Same Tenant? New Lease? Watch Out!

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When the terms of an existing lease between a tenant and its landlord are dramatically changed, the parties frequently terminate their old lease and enter into a brand new lease.  The consequences of doing so are rarely considered by the parties, and they may be surprised to learn the following.

Any particular lease is affected by the terms of other leases at a project, recorded documents (such as Declarations of Restrictions), and the terms of financing documents.  In most cases, the tenant entering into a “replacement” lease had no control over, and no input into, any of those documents.  Frequently, landlords are unaware of important terms of those other agreements.

Even though all of these other documents, when executed, may have contemplated that a then-existing tenant would later “swap” its lease for a “replacement” lease, such prescience is rare. Consequently, a “replacement” lease should be thought of as an entirely new lease and at least the following situations should be considered:

  1. Will the tenant’s permitted use be barred by the terms of a later tenant’s lease which only excluded “existing leases”?
  2. Will other tenants be permitted to conduct activities that the “old” lease prohibited, but would now be grandfathered under the “replacement” lease?
  3. Will the Subordination, Non-Disturbance and Attornment Agreements already in place still be valid?
  4. If the tenant is required to surrender its premises at the end of the “replacement” lease term in its “original” condition, does that relate back to the start of the lease that has been replaced or only to the start of the “replacement” lease?

To avoid the surprises that can arise when the parties make substantial changes to an old lease, they should produce an Amended and Restated Lease instead of an entirely new lease.  Although such a lease effectively replaces all of the “old” lease’s language with an entirely new lease form, it will still be only an “amendment,” albeit a very major one.  This technique would serve to preserve the various commencement dates from the original lease.  Aside from trying to cover all of the “troublesome” items by careful drafting, use of one or more of the following suggested lease provisions in the “replacement” lease should help the draftsperson make the transition from the old to the new.

PREAMBLE OR RECITAL

NOW, THEREFORE, in consideration of the mutual promises herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby mutually acknowledged, Landlord and Tenant hereby mutually agree that the Existing Lease be amended and restated as of the Effective Date (as defined in Section    ) as follows:

or:

WHEREAS, the parties hereto desire that the Existing Lease be substantially amended and restated, inter alia, to modify the Existing Lease.

TRANSITION PROVISION

Prior to the Effective Date, the rights and obligations of Landlord and Tenant are those described in the Existing Lease.  On the Effective Date, the Existing Lease shall be deemed amended and restated so as to contain all of the terms of this Lease and this Lease as amended and restated shall govern all future rights, obligations, duties and liabilities of the parties.

GRANT OF EXCLUSIVE USE RIGHT

(and clarification as to when it speaks)

 Provided that Tenant is not in default under the provisions of this Lease beyond applicable notice and cure periods and is operating a [specify use] as permitted hereunder, Landlord hereby agrees not to lease, or permit the use of, any portion of the Shopping Center as [specify use].  This covenant shall not apply to any tenant in the Shopping Center as of [Date of Original Lease] whose lease would permit it to operate a [specify use].

ACCEPTANCE OF CURRENT CONDITION

 Tenant is currently in possession of the Demised Premises and does hereby accept the Demised Premises in its present “AS IS” condition, as of the Effective Date.

 STATEMENT OF INTENT

 This Lease is only a modification and restatement of the Existing Lease.  It does not serve as a termination of the Existing Lease.  As such, the rights and obligations of each of Landlord and Tenant for the period prior to the Effective Date are set forth in the Existing Lease.  On and after the Effective Date, those duties and obligations are modified prospectively in accordance with the terms of this Lease.

If the parties really want to start with a new lease and understand that other tenants at the project and lenders already in place may then have intervening rights, they still will want to consider the following type of lease provision in the new lease:

 MERGER AND INTEGRATION PROVISION

This Lease: (i) supersedes all prior negotiations, representations, understandings, and agreements of, by or between the parties, which are fully merged herein; (ii) contains the entire agreement of the parties; (iii) shall be construed and governed by the laws of the State in which the Demised Premises are located; and (iv) may not be changed or amended except by a written instrument duly executed by the party sought to be bound.  Landlord and Tenant were parties to the following prior leases for all or part of the Demised Premises (each, an “Existing Lease”): (1) a lease dated _______ ; a lease dated ________ ; … .

Notwithstanding the foregoing: (A) Tenant shall remain responsible to Landlord for: (a) any and all Fixed Rent, Additional Rent, and other charges due, owing or accruing under each Existing Lease prior to the Effective Date of this Lease; (b) its obligations under each Existing Lease which expressly or impliedly survive termination of that Existing Lease; (c) third party claims against Landlord for which Tenant was required to either or both indemnify and hold Landlord harmless pursuant to each Existing Lease; and (d) Tenant=s introduction of Hazardous Substances or violations of environmental law at or affecting the Shopping Center before the Effective Date of this Lease; (B) Landlord shall remain responsible to Tenant for: (x) its monetary obligations, if any, to Tenant due, owing or accruing under each Existing Lease; (y) its obligations under each Existing Lease which expressly or impliedly survive termination of that Existing Lease; and (z) third party claims against Tenant for which Landlord was required to either or both indemnify and hold Tenant harmless pursuant to each Existing Lease.  Further, the obligations of the Landlord to adjust items of Additional Rent and each party’s rights, if any, to audit the records of the other under each Existing Lease shall survive termination of that Existing Lease for as long as provided in that Existing Lease; and (C) the condition to which Tenant shall be required to return the Demised Premises shall be that which existed when delivery of possession was made by Landlord to Tenant under each Existing Lease as to the premises described in that Existing Lease and if the Existing Leases cover all or part of the same premises, then to the condition required by the earlier or earliest of the Existing Leases.

As was the case last week, astute readers (or “an astute reader”) might realize that this week’s posting look remarkably similar to a 10 year old article. That’s because it is. Let’s call it “vacation,” not laziness. Or, let’s call it: “Best of.” Fresh meat will be available next week.

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Comments

  1. Brilliant, Ira. Clear and simple. Would you recommend the same approach in an assignment context, where the real value in approving an assignment for the landlord is the chance to upgrade lease language and refashion new business terms with assignee?

  2. This raises an ancillary issue/concern from the Tenant’s perspective. Assignment provisions in leases which typically keep the assignor-tenant on the hook for the lease post-assignment. When representing Tenant’s at the inception of a lease, it is important to limit the potential future impact of such a provision as much as possible– in the very least to make certain that the assignor is only responsible for the balance of the then current term (durational) and on the same terms (substantive) but not for modifications, replacements, renewals, or extensions. Conversely, when entering into a new agreement with an existing tenant who is an assignee, the landlord should be mindful of any such provisions in their leases with respect to post-assignment liability when agreeing to enter a new lease or to amend an existing one.

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