A Pig In A Poke And Other Lease Negotiation Sad Tales Of Woe

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Have you ever bought a $300,000 house solely based on reading a classified ad? What about doing a $3,000,000 lease (30 years, including options, at $100,000 a year) without ever seeing the property or at least taking a good “look” at the property from far away? Why would you NEVER buy a house that way, yet regularly do a lease based solely on a term sheet and with no other “due diligence” investigation? Simply said, you shouldn’t. 

What are we talking about in the way of “due diligence”? Our short, generic list is as follows:

  • Full Size Site Plan
  • Environmental Reports
  • Copy of all exclusive use rights granted to existing tenants
  • Copy of all permitted use clauses for tenants over a size commensurate with the size of the project itself
  • Survey
  • Title Work with copies of all recorded documents
  • REAs, if not included with title work
  • Form of SNDA being used
  • Pictures of existing pylon and monument signs
  • Lighting Survey
  • Utilities Survey
  • Physical Condition Reports
  • CAM Budget
  • CAM History

Why, you ask? Suppose a landlord sincerely believes that none of the existing exclusive uses would adversely affect a prospective tenant, but the prospective tenant or even the landlord’s own attorney or other representative, upon review of the actual text, thinks otherwise? Do you want a lawsuit over the “exclusives,” or do you want to be left alone and do your business? How do you know if any particular access path, even for rear door deliveries, needs to be “protected.” How about long-forgotten restrictions of record that would have an impact on a tenancy? When you negotiate for CAM “carve-outs,” wouldn’t it be helpful to see what has historically been included? You could even tailor the CAM cost definition by reviewing the property’s budget or history. Make up your own examples. We could fill pages and pages, and it wouldn’t necessarily be a hypothetical list. We’ve seen situation after situation where the parties were surprised by what a simple investigation turned up (or would have turned up).

What can you do if the principals aren’t equipped to furnish this kind of information? Scratch around yourself. Use the internet to find out about the property. Google Earth (TM) is a great tool. In most cases you can actually see the entire property, the premises, its storefront, the signage, the abutting roadways and way more. The three dimensional view can get you familiar with the elevations and identify visibility issues. You can also use the internet to find out who else may be located at the property. An increasing number of recording offices make record documents available. Look for tax records. Sometimes you will find newspaper articles that may “warn” you of possible issues related to the subject property. There is a treasure trove of information out there.

Basically, a little bit of due diligence information can turn a nondescript, generic property into the particular property you’ll be working on and, in turn, can turn a generic lease into one truly tailored to the location at hand.

This isn’t just an issue for a tenant; landlords can get kicked in the face just as well. Think about how often a landlord makes a plain vanilla, unremarkable representation about the absence of restrictions. Has it or its attorney or other representative taken a recent look at leases, mortgages or documents of record?

We’ve written about the real need to review title work when negotiating a lease. You can see our Ruminations on that subject by clicking HERE. That posting tells the story of a lease negotiated with a landlord who was in the process of losing its property by way of a mortgage foreclosure. Title work also reveals recorded restrictions, many times including exclusive use rights of other tenants, even of tenants who have retained their rights after disappearing from view at the project. Title work also includes existing mortgages, and that allows you to see if a lender’s consent is required for your lease or for a lease amendment. You can find out the actual landlord’s name and that of its lender(s). On more than a handful of occasions, we’ve found that the names we were going to put on the documents didn’t match the real “owner’s” name.

It isn’t often that a lease negotiator’s due diligence (or that done by the leasing party itself and conveyed to its negotiator) will “kill” a deal, but the results of even a basic due diligence effort will often shape some lease provisions that would have looked differently or even would have been absent without the due diligence taking place.

We recently saw a pretty insignificant case, that of Weiner v. SGI-Malden LLC, 2013 WL 1458629 [Mass.App.Ct.]. You can look at a copy by clicking HERE. In this case, the tenant made what seems to us to be a pretty weak claim, but one that could have been avoided without the cost of a trial and of an appeal. The lease had a pretty standard common area maintenance cost recovery clause and defined the common areas as the portions of the shopping center that the “tenant and its customers may use.” The lease apparently said something like “Tenant and its customers may only park in the area(s) shown by crosshatching” on an attached lease exhibit. So, for one reason or another, the tenant argued that, as to it (as contrasted with any other tenant at the shopping center), the share of common area costs should only be those related to the parts of the shopping center “it” could use, and not what was generally usable by tenants and customers of the overall shopping center.

If the tenant was “genuine” about this concern, a due diligence examination of the site plan would have triggered the issue BEFORE the lease was signed. The landlord could also have pre-empted the argument by recognizing the disparity and making the lease clearly say “it doesn’t matter” – you, the tenant, have to pay your share for the entire property. Ruminations is a strong proponent of “say what you mean, and mean what you say,” but if you didn’t look at the “picture” when writing the lease, how would you know what to say?

You might argue: “this really doesn’t implicate a failure to conduct appropriate due diligence ahead of time,” but the court, citing an earlier case between different parties, pointed out that the parties could have negotiated a reduction in “share” ahead of time. Perhaps the tenant (or the landlord) itself didn’t “see” this when it negotiated the business terms, but shouldn’t its advisor have had a “crack” at “advising” the tenant (or the landlord) of this disparity? We don’t know what the parties were looking at, but it does seem that if this tenant was being “genuine” about the issue, a pre-signing look at the overall site plan and its “common areas” could have brought this issue to the table.

We grant that the Weiner case isn’t the “best” example, especially because we are making a lot of guesses about what was really going on. But, if you accuse us of acting in that fashion, why are you making lots of guesses about the shopping center or other kind of project instead of doing your “due diligence”?

Adding your comments, especially adding to the list of due diligence type items, would help all readers. You can do so by clicking right under the title where you will find some form of the word, “comment.”

And yes, this week’s title was better than this week’s posting, but we liked it. So, we used it instead of saving it for later. Shoot us.

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Comments

  1. If you’re a tenant that uses large delivery trucks, ask the landlord to have his architect superimpose a WB-67 template (or whatever size truck you use) on the engineered site plan. This will ensure that you can actually receive your deliveries without the truck taking out a corner of the building or a fence. It’s not a happy thing to get to the end of a lease negotiation and find out that there is no way to receive our stuff, especially when a little more due diligence would have revealed the issue.

  2. One of the main things that I see tenants overlook is “who pays for what”. In retail space tenants are almost always responsible for tenant improvements, electricity, signage, hvac maintenance, repair and/or replacement, and anything else within the premises.

    However tenants never ask the right questions and always assume the landlord is paying for certain items. It’s important that they ask and get all the answers in writing on the lease contract..
    AND NEVER ASSUME!

  3. Lew Lefkowitz says:

    Most of these (other than title and survey) are items that the tenant’s site location team and/or broker should be looking into before a term sheet is even agreeded to. They should also ask the landlord to complete an environmental questionaire and/or provide a copy of the most recent Phase 1.

    When a new lease comes in I always check Google Earth(tm) as well as LoopNet(tm) and other real estate for lease websites; they sometimes provide valuable information. Also, checking tax records will oftentimes reveal the landlord’s payment record and any mortgagees of record.

  4. The list should include zoning designation and review of permitted uses under that zone. How about signing a 10 year lease only to discover that the tenant’s proposed use, while perfectly fine with the landlord, is not legal under the existing zoning? Or requires a conditional use permit – which may end up having unacceptable conditions attached to it? I’m a bit shocked this wasn’t on the list as it is almost the first thing I want to know…

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