The Rent Has To Start Sometime. So, Why Doesn’t The Lease Say So?

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Everyone knows that “the rent has got to start sometime.” So, why do we see leases where that might not be true? In the most common such scenario, rent will begin “X” days after the tenant gets all of the final and unappealable permits it needs to adapt the leased space for its intended use. If a landlord were planning to use the rent money for an around-the-world vacation trip, what should its booking date be?

There are so, so, many variables when it comes to getting “all” permits. For one, you don’t even know what “all” might be. We’re not going to attempt a comprehensive list, but a few examples might be in order: land use (zoning-use, subdivision, site plan) approvals; signage approvals; business licenses; refrigeration permits; recycling permits; liquor licenses; and sewer permits. Oh yes, the one you were thinking of: the building (or construction) permit.

Now, you’ve got to apply for these (and more). For some, you need to prepare plans or submit other extensive materials. Often, the tenant has to rely on third party preparers – architects, engineers, traffic counters, sign shops, landscapers, and more. These people need to be hired and service contracts are often negotiated. Even internal resources need to be marshalled. When, as often is the case, resources (time and sometimes money) are limited, it can take quite a bit of time for this “act to be pulled together.” And, that’s when the tenant has its own “act together,” not always a safe bet.

Then, the process takes time. Even when the tenant (and its landlord) act expeditiously, the approving authorities have a whole ‘nuther idea. Many real estate professionals don’t think twice when a land use board, faced with your line-up of ten presentation-ready professionals, announces – “We don’t have time tonight for you, come back next month.” And, what about the process of getting that approval vote reduced to a resolution and then published (twice?) How about the wait to see if there are any objectors stirred-up enough to appeal. How long does that appeal take?

It’s an interesting concept: if you prepare your building plans in accordance with the construction code, they will be “rubber stamped” – no discretion needed. It is a mere technical process. Unfortunately, it just doesn’t seem to work that way. Setting aside mistakes or omissions in submitted plans (and you can expect there will be some), why does it often seem that the municipality’s construction official just returned from a three day seminar with a whole bunch of new ideas to be applied to the first application seen upon her or his return – yours!

Are there any time limits to these processes if the Lease doesn’t set any? Of course there is, and it’s called “with a reasonable time.” We know that because when these disputes get to court, the judges tell us that. And, what is a “reasonable” time? Well, it depends. It depends on the “facts and circumstances” presented to the court. As we read those case, the judges seem to do a pretty good job of opining as to what is a “reasonable” time under those facts and circumstances. The problem is that, as correct as a court might be, landlords who agree to a lease without time markers or benchmarks never expected that “it would take so long.” How long? We’ve seen “four years” before a court called a lease “quits.” We’ve seen six years for a full project development. Given what was reported to have taken place after the lease or contract was signed, even Ruminations had to agree with those courts.

You see, the problem is not whether the permit-gathering process is moving as quickly as it can under the circumstances. The problem is that the parties have certain “expectations” when a lease is signed. The landlord wants rent sooner rather than later. Its tenant doesn’t want to pay for what it can’t use quite yet.

What can or should be done? The simple solution is to put the burden and risk entirely on the tenant (assuming that the landlord cooperates throughout the permit-gathering process). Tenants don’t like that, but would be unreasonable to think the risk should be entirely on landlords

Can that gap be bridged? One way is to say that the rent (and the lease term) will begin no later than “Y” date. How does that that balance the risks? What if the tenant can never get its permits? Require the tenant to diligently prosecute its applications and if it does so, but just can’t get them by a given date, let it cancel the balance of the lease term with the landlord keeping the rent owed to that point. If “Y” date is before the rent would have begun, so be it. That’s a deal that can be made. If the landlord wants to try to hold onto the tenant, give the landlord an opportunity to prosecute the tenant’s applications and the lease wouldn’t end on the tenant’s chosen termination date if the landlord is successful within a given period of time. Will this satisfy a landlord who doesn’t care that its tenant can never use the leased space? No, but is that the kind of landlord the tenant really wants?

Or, don’t use the “rent no later than ‘Y’ date” approach, but give either party the right to terminate the lease after a given date if the permits haven’t been received by then. Of course, to have that right, the tenant can’t have failed to act in a reasonable way to obtain its permits and the landlord can’t have failed to give any required help. The technical ways of writing such a provision are not being shared today.

Another approach, and not a mutually exclusive one, is to set a timeline for the steps that are under the control of the applying party. Say the plans have to be submitted by a certain time. Say that applications must be submitted by a certain time. Say that responses to approving authorities’ requests must be made with a certain number of days. Require that copies of submissions by one leasing party be given to the other contemporaneously with their submission to the approving authorities. Require that copies of all correspondence be shared. If these timelines aren’t met (perhaps with some notice and grace period), them make the rent start by “X” date. While it may be difficult to control the calendar of the approving authorities, the landlord and tenant should take responsibility for their own activities.

By the way, it’s not only the “rent starts when we get our permits” that gets everyone into a bind. Anytime a (rent, term or lease) “commencement” date is dependent on the occurrence of an event, you’re going to have a problem. We’re not going to list the other ways landlords and tenants get into the “when do we really start” bind. If you’d like to share such a war story, just go ahead and do so by clicking “comment” or “comments” just below the title to today’s posting.

Ruminations is well aware that neither landlords nor tenants are going to be entirely happy with today’s posting. That’s because their interests are mutually exclusive. Basically, with rare exception, the landlord wants the rent and doesn’t care when or if its tenant can start doing business in the leased space. On the other hand, tenants abhor paying rent if the space can’t be used. Speaking of “used,” get “used” to it. The rent has to start flowing and should start flowing by the date the parties “expect” that it will start. Yes, whenever a deal is made, the parties have a date in mind when they think the rent will start. Landlords and tenants should discuss that and agree on that date (or time period) and then put that into the lease as the “outside” date. Sure, if the tenant, through no fault of its own, can’t open for business in the leased space, let either party end the misery. We think the landlord should be able to keep the rent in return for, what turned out to be, keeping the property off the market for the benefit of the tenant.

For those readers who made it all the way through and wonder why we’ve chosen today’s topic when “everyone” already knew all of that and there was nothing new in the posting, ask yourself: “Is that really true?” If you think it is, then you just haven’t been out there long enough – you haven’t read many tenant-form leases. Think about it. All that we’ve written is intuitive, and yet lots of leases fail to have an “outside” date. If nothing else, remember these two thoughts: (1) you need an outside date; and (2) it should be the date the negotiating parties reasonably agree would be the starting time if things went as planned (plus a smidgen, it you insist).

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Comments

  1. Phil Kling says:

    One-sided view of lease negotiations.
    Tenant’s don’t commit resources to a transaction without expectations. Merchandise is ordered, sales are budgeted, slots in capital growth programs are committed all based on a reasonable estimate of the Commencement Date.
    Rent paid with no sales and without Construction benefit makes it harder for retailers to profit. Unprofitable retailers make bad tenants. Leases need to have incentives and penalties on both sides so that the plan approval process goes smoothly, that there is coooperation among the parties, even in dealing with
    the “rabbit-hole” known as the permit process.

  2. As a tenant rep, I find far too many landlord either prefer to ignore realty or live in an alternate reality where permitting is involved. you can call a municipality and get a good handle on the MINIMUM time needed to get a permit, never the maximum. It is not uncommon for a landlord to stipulate they want rent to start in less days than the City says it takes for a permit to even be processed, forget about preparing plans, health dept’s, etc. Toss in a few ‘new ADA” issues, a fire dept code update or two and the ‘minimum’ time is way too optimistic. Far better to stipulate: Submit plans to plan check by within 45 days with full acceptance by City for process no more than 60 days. This means the tenant is now ‘in the gov. system’.

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