is the only one missing this month’s rent, a phone call or letter will straighten that out. The bottom line is that a large tenant isn’t going to accept a lease that doesn’t say failure to pay rent is a default unless it first gets a notice from the landlord that the rent hasn’t been paid and then has 10 days to pay. So, why do some landlord form leases leave this out when the final lease is going to say this anyway?

As to a small tenant, the fastest way to get paid the “missing” rent, if it is going to be paid at all, is to pick up the phone or make a personal visit. Even here, when it comes to an actual default, why should a tenant be in jeopardy just because the rent arrives on the second day of the month? What’s the big deal about giving notice? Aren’t landlords going to give notice anyway? Ten days is pretty standard. It allays the tenant’s (false) fear that its check might get lost in the mail, but if the landlord is getting the rent every month, early in the month, the landlord isn’t suffering any damage.

As to late fees, despite the formulaic statement that these aren’t penalties, but are legitimate estimates of the administrative cost to process a late payment, they are put into leases as penalties. And, that seems pretty fair (though not to courts that are hidebound to the “contract damages can’t be penalties” school of thought). Why shouldn’t there be an inducement for a tenant to write its check on time, so long as that amount is reasonable (whatever that might be)? On the other hand, if a late fee is intended to induce a tenant to pay on time, why should a tenant who just screws up and pays late once or twice be obligated to pay a penalty aimed at ‘training” the tenant to pay on time? Well, there is a pretty standard approach to these issues, found in many, many leases. Tenants aren’t obligated to pay a late fee unless they pay the rent within 5 days after receipt of a “we didn’t get your rent” notice from the landlord. But, the tenant is only entitled to two such notices in any 12- month period. That’s the way this usually works out in the end. So, why don’t the form leases say that to begin with?

Lastly, we’ve tried to distinguish between “breaches” and “defaults,” and think leases should do so as well. Better drafted leases speak of an “Event of Default” as something special. Remedies flow from the occurrence of an Event of Default, not from a “default.” Often a proposed lease doesn’t make a distinction between a breach, something a tenant (or, in the case of a landlord’s breach, a landlord) can cure, and a default, which is what you have when the breach isn’t cured. If leases were written with that distinction in mind, tenants (or landlords) wouldn’t have to add “after applicable notice and grace periods” after ever mistaken reference to a “default.”

Why have we written all of this? It’s because we think it is a distracting waste of time to mark up a proposed lease so that it will look like what almost everyone in this business knows that it will look like weeks later. And, we think it is a “double” waste to negotiate over these kinds of items. If we eliminate all of these distractions, negotiators can use their energy and effort to work out items that are specific to the nature of the tenant and landlord, to the specific property, and to the tenant’s desired use.

To Ruminations, if a landlord and a tenant really want to get a mutually acceptable lease done quickly, they should start with a lease form that employs universally acceptable provisions for issues that have no special relationship to the deal on the table. Landlord and tenant default provisions are a good place to start. Doing otherwise gets you to the same place anyway; not doing so undermines the negotiating process by making your negotiators feel obligated to defend “20” days to cure when they know the final lease is going to end up with 30 days, and lots of other thing like that.

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Comments

  1. Ira, I agree with you in principle but you have focused on one of the least contentious subjects. Many landlords build into their form leases the very things you are advocating. Where they don’t, you still get a little resistance which then is quickly resolved. To the extent it has to be discussed at all, that is the lawyer’s BS, not the client’s. When you are talking about larger issues, such as the landlord’s right to review a tenant’s build-out, legitimate concerns are raised by both sides – there is not an industry standard” solution to this. Would that it were otherwise. I’m not a fatalist nor advocating more billable hours; it’s what I see in the operational realities of both landlords and tenants. The key to quicker conclusions of deals in my opinion is (i) more expansive LOI’s and both sides honoring them, (2) a willingness to hear the other’s point of view and the flexibility to be reasonable and fair. I have seen good results when these elements are present, even if “industry standard” solutions are not built into the lease form.

  2. “Why have we written all of this? It’s because we think it is a distracting waste of time to mark up a proposed lease so that it will look like what almost everyone in this business knows that it will look like weeks later”. Unfortunately, Ira as much as you advocate a reasonable and practical approach, not everyone is as prudent as you are, and they should be. I applaud your point of view and approach.

  3. Alan, would you agree with me that a fully negotiated, balanced lease between a particular sophisticated landlord and particular sophisticated tenant could not realistically function as a “one size fits all” document? Much as we would like it to be so, I fear that it is not achievable. I recall that the real estate community in New York came up with a “standard” SNDA with the goal that it would be used by everyone, without further negotiation. Trouble was, there was not a strong enough tenant voice at the table so the “balanced” SNDA was really titled in the lender’s favor – the lawyers there deciding in advance what the lenders wouldn’t like and decided in advance what a tenant should accept. Even if it were truly balanced (i.e. vetted by an experienced tenant lawyer), would all lenders and tenants agree to it? Same with a retail lease. Assuming the landlord community and tenant community all agreed to live by a standard lease on all issues, who would negotiate for each side? For the tenant’s side, we would need to select a champion like Ira .

  4. It has been my belief that Landlords keep these clauses to celebrate that they manage to get them the really terrible burdens foisted on the unknowledgeable tenants, the mom n pops…the folks least able to afford legal fees. It is amazing what is in some the startup mom n pop leases crafted by Landlord legal ‘counsel’. I don’t know if the clauses are in for that reason or just to require more legal billing hours to ‘fix’.

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