§ 19.35 Checklist for Drafting and Negotiating Commercial Lease Provisions Concerning Continued Occupancy and Default
M Delineate rights in event of condemnation of property. See
§ 19.36 below.
Address limits lease places upon tenant rights if partial, temporary, or complete condemnation occurs.
Determine whether rent will be prorated and if tenant will share in condemnation award.
Negotiate clause addressing whether tenant is entitled to value of fixtures, value of improvements, and reloca-tion costs.
M Establish remedies for damage and destruction. See § 19.37 below.
Negotiate rent abatement and landlord repair provisions applicable if property becomes partially or completely damaged.
Consider and draft lease provision addressing issue of limiting landlord’s obligation to restore and tenant’s rent abatement to amount of insurance proceeds land-lord receives under landland-lord’s casualty insurance policy.
Provide for lease termination rights if premises are badly damaged and landlord elects to demolish or rebuild.
M Specify subletting and assignment requirements. See
§ 19.38 below.
Negotiate lease provision concerning consent needed to sublet or assign lease.
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Determine percentage that may be subleased before landlord will be entitled to recapture right.
Ascertain whether tenant must pay landlord share of consideration or profit tenant receives from subletting or assignment.
Provide that landlord consent to subletting or assign-ment cannot be unreasonably withheld and refusal must be based on specific, objective standards.
M Explain factors to consider in selecting arbitration or ap-praisal. See § 19.39 below.
Suggest that potential disputes be settled by arbitration, with each party designating an arbitrator, and arbitra-tors appointing neutral arbitrator.
Caution that arbitration awards cannot normally be set aside by courts, and judgment confirming award is generally granted.
Suggest appraisal to resolve valuation disputes.
M Negotiate default and notice provisions. See § 19.40 below.
Include provisions calling for notice of default or notice to cure, and remedies if tenant fails to cure default, including termination, right to relet, right to cure default at tenant’s expense, and entitlement to default interest or late charges. See § 19.40 [1] below.
Recommend that if tenant fails to vacate and holds over at end of lease term, tenant must pay greater of percent-age of final adjusted monthly rent or percentpercent-age of fair market rent as use and occupancy charge. See § 19.40 [2] below.
Inform client that tenant may seek Yellowstone injunc-tion to toll period allowed for cure. See § 19.40 [3]
below.
Negotiate remedies, including specific performance, monetary damages, and limiting liability to property interest if landlord fails to cure default. See § 19.40 [4] below.
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M Consider implications of sale or mortgage of landlord’s interest. See § 19.41 below.
Advise client of possible need for tenant to provide estoppel certificate, execute and deliver subordination agreement, and obtain non-disturbance agreement where landlord’s interest is sold or mortgaged. See
§ 19.41 [1] below.
Negotiate time period to deliver estoppel certificate and limit estoppel certificate to tenant’s knowledge. See
§ 19.41 [1] below.
Request notice of any sale of property. See § 19.41 [1]
below.
Require non-disturbance agreement in connection with subordination and attornment agreements (SNDA agreement). See § 19.41 [2] below.
M Consider implications of mortgaging tenant’s long-term leasehold interest. See § 19.42 below.
Recommend lease provision permitting appropriate tenants to mortgage leasehold and providing protections likely required by lenders, including notice of default, right to cure, and free assignability of lease.
M Search Advisor:
Real & Personal Property Law > Landlord & Tenant
> Assignments & Subleases
Real & Personal Property Law > Landlord & Tenant
> Commercial Leases
Real & Personal Property Law > Mortgages & Other Security Interests > Assignments & Transfers
Real & Personal Property Law > Mortgages & Other Security Interests > Remedies on Default
§ 19.36 Delineating Rights in Event of Condemnation Governmental taking of all or part of a demised premises through condemnation is usually not under the control of the landlord or tenant, and condemnation insurance is not ordinarily available.
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Consequently, it is desirable for the lease to contain a condemnation clause specifically delineating the rights of both parties in the event of condemnation.
In absence of a condemnation clause, tenants will share in the condemnation award to the extent of their leasehold interest value.
However, most leases include provisions limiting tenant’s rights.
The Real Estate Board Office Lease provides that the lease terminates upon condemnation and the tenant does not share in the award. Tenants may negotiate for proration of rent paid in advance and, where tenant is strong, sharing of the condemnation award with the landlord and any mortgagee.
z Strategic Point: If the landlord refuses to agree to share a condemnation award, tenant’s attorney should request a clause providing tenant the right to compensation for the value of fixtures and improvements that cannot be readily removed, plus relocation costs.
PRACTICE RESOURCES:
● Warren’s Weed: New York Real Property §§ 28.29 – 28.44 (measure of damages), § 28.55 (leased property, award),
§ 84.09 (assessing impact of condemnation: eminent domain).
● New York Practice Guide: Real Estate § 25.06 [12] (PG:
condemnation), § 25.03 [10], § 25.07 [1] (Form No. 25-1:
Office Lease ¶ 10), § 25.07 [2] (Form No. 25-2: Store Lease
¶ 10), § 25.08 [11] (eminent domain clauses).
● Steinman’s Bergerman and Roth, New York Real Property Forms Annotated Form No. 200.14 (Lease to Anchor or Key Tenant: Shopping Center to be Built, Article 18), Form No.
200.15 (Landlord-Oriented Shopping Center Lease, Article 22), Form No. 201 (Retail Store Lease § 9.2), Form No.
205 (Loft Lease ¶ 10), Form No. 209 (Office Lease, Article 16), Form No. 296 (Rights Governed by Lease upon Con-demnation), Form No. 297.1 (Rent to be Apportioned),
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Form No. 297.2 (Payments to Compensate Lessee on Condemnation).
● LexisNexis AnswerGuide New York Surrogate’s Court
§ 9.03 [4] (Surrogate may authorize release rights to con-demnation award).
§ 19.37 Establishing Obligations and Recovery for Destruction of Premises
Lease terms vary considerably regarding the rights of landlords and tenants to cancel a lease in the event of fire or other casualty.
RPL § 227 provides that, in absence of a lease provision, a tenant who is not responsible for the destruction may give up possession of the untenantable premises and recover prepaid rent.
Since it is generally in the best interest of all parties to preserve the lease even where the premises have been damaged by fire, many leases contain express waivers of the RPL § 227 provisions. The Real Estate Board Office Lease Form provides that, if the premises are partially damaged, the landlord may make repairs and rent will be abated on the unusable portions of the premises.
s Timing: If damage is total, rent will be fully-abated from the casualty date until the premises are rebuilt and the tenant is fully-restored to possession.
The landlord may terminate the lease if the premises are badly damaged and the landlord decides to demolish or rebuild. Where the landlord intends to hold the tenant to the lease, the landlord must perform repairs within a reasonable time.
t Warning: The landlord may attempt to limit the ten-ant’s rent abatement to the rental income insurance pro-ceeds the landlord receives under the landlord’s casualty insurance policy. Any obligation of the landlord to restore should be limited to recovery of adequate insurance pro-ceeds. Tenant’s attorney should attempt to require the
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landlord to restore in all cases, whether or not the landlord has adequate insurance proceeds.
Tenants in a strong bargaining position should seek a clause providing that if an uninsured partial destruction of the premises occurs, the landlord will restore the premises and will not be entitled to terminate the lease if restoration cost is below a specified threshold. If more than a specified portion of the premises is rendered unusable by destruction, and the landlord fails to complete such restoration within a specified time, the tenant should be allowed to terminate the lease. If the landlord fails to make required repairs, the tenant should have the right to perform the work and take a credit against future rent.
Where the tenant is obligated to make repairs (net leases), the tenant should ask the landlord and any mortgagee to agree that insurance proceeds will be applied toward restoration costs. Ten-ant’s counsel may also request the following:
1. Tenant’s obligation be limited to extent of insurance proceeds;
2. Tenant be required to repair only where cause of loss is insurable; and
3. Tenant’s obligation will be reduced when loss occurs during last few years of lease.
Tenants who anticipate leasehold financing must clear this clause with their lender in advance.
PRACTICE RESOURCES:
● Warren’s Weed: New York Real Property § 80.27, § 80.28,
§ 80.29 (destruction or damage by fire or casualty).
● New York Practice Guide: Real Estate § 25.06 [13] (PG:
destruction or damage), § 25.03 [5] (obligation to repair premises), § 25.07 [1] (Form No. 25-1: Office Lease ¶ 8,
¶ 9), § 25.07 [2] (Form No. 25-2: Store Lease ¶ 8, ¶ 9),
§ 25.08 [12] (damage and destruction clauses).
● Steinman’s Bergerman and Roth, New York Real Property Forms Annotated Form No. 270 (Tenant to Repair After
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Damage; Insurance), Form No. 270.1 (Procedure for Ten-ant’s Restoration), Form No. 271 (Landlord’s Obligation to Restore), Form No. 271.1 (Lessor to Rebuild in Event of Destruction), Form No. 271.2 (Fire Damage to Premises), Form No. 271.3 (Destruction of Premises Due to Uninsured Risk), Form No. 273.1 (Apportionment of Rent Upon Destruction).
● LexisNexis AnswerGuide New York Civil Disclosure § 2.16 (obtaining insurance policy contents).
● RPL § 227 (fault-free tenant can abandon property and recover prepaid rent if premises are destroyed).
§ 19.38 Negotiating Subletting and Assignment Rights A subletting is a transfer of possession for less than the entire term remaining on the lease, and the sublessor retains a reversion-ary interest. An assignment is a transfer of the tenant’s entire interest in the leasehold, and the assignor does not retain a reversionary interest. Where the premises are subleased, the prime tenant retains renewal rights.
In absence of contrary lease language, a commercial tenant may freely assign or sublease. Commercial leases vary considerably regarding subletting and assignment rights. However, most com-mercial leases require the landlord’s consent to either sublease or assign, including indirect assignments by transferring control or ownership of the tenant’s entity.
t Warning: At a minimum, tenant’s attorney should require that the landlord’s consent to assignment or sublet-ting not be unreasonably withheld or delayed.
Where the lease permits assignments or subleases only with consent of the landlord and does not provide that consent shall not be unreasonably withheld, the landlord may refuse consent without stating any reason. Where the lease provides that consent shall not be unreasonably withheld, landlord’s refusal must be based on objective standards and explained with specificity. If sublets are
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contemplated initially, tenant’s counsel may request that the land-lord’s consent is not required if specified objectives and obvious criteria are met (for example, net worth, reputation, no felony convictions, experience, and proposed use).
z Strategic Point: Larger tenants are in a better position to bargain for the right to freely transfer to affiliates or transfer in connection with sale of the tenant’s business, although the landlord may require that the assignee or subtenant thereafter remain an affiliate throughout the entire lease term.
Landlord’s often seek to prohibit assignments or sublets in the following circumstances:
1. Collateral assignment of lease (for example, mortgaging of lease);
2. Assignment or sublet to existing tenants in building;
3. Assignment or sublet to prospective tenants with whom landlord is actively negotiating; and
4. Assignment or sublet to anyone for less than fair market or present rent.
The landlord may insist on a recapture right if the tenant wants to sublease 50 percent or more of its space, and may want to require the tenant to pay a share of consideration or other profit the tenant receives from subletting or assignment, in which case the landlord will need the right to audit the tenant’s records.
The relationship of the prime tenant and subtenant is that of landlord and tenant. The provisions of the prime lease should be incorporated into the sublease, so the prime tenant can enforce any breach against the subtenant. Lease restrictions upon assignments and subleases are strictly construed in favor of tenants. The courts generally enforce a lease clause calling for arbitration of disputes relating to assignments and subleases.
For additional discussion of assignments and subleases, see
§ 20.07 below.
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PRACTICE RESOURCES:
● Warren’s Weed: New York Real Property Ch. 81 (Leasing of Property: Assignments and Subleases).
● New York Practice Guide: Real Estate § 25.03 [3][a][ii]
(assignment, percentage leases), § 25.07 [1] (Form No.
25-1: Office Lease ¶ 11), § 25.07 [2] (Form No. 25-2:
Store Lease ¶ 11), § 28.01, § 28.02 (assignments and subleases), § 28.04 (Checklist: Drafting Assignment or Sublease Clause; Commercial and Residential Leases not Covered by RPL § 226-b), § 28.06, § 28.07, § 28.08 (lease clauses and forms providing for assignment or subleasing).
● Steinman’s Bergerman and Roth, New York Real Property Forms Annotated Form No. 295 (Prohibition Against As-signment as of Right), Form No. 295.1 (Covenant Against Subletting as of Right), Form No. 295.2 (Covenant Against Assignment and Subletting as of Right), Form No. 295.3 (Permission to Sublet for Limited Period).
● GOL § 5-703 (assignment of lease for over one year).
● RPL § 228 (subtenant is tenant at sufferance after prime lease expires).
§ 19.39 Prescribing Arbitration and Appraisal Remedies If Disputes Occur
Since there are many potential disputes under lease obligations, the parties should prescribe the nature of remedies available if they cannot agree. Many parties believe arbitration is a more effective remedy than summary proceedings or plenary actions.
Under one common arrangement, each party designates an arbitrator, and the two arbitrators appoint a third (neutral) arbitrator.
Use of the facilities of the American Arbitration Association may be prescribed. Arbitration awards cannot normally be set aside by court, and judgment confirming the award is generally granted as a matter of course.
z Strategic Point: Counsel should specify whether a
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commercial lease provision calling for arbitration allows recovery of attorneys’ fees incurred during arbitration proceedings.
Appraisal is another remedy and, like arbitration, involves extra-judicial resolution of disputes by impartial third parties. Arbitration agreements have two advantages over appraisal agreements:
1. Arbitration generally involves resolution of wide variety of disputes, appraisal involves resolution of specific issues, often relating to valuation; and
2. Arbitration awards are enforceable under CPLR Article 75, appraisal must be enforced in separate plenary actions.
PRACTICE RESOURCES:
● Warren’s Weed: New York Real Property Ch. 8 (Arbitration).
● New York Practice Guide: Real Estate § 25.06 [16] (PG:
arbitration and appraisal), § 25.08 [17] (arbitration and appraisal clauses), § 29.05 (Checklist for Drafting Arbitra-tion or Appraisal Provisions, lease renewals), § 29.10 [1]
(Form No. 29-15: Arbitration Clause).
● Steinman’s Bergerman and Roth, New York Real Property Forms Annotated Form No. 200.14 (Lease to Anchor or Key Tenant: Shopping Center to be Built, Article 23), Form No.
209 (Office Lease, Article 28), Form No. 312 (Use of Arbitration).
● LexisNexis AnswerGuide New York Civil Litigation § 15.03 (identifying written agreement to arbitrate).
● CPLR 7501 et seq. (arbitration and enforcement).
§ 19.40 Defining Default Responsibilities and Notice Requirements
[1] Requesting Notice and Remedies
There is always risk that the tenant will default in performing one or more lease obligations. Landlords will include lease
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provisions requesting notice of default or notice to cure, along with remedies available if the tenant fails to cure the default. Remedies may include the following:
1. Termination;
2. Right to relet premises and collect any deficiency from defaulting tenant;
3. Right to cure default at tenant’s expense; and
4. Entitlement to default interest or late charges on amounts payable.
s Timing: Tenant should ask for grace periods of 15 days for payment defaults and 30 days for other defaults.
Tenant’s counsel should request prompt notice of default, prompt notice to cure, and sufficient time to cure, so lease termination can be avoided. The default rate of interest should be due even after judgment and the tenant should waive counterclaims, other than compulsory counterclaims.
z Strategic Point: Tenants should bargain for the land-lord’s assumption of a duty to mitigate damages if the tenant defaults (not otherwise required by law or courts in commercial leases), provisions covering landlord de-fault, and a right to cure landlord default at the landlord’s expense.
Tenants in a strong negotiating position sometimes demand lease clauses providing for the tenant to offset against rent certain claims the tenant has against the landlord (for example, landlord’s breach of any covenant to keep premises in good repair). Landlords are obviously resistant in part because protracted litigation may occur before the landlord can collect rent.
z Strategic Point: An effective compromise for
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landlord’s and tenant’s counsel in rent-offset disputes is to provide for arbitration of tenant claims against the landlord, as arbitration is generally less time-consuming than litigation.
PRACTICE RESOURCES:
● Steinman’s Bergerman and Roth, New York Real Property Forms Annotated Form No. 279 – Form No. 290 (lease provisions relating to default, surrender, termination).
[2] Calculating Holdover Cost and Selecting Arbitration over Litigation
Landlords often require that if the tenant fails to vacate and holds over at the end of the term, the tenant must pay the greater of a percentage of the final adjusted monthly rent under the lease or a percentage of the fair market rent as a use and occupancy charge (150% is commonly used). The tenant will want to request that any holdover rent be on a per diem basis for partial months.
PRACTICE RESOURCES:
● Warren’s Weed: New York Real Property Ch. 8 (Arbitration).
● Warren’s Weed: New York Real Property §§ 82.27 – 82.37 (lease defaults and litigation).
● RPL § 232-c (month-to-month tenancy implied after holdover).
[3] Preserving Purchase and Renewal Rights Through Yellowstone Injunction
Options to renew, options to purchase, and rights of first refusal are sometimes made conditional on the tenant not being in default on any lease covenant. Thus, when a landlord serves a notice to cure on an alleged lease default, the tenant who fails to cure before the applicable deadline potentially stands to forfeit not only the current lease, but also any purchase or renewal rights. Tenant’s attorney should negotiate a clause specifically permitting the tenant
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to apply for a Yellowstone injunction (see § 20.09 [3] below) saving the right to cure the alleged default for purposes of renewal rights, first refusal rights, and purchase options.
t Warning: Considerable confusion exists and courts differ as to whether a default clause is a conditional limitation (supporting Yellowstone injunction) or a condi-tion subsequent (not supporting Yellowstone injunccondi-tion).
In upstate New York, some practitioners seek a Yellow-stone injunction in either case.
PRACTICE RESOURCES:
● Warren’s Weed: New York Real Property Ch. 154 (Yellow-stone Injunctions).
● New York Practice Guide: Real Estate § 25.08 [18][c]
(Form No. 25-84: Conditional Limitation), § 27.04 [13]
(Yellowstone injunction).
[4] Requiring Specific Performance and Attorneys’ Fees If the landlord unreasonably withholds consent where the lease requires the landlord to be reasonable, landlord’s counsel should require that the tenant’s only remedy be specific performance, not monetary damages. The landlord’s liability should be limited to its interest in the property. The landlord should have open-ended periods to cure non-monetary defaults, provided the landlord is diligently prosecuting the cure.
z Strategic Point: A landlord should not rely on a blanket clause merely requiring tenant to pay the landlord’s costs attributable to tenant’s default. A specific provision regarding attorneys’ fees should be included in the lease.
PRACTICE RESOURCES:
● New York Practice Guide: Real Estate § 25.06 [22] (PG:
lease defaults), § 25.07 [1] (Form No. 25-1: Office Lease
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¶ 17, ¶ 18, ¶ 19, ¶ 28), § 25.07 [2] (Form No. 25-2: Store Lease ¶ 17, ¶ 18, ¶ 19, ¶ 27), § 25.08 [18][a] (Form No.
25-82: Landlord-Oriented Clause), § 25.08 [18][b] (Form No. 25-83: Tenant-Oriented Clause).
● Steinman’s Bergerman and Roth, New York Real Property Forms Annotated Form No. 200.14 (Lease to Anchor or Key Tenant: Shopping Center to be Built, Article 19), Form No.
200.15 (Landlord-Oriented Shopping Center Lease, Articles 24, 25, 26, 32, 34), Form No. 201 (Retail Store Lease secs.
3.5, 10.2, 10.3, 10.6, 10.7, 11.1, 11.13), Form No. 205 (Loft Lease ¶ 17, ¶ 18, ¶ 19, ¶ 28), Form No. 209 (Office Lease, Articles 17, 18, 19, 39).
● RPAPL § 711 (grounds for summary proceedings).
§ 19.41 Requesting Documents in Sale or Mortgage of Landlord’s Interest
[1] Requesting Estoppel Certificates from Tenant
[1] Requesting Estoppel Certificates from Tenant