TABLE OF CONTENTS

Volume 1

CHAPTER 1

Commercial Lease Fundamentals

§ 1.01 Evolution of the Modern Commercial Lease— Emergence of the “Killer Lease”...... 1-3 [1] The Past and Today...... 1-3 [2] Trends Impacting Commercial Leasing ...... 1-5 [a] A Traditional Lease vs. Alternative Occupancy Arrangements— Issues to Consider ...... 1-6 [i] The Traditional Office Lease...... 1-6 [ii] Alternative Occupancy Arrangements ...... 1-7 [b] Artificial Intelligence, Virtual Reality, and Augmented Reality...... 1-8.12 [i] VR vs. AR ...... 1-8.12 [ii] Utilizing the Technologies. . . 1-8.13 [iii] Impact on Real Estate Deals. . 1-8.14 [iv] The Impact on Commercial Leasing...... 1-8.17 [c] Pop Up Leasing...... 1-8.18 [i] Pop Up Leases—What They Are and How They Work. . 1-8.18 [ii] Documenting the Pop Up Lease...... 1-8.19 [d] Legalization of Marijuana: The Implications for Commercial Real Estate...... 1-8.21 [i] Impact on Rents...... 1-8.21 [ii] Federal Law vs. State Law. . . . 1-8.21 xxxiii (Rel. 49) xxxiv OFFICE LEASES [iii] Other Issues Presented by Marijuana for Landlords and Tenants...... 1-8.23 [e] Blockchain, Cryptocurrencies, Digitization and Records Retention...... 1-8.23 [i] Introduction...... 1-8.23 [ii] Tokenization...... 1-8.24 [iii] Blockchain Uses and Benefits...... 1-8.25 [iv] Legal and Regulatory Considerations ...... 1-8.26 [v] Smart Contracts...... 1-8.27 [f] The Changing World of Commercial Real Estate. . . . . 1-8.28 [i] Adaptive Repurposing . . . . 1-8.28 [ii] Building Communities. . . . 1-8.29 [g] Looking to the Future...... 1-8.30 § 1.02 What Is a Lease? ...... 1-8.34 [1] Leasing vs. Owning...... 1-8.34 [2] Lease vs. License...... 1-8.34 [3] Necessity of a Writing...... 1-8.36 [4] Elements Required for Enforceability. . . 1-8.37 [5] Can Electronic Communications Satisfy the Writing Requirement Under the Statute of Frauds? ...... 1-8.38 [a] Electronic Transactions Statutes. . . 1-8.38 [b] Statute of Frauds and Court Decisions...... 1-8.39 [c] What Do UETA and E-Sign Mean? ...... 1-8.45 [d] Best Practices...... 1-8.45 [e] Conclusion...... 1-8.46 [6] Uniform Standards Toward a Fair Lease...... 1-8.47 § 1.03 Life of the Lease...... 1-9 [1] Signing vs. Execution ...... 1-9 [2] Contract Interval Before Possession. . . 1-12 [3] Cancellation of the Lease ...... 1-14 [a] During the Contract Interval. . . . 1-14 [b] After Delivery of Possession . . . . 1-15 [4] Conditional Demising...... 1-18 § 1.04 Office Lease Provisions...... 1-22.1 [1] In General...... 1-22.1 [2] Checklist of Lease Provisions...... 1-22.5 [3] Omission of Terms...... 1-23 TABLE OF CONTENTS xxxv § 1.05 Drafting and Analysis Basics...... 1-24 [1] Interpreting Definition Pyramids. . . . . 1-24 [2] Following Lease Time Lines...... 1-30.1 [3] Precision Drafting...... 1-36 [4] Value of Lease Forms for Landlord and Tenant...... 1-41 [5] Long Range Planning...... 1-43 § 1.06 Summary...... 1-45

CHAPTER 2

Who Is the Landlord and Who Is the Tenant?

§ 2.01 Who Has Authority to Sign the Lease?. . . . 2-1 § 2.02 Who Is the Landlord?...... 2-5 [1] In General...... 2-5 [2] Ground Leases...... 2-5 [a] Ground Lessee as Landlord . . . . 2-5 [b] Ground Lessor as Landlord. . . . . 2-6 [3] Landlord as Assemblage Owner. . . . . 2-8 [4] Partnership or Corporation as Landlord. . 2-9 § 2.03 Who Is the Tenant? ...... 2-10 § 2.04 Limitations on Landlord’s Authority. . . . . 2-15 § 2.05 Title Insurance...... 2-16 [1] The Importance of Conducting a Title Search...... 2-16 [2] Title Insurance Coverage...... 2-16 § 2.06 Covenant and Representation of Authority of Tenant...... 2-18 § 2.07 Summary...... 2-19

CHAPTER 3

The Leased Premises

§ 3.01 Space Selection ...... 3-2 § 3.01A Description of Demised Premises ...... 3-4 [1] The Actual Premises ...... 3-4 [2] Beyond the Four Walls of the Premises. . 3-7 § 3.02 Measurement Standards ...... 3-8.1 [1] In General...... 3-8.1 [2] International Property Measurement Standards for Office Buildings. . . . 3-11 § 3.03 Space Maintenance and Repair Obligations . . 3-12

(Rel. 49) xxxvi OFFICE LEASES § 3.04 Compliance and Safety...... 3-13 [1] Compliance with Laws ...... 3-13 [2] Building Safety...... 3-15 [a] The Old Rule: Caveat Emptor. . . 3-15 [b] Addressing Safety Issues in the Lease...... 3-17 [i] Delivery of Premises . . . . . 3-17 [ii] Destruction Clause...... 3-18 [iii] Rent Abatement ...... 3-19 [iv] Insurance...... 3-20 [v] Safe Occupancy Clause . . . . 3-21 [c] Building Safety in the Aftermath of the World Trade Center Tragedy. . 3-22 [i] A Whole New World. . . . . 3-22 [ii] The Importance of Having Strategies in Place . . . . . 3-25 [iii] Future Safety Measures . . . . 3-27 § 3.05 Tenant Relocation...... 3-28 [1] Notice, Timing and Frequency. . . . . 3-29 [2] Nature of Substituted Premises. . . . . 3-30 [3] Landlord’s Payment Obligations. . . . . 3-31 [4] No Additional Costs for the Tenant. . . 3-32 [5] Rent Credit...... 3-33 [6] Tenant’s Right to Terminate...... 3-33 [7] Conclusion ...... 3-33 § 3.06 Office Leases in Retail Space ...... 3-35 § 3.07 Summary...... 3-36

CHAPTER 4

The Lease Terms

§ 4.01 Commencement of the Lease Terms. . . . . 4-2 [1] Dating the Lease ...... 4-2 [a] Contract Interval...... 4-2 [b] Impact on Base Years...... 4-2.1 [c] Impact on Escalations...... 4-4 [d] Impact on Rental Rates...... 4-5 [2] Possession for Occupancy Terms. . . . 4-6 [3] Demising Term...... 4-7 [4] Rental Term...... 4-8 § 4.02 Abatements, Concessions and Other Inducements Offered Tenants ...... 4-14.9 [1] Initial Considerations and the Letter-of-Intent Stage...... 4-14.9 [2] Lease Negotiation and Strategy. . . . . 4-14.10 TABLE OF CONTENTS xxxvii [3] Lender Recognition ...... 4-14.11 [4] Abatements and Concessions...... 4-14.12 [a] Rental Abatements...... 4-14.12 [b] Concessions for Alterations . . . . 4-14.15 [c] Recapture of Abatements or Concessions...... 4-14.15 [d] Recapturing the Cost of Tenant Improvements and Leasing Commissions...... 4-14.16 [e] Taking Over an Existing Lease . . . 4-14.21 [i] In General...... 4-14.21 [ii] The Various Takeover Options...... 4-14.22 [iii] Landlord Sublease or Assignment Issues . . . . . 4-14.23 [iv] Conclusion...... 4-14.24 § 4.03 Phased-In Possession or Occupancy . . . . . 4-14.25 § 4.04 End of the Term...... 4-17 § 4.05 Condition of the Premises ...... 4-19 § 4.06 Summary...... 4-23

CHAPTER 4A

Security Deposits and Other Forms of Security

§ 4A.01 Introduction...... 4A-4 [1] General...... 4A-4 [2] Amount of Security...... 4A-6 [a] Security Initially Required . . . . . 4A-6 [b] Changing the Amount of the Security...... 4A-7 [3] Transfer of Security...... 4A-10 [4] Assignment of Lease...... 4A-12 [5] General Tenant Concerns...... 4A-13 [6] Landlord Issues—Treatment of Security Deposits in a Tenant’s Bankruptcy. . . 4A-14 § 4A.02 Kinds of Security ...... 4A-17 [1] Introduction...... 4A-17 [2] Cash Security...... 4A-17 [a] Segregation of Cash Security. . . . 4A-17 [b] Interest and Earnings on Cash Security...... 4A-19 [c] Cash Security—The Bankruptcy Problem...... 4A-20 [3] Letters of Credit...... 4A-20

(Rel. 49) xxxviii OFFICE LEASES [a] What Is a Letter of Credit?. . . . . 4A-20 [b] Treatment of Letters of Credit in a Tenant’s Bankruptcy. . . . . 4A-22 [c] Issuing Bank Failure...... 4A-25 [i] General ...... 4A-25 [ii] Role of the FDIC...... 4A-26 [iii] Landlord Steps to Mitigate Risk...... 4A-27 [d] Standby Letters of Credit Versus Cash Security Deposits in a Tenant Bankruptcy ...... 4A-30 [i] Advantages...... 4A-30 [ii] Disadvantages...... 4A-30 [e] Letters of Credit—General Information ...... 4A-31 [i] Common Forms of Letters of Credit...... 4A-31 [ii] The Parties Involved. . . . . 4A-31 [iii] Governing Codes ...... 4A-31 [iv] Irrevocability/Modification of Letter of Credit . . . . . 4A-32 [v] Conditions to Payment. . . . 4A-33 [vi] Term of Letter of Credit/ Evergreen Letters of Credit...... 4A-34 [vii] Transferability...... 4A-34 [viii] Presentation, Governing Law, Jurisdiction and Venue, and Enforcement...... 4A-35 [ix] Partial Drawings...... 4A-36 [x] Notice of Draw...... 4A-37 [xi] Sample Lease Provision. . . . 4A-37 [xii] Comment...... 4A-40 [4] Guaranties...... 4A-40 [a] Introduction...... 4A-40 [b] Basic Components of Guaranties— Landlord’s Concerns...... 4A-42 [i] Consideration ...... 4A-42 [ii] General Waiver of Defenses. . 4A-43 [iii] General Rule—Avoid Release of Guarantor...... 4A-43 [iv] Avoid Release of Guarantor by Reason of Tenant’s Bankruptcy...... 4A-44 [v] Avoid Release of Guarantor by Reason of a Modification of Lease ...... 4A-45 TABLE OF CONTENTS xxxix [vi] Avoid Release of Guarantor by Reason of the Tenant’s Assignment of Lease. . . . 4A-46 [vii] Waive Defenses Based on Landlord’s Forbearance. . . 4A-47 [viii] Payment and Performance vs. Collection Guaranties. . . . 4A-48 [ix] Holdover and Post-Termination Obligations ...... 4A-48 [x] Successors and Assigns . . . . 4A-49 [xi] Subordination of Guarantor’s Claims/Deferral of Right to Sue Tenant...... 4A-49 [xii] Recovery of Attorneys’ Fees and Disbursements. . . . . 4A-50 [xiii] Waiver of Notices...... 4A-50 [xiv] Waiver of Jury Trial. . . . . 4A-50 [xv] Joint and Several Liability. . . 4A-51 [xvi] Lease Provisions...... 4A-51 [c] Guaranty of Performance and Obligations...... 4A-51 [d] Guarantor Protections...... 4A-60 [e] “Good Guy” Guaranty Issues. . . . 4A-61 [f] Preserving Security in a “Good Guy” Guaranty ...... 4A-68.1 [g] International Guarantees...... 4A-72 [5] Bonds ...... 4A-72 [a] Construction Bonds...... 4A-72 [b] Lease Bonds...... 4A-74 [i] In General...... 4A-74 [ii] Tenant’s Perspective. . . . . 4A-74 [iii] Landlord’s Perspective. . . . 4A-75 [iv] Surety Bonds in the Context of Tenant Bankruptcy. . . . 4A-76 [v] Risks and Landlord Protections...... 4A-77 [6] Additional Security—Perfecting a Security Interest in the Tenant’s Assets...... 4A-79 [a] Accounts Receivable as Security. . . 4A-80 [b] Landlord’s Lien on Tenant’s Property ...... 4A-81 [c] Securities and Stock as Pledged Security...... 4A-83 § 4A.03 Concluding Comment...... 4A-88

(Rel. 49) xl OFFICE LEASES CHAPTER 5

Preparing the Premises for Occupancy

§ 5.01 Prioritizing Landlord’s and Tenant’s Work. . . 5-1 § 5.02 Control of the Work Site...... 5-7 § 5.03 Inspecting and Monitoring Work Quality. . . 5-11 § 5.04 Right to Exclude Landlord...... 5-14 § 5.05 Summary...... 5-15

CHAPTER 6

Landlord Access

§ 6.01 Building Systems and Compliance ...... 6-1 § 6.02 Landlord Access to Premises...... 6-3 § 6.03 Emergency vs. Security ...... 6-7 § 6.04 Interference and Business Interruption . . . . 6-8 § 6.05 Summary...... 6-12

CHAPTER 7

Area

§ 7.01 Usable Area...... 7-1 § 7.02 Rentable Area...... 7-3 [1] In General...... 7-3 [2] BOMA’s Measurement Standards. . . . 7-3 [3] International Property Measurement Standards for Office Buildings. . . . 7-4.6 § 7.03 Carpetable Area...... 7-5 § 7.04 Loss Factors ...... 7-7 § 7.05 Measuring Additional or Option Space. . . . 7-8 § 7.06 Remeasurement...... 7-11 § 7.07 Measurement Representations and Proportionate Shares...... 7-15 § 7.08 Limiting Tenant’s Proportionate Share. . . . 7-20 § 7.09 Sum of the Demised Premises...... 7-21 § 7.10 Stand-Alone Areas ...... 7-25 [1] Expanding the Definition of “Land”. . . 7-25 [2] Tax Lots...... 7-25 [3] Retail and Garage Areas...... 7-27 § 7.11 Summary...... 7-29 TABLE OF CONTENTS xli CHAPTER 8

Use

§ 8.01 Types of Uses...... 8-2 [1] In General...... 8-2 [2] “Any Lawful Use”...... 8-4 [a] Lawful Use ...... 8-4 [b] Liability for Unlawful Use of Property...... 8-6 [3] Specific or Mandatory...... 8-7 [4] Special Designations ...... 8-8 [5] Exclusionary Use and Exclusives. . . . 8-8.1 [6] The Right to “Go Dark” ...... 8-8.3 [a] In General ...... 8-8.3 [b] Ensuring that the Lender Does Not Object...... 8-8.4 [c] Making Conditional on No Adverse Impact on Landlord’s Insurance...... 8-8.4 [d] Requiring Notice...... 8-8.5 [e] Compliance with All Lease Terms Right to Go Dark ...... 8-8.5 [f] Requiring Security...... 8-8.5 [g] Landlord Recapture Right. . . . . 8-8.5 [7] Special Requirements Leases...... 8-8.6 [a] Issues Specific to Health Care Tenants...... 8-8.6 [b] Applicability of the Stark and Anti-Kickback Laws...... 8-8.7 [c] Utilities and Medical Waste. . . . 8-8.8 [d] Data Privacy and Security Concerns ...... 8-8.8 [e] Rights and Responsibilities Regarding Tenant Improvements ...... 8-8.9 [f] Americans with Disabilities Act Issues ...... 8-8.9 § 8.02 Zoning or Building Use Laws...... 8-8.10 § 8.03 No Representations—Permissive Use . . . . . 8-9 § 8.04 Failure of Essential Purpose...... 8-10 § 8.05 Summary...... 8-14

(Rel. 49) xlii OFFICE LEASES CHAPTER 9

Appurtenances

§ 9.01 Common Areas...... 9-2 [1] In General...... 9-2 [2] Use of the Common Areas ...... 9-3 [3] Loading Areas ...... 9-4.1 [4] Elevators...... 9-6 [a] Level of Service ...... 9-6 [b] Freight Elevators...... 9-8 [5] Sidewalks...... 9-9 [6] Storage and Vaults...... 9-11 [7] Parking...... 9-12 [a] Responsibilities for Associated Costs ...... 9-12 [b] Changes in Parking Conditions. . . 9-13 [c] Security ...... 9-14 [d] ADA Requirements for Direct Access Entrances from Parking Structures...... 9-14 [8] Cooling Towers and Mechanical Rooms...... 9-17 [9] Roofs...... 9-18 [a] Availability and Liability . . . . . 9-18 [b] Communications Antennas. . . . . 9-19 [10] Common Area Maintenance Costs. . . . 9-29 [a] In General ...... 9-29 [b] Cumulative Versus Noncumulative CAM Charges...... 9-30.1 [c] Fixed CAM Charges...... 9-30.2 § 9.02 Directory and Signs ...... 9-30.3 § 9.03 Building Systems, Fixtures and Improvements...... 9-30.4 [1] In General...... 9-30.4 [2] Air Conditioning, Ventilation and Heating...... 9-30.4 [3] Electrical...... 9-32 [4] Security Systems and Fire Command. . . 9-34 [5] Ownership of Improvements...... 9-35 [6] Abandoned Building System Areas. . . . 9-37 § 9.04 Impact on Additional Rentals...... 9-39 § 9.05 Summary...... 9-40 TABLE OF CONTENTS xliii CHAPTER 10

Repairs and Maintenance

§ 10.01 Obligations of the Parties...... 10-2 [1] Landlord Obligations...... 10-4 [a] The Majority Rule...... 10-5 [b] The Minority Rule...... 10-5 [c] Comment...... 10-7 [2] Tenant Obligations...... 10-9 § 10.02 Quality of Service...... 10-10.5 § 10.03 Self-Help Remedies ...... 10-10.7 § 10.04 Repairs Necessitated by Preexisting Conditions...... 10-11 [1] During Initial Tenant’s Work ...... 10-11 [2] Future Repairs ...... 10-12 [3] Hazardous Materials—Risks and Remediation...... 10-14 [a] Allocating Risk and Remediation Obligations...... 10-14 [b] CERCLA’s Bona Fide Prospective Purchaser Defense...... 10-18 [c] Landlord’s Remediation Responsibilities...... 10-20 [d] Identifying and Booking Liabilities for Expected Environmental Cleanup Costs...... 10-22 [4] Potential Landlord/Tenant Issues Involving Mold ...... 10-24 [a] Introduction...... 10-24 [b] Maintenance and Reporting Requirements...... 10-26 [c] Assessment and Remediation. . . . 10-26 [d] Indemnification ...... 10-28 [e] Insurance ...... 10-28 [f] Tenant’s Perspective...... 10-28.1 [g] Establishing a Checklist for Mold Detection, Evaluation and Remediation...... 10-28.1 [h] Assessing the Cause and Extent of the Mold and Moisture Damage and Tips for Proper Maintenance ...... 10-28.3 [i] A Checklist of Leases Issues— A Mold Addendum...... 10-29 [j] Sample Mold-Related Clauses . . . 10-30

(Rel. 49) xliv OFFICE LEASES [k] Devising a Policy and Program to Deal with Mold-Related Issues...... 10-32 § 10.05 Insurance Coverage for Damage to Tenant Property and Improvements...... 10-34 [1] Ownership Interests and Insurance Obligations...... 10-34 [2] The Lease Language ...... 10-34 [3] Insurance Policies and Coverage. . . . . 10-35 [a] The Interplay of Multiple Insurance Policies...... 10-37 [b] “Other Insurance” Limitation. . . . 10-37 [c] Overlapping Coverage...... 10-37 [4] Conclusion ...... 10-38 § 10.06 Summary...... 10-39

CHAPTER 11

Condemnation and Destruction § 11.01 Condemnation...... 11-2 [1] Takings in General...... 11-2 [a] Temporary...... 11-2 [b] Permanent...... 11-3 [2] Valuation and Allocation of Award . . . 11-4 [a] Just Compensation...... 11-4 [b] Condemnation Proceedings. . . . . 11-5 [c] Partial Taking ...... 11-6 [d] Ground Leases...... 11-6 [3] Mortgagee’s Interest in Condemnation Award...... 11-7 [4] Viability Clause...... 11-7 [5] Condemnation Clause...... 11-8 § 11.02 Destruction by Fire, Flood or Other Casualty. . 11-13 [1] Insurance...... 11-25 [a] Full Value Insurance...... 11-25 [b] “No Fault”...... 11-26 [c] Self-Insurance ...... 11-26 [d] Requirement of Minimum Coverage...... 11-28 [e] Waiver of Subrogation Rights . . . 11-29 [f] Business Interruption Insurance. . . 11-29 [i] In General...... 11-29 [ii] Policy Coverage and Review ...... 11-31 TABLE OF CONTENTS xlv [iii] Caveat—Dealing with Multiple Causes of Losses . . . . . 11-32 [g] Rent Abatement and Rent Value Insurance...... 11-33 [h] Loss in Value of the Lease. . . . . 11-33 [i] Conditions Attached to Coverage. . 11-33 [j] Third Party Issues...... 11-34 [k] Insurable Events ...... 11-34 [2] Landlord’s Obligation to Restore . . . . 11-36 [3] Liability...... 11-38 [4] Damage or Destruction Clause. . . . . 11-38.1 [a] In General ...... 11-38.1 [b] Sample Clauses...... 11-38.2 § 11.02A Destruction by Force Majeure...... 11-38.16 [1] In General...... 11-38.16 [2] Sample Force Majeure Clauses. . . . . 11-40 [3] Terrorist Activities...... 11-44 [4] Natural Disasters ...... 11-46.1 § 11.03 Mortgagee’s Interest in Insurance Proceeds . . 11-47 § 11.04 Rent Abatements During Condemnation or Destruction...... 11-50 § 11.05 Length of Restoration Period...... 11-51 § 11.06 Summary...... 11-53

CHAPTER 12

Alteration

§ 12.01 Initial Alterations ...... 12-2 [1] In General...... 12-2 [2] Approvals and Consents ...... 12-4 [3] Permits, Violations and Certificates of Occupancy...... 12-5 [4] Field Conditions...... 12-7 [5] Delays and Hidden Costs...... 12-8 [6] Building Conditions Preventing Alterations ...... 12-9 [7] Initial Construction Clause ...... 12-10 [8] Large Lease vs. Small Lease Issues. . . 12-12.1 § 12.02 Subsequent Alterations to the Premises. . . . 12-12.5 [1] Landlord Resistance to Subsequent Alterations ...... 12-12.5 [2] Necessity for Subsequent Alterations. . . 12-12.6 [3] Subletting a Portion of the Premises. . . 12-14 § 12.03 Monitoring Alterations and Compliance. . . . 12-15

(Rel. 49) xlvi OFFICE LEASES [1] Process and Documentation...... 12-15 [2] Landlord Costs...... 12-15 § 12.04 Alterations Clauses...... 12-17 [1] Oppressive Approach...... 12-17 [2] Reasonable and Practical Approach . . . 12-25 [3] Model Approach...... 12-27 § 12.05 Summary...... 12-37

CHAPTER 13

Compliance with Laws

§ 13.01 In General...... 13-2 § 13.02 Compliance Obligations Within the Building. . 13-4.1 [1] Responsibilities...... 13-4.1 [2] Tenant Self-Help and Indemnities. . . . 13-4.1 § 13.03 Compliance Obligations Within the Premises ...... 13-7 [1] Circumscribing Responsibilities...... 13-7 [2] Compliance Clauses...... 13-8 [a] Reasonable Approach...... 13-8 [b] Oppressive Approach ...... 13-11 [3] Impact on Permits and Improvements. . . 13-16 § 13.04 Preexisting Noncompliance ...... 13-17 [1] Structural...... 13-17 [2] Inclusion in Additional Rentals. . . . . 13-17 § 13.05 Compliance Arising After Lease Commences...... 13-19 § 13.06 Major Substantive Compliance Issues. . . . . 13-21 [1] Environmental Issues in General. . . . . 13-21 [2] Asbestos...... 13-23 [a] Background ...... 13-23 [b] Asbestos Risk Detection, Assessment and Due Diligence. . 13-25 [3] Sick Building Syndrome...... 13-26.1 [4] Americans With Disabilities Act. . . . . 13-26.2 [a] The Law Generally...... 13-26.2 [b] Specifics of the Amended ADA Rules ...... 13-31 [i] The Standards Generally . . . 13-31 [ii] Three Phases of Accessible Design and Construction. . 13-32 [iii] Concluding Comment. . . . . 13-36 [5] Architecture Barriers Act Compliance . . 13-37 § 13.07 Summary...... 13-39 TABLE OF CONTENTS xlvii CHAPTER 13A

Green Lease Provisions

§ 13A.01 Green Buildings in General...... 13A-2 [1] Introduction...... 13A-2 [2] What Is a Green Building?...... 13A-3 [3] Motivation to Be Green...... 13A-5 [a] For the Environment...... 13A-5 [b] For the Bottom Line...... 13A-5 [c] Landlord’s Motivations...... 13A-6 [d] As a Response to COVID-19. . . . 13A-10 [e] Tenant’s Motivations ...... 13A-10 [4] Which Party Drives the Green Building Effort ...... 13A-11 [5] Sustainable Building Law and Its Impact on Negotiating and Drafting Contracts...... 13A-12 [6] Why Property Owners Do and Do Not Obtain Certification...... 13A-13 [7] Green Rating Systems—Generally. . . . 13A-13 [8] Some of the Best-Known Rating Systems...... 13A-14 [a] LEED...... 13A-14 [b] Green Globes...... 13A-17 [c] Living Building Challenge. . . . . 13A-20 [d] Energy Star ...... 13A-24 [e] ASHRAE ...... 13A-26 [f] WELL Certified and WELL Compliant ...... 13A-26 [g] Other U.S. Rating Agencies. . . . 13A-26.1 § 13A.02 Green Lease Provisions - General...... 13A-26.2 § 13A.03 Green Lease Provisions - Landlord Sustainability Covenants ...... 13A-28 [1] Permitted Use...... 13A-29 [2] Operating Expenses...... 13A-30 [3] Capital Expenditures ...... 13A-31 [4] Compliance with Laws ...... 13A-33 [5] Services...... 13A-34 [6] Assignment and Sublet ...... 13A-36 [7] Alterations/Improvements ...... 13A-37 [8] Repairs and Maintenance...... 13A-40 [9] Access...... 13A-41 [10] Insurance...... 13A-41 [11] Indemnification...... 13A-42 [12] Surrender...... 13A-43

(Rel. 49) xlviii OFFICE LEASES [13] Default and Remedies...... 13A-43 [a] Tenant Default...... 13A-44 [b] Landlord Default...... 13A-45 [14] Rules and Regulations...... 13A-46 [15] Renewal ...... 13A-48 [16] Recycling/Waste Management/Janitorial. . 13A-49 [17] General Affirmative Covenants – Tenant Obligation ...... 13A-50 [18] General Negative Covenants – Tenant Obligations...... 13A-50 [19] General Covenants – Landlord Obligations to Green Tenant. . . . . 13A-50 [20] Definitions ...... 13A-51 [21] Parking...... 13A-52 [22] Data Reporting...... 13A-52 [23] Relocation...... 13A-52 [24] Certification and Landlord’s Sustainability Requirements . . . . . 13A-53 [25] Taxes and Credits...... 13A-53 [26] Landlord’s Additional Sustainability Requirements...... 13A-54 § 13A.04 The Green Work Letter ...... 13A-55 § 13A.05 Conclusion...... 13A-58

CHAPTER 14

Conditions of Limitation and Defaults § 14.01 Operation of Condition of Limitation. . . . . 14-2.1 [1] Requirements for a Condition of Limitation...... 14-2.1 [2] Equitable Relief...... 14-9 [a] Generally...... 14-9 [i] Yellowstone Injunctions . . . . 14-9 [ii] Obtaining a Yellowstone Injunction ...... 14-10.2 [iii] Equitable Relief ...... 14-10.4 [iv] Timeline for Relief...... 14-10.6 [v] Language in Lease...... 14-10.9 [vi] Lease Termination Notice . . . 14-10.10 [vii] Conditional Limitation v. Condition Subsequent. . . . 14-10.11 [viii] Cure Period...... 14-10.13 [ix] Termination Period...... 14-10.18 [x] Other Yellowstone Issues. . . 14-10.20 [b] Equity in Federal Court...... 14-10.22 TABLE OF CONTENTS xlix [2A] Alternative Dispute Resolution. . . . . 14-10.32 [a] In General—The Pros and Cons. . . 14-11 [b] The Risks of “Baseball Arbitration” in Resolving Real Estate Disputes: A Neutral’s Perspective...... 14-14 [c] Drafting an Arbitration Provision...... 14-18 [d] Managing the Arbitration Process...... 14-19 [e] Mediation...... 14-20 [f] Conclusion...... 14-22.1 [3] Notices ...... 14-22.2 [a] Nonmonetary Defaults...... 14-22.2 [b] Monetary Defaults...... 14-22.2 [c] Statutory Notice Requirements. . . 14-22.2 [4] Condition of Limitation Clause. . . . . 14-22.3 § 14.02 Defaults...... 14-23 [1] Incurable Defaults ...... 14-23 [2] Material Defaults...... 14-23 [3] Tenant Self-Help When Landlord Defaults ...... 14-24 [a] Operation of Self-Help...... 14-24 [b] Rights of Superior Interest Holders. . 14-26 [4] Landlord Leasing Strategies to Address Tenant Defaults...... 14-26 [a] Additional Rent...... 14-26 [b] Rent Acceleration ...... 14-27 [c] Late Charges...... 14-29 [d] Chronic Nonpayment...... 14-30 [e] Landlord Self-Help Rights When Tenant Defaults...... 14-30.1 § 14.03 Determination of Damages After Default and Termination...... 14-30.6 [1] In General...... 14-30.6 [2] Under the Common Law...... 14-33 [2A] Clauses Limiting the Landlord’s Liability ...... 14-35 [a] Introduction...... 14-36 [b] Tenant Changes to the Landlord Liability Limitation Clause. . . . 14-36.1 [c] Landlord Changes to Its Limitation of Liability...... 14-36.2 [3] Under the “Killer Lease”...... 14-36.4 [4] Statutory Provision for Termination and Remedies...... 14-39

(Rel. 49) l OFFICE LEASES [5] Reletting and Mitigation of Damages. . . 14-42 [a] The Landlord’s Obligation to Mitigate Damages...... 14-43 [b] Upon a Default ...... 14-44 [c] A Typical Clause...... 14-44 [d] Common Law Exceptions. . . . . 14-45 [i] Agreement as to Mitigation Obligation...... 14-46 [ii] State Laws (and District of Columbia)...... 14-46 [e] Conclusion...... 14-48 [6] The “Good Guy” Clause...... 14-48 [7] Liquidated Damages...... 14-49 § 14.04 Summary...... 14-51

CHAPTER 15

Reentry by Landlord

§ 15.01 Emergency Access ...... 15-1 § 15.02 Routine Access...... 15-3 § 15.03 Reentry as a Remedy...... 15-7 § 15.04 Consensual Reentry...... 15-8.1 § 15.05 Reentry to Security Areas ...... 15-9 § 15.06 Summary...... 15-10

CHAPTER 16

Services

§ 16.01 Levels of Services...... 16-1 [1] In General...... 16-1 [2] Issues for Negotiation ...... 16-2 [a] Contract Restrictions...... 16-2 [b] Quality and Quantity of Service. . . 16-3 [c] Timing of Service Delivery . . . . 16-6.1 [3] Complex Services Clauses...... 16-6.3 [a] Basic Approach...... 16-6.3 [b] Onerous Approach...... 16-13 § 16.02 Essential Services...... 16-28 [1] Negotiating Specific Protections. . . . . 16-28 [2] Frustration or Failure of Essential Purpose...... 16-29 [3] Self-Help and Abatements...... 16-30 TABLE OF CONTENTS li § 16.03 Differing Levels of Services Among Tenants. . 16-33 § 16.04 Summary...... 16-35

CHAPTER 16A

Technology, Telecommunications and Rooftop Rights

§ 16A.01 In General...... 16A-3 [1] Introduction and Scope ...... 16A-3 [2] Technology Issues in Real Estate Transactions...... 16A-4.1 [a] Price and Agreement Terms. . . . 16A-4.2 [b] Service Performance Standards and Levels...... 16A-4.2 [c] Data Protection ...... 16A-4.2 [d] Infringement Issues and Liability Concerns ...... 16A-4.3 [e] Insurance ...... 16A-4.3 § 16A.02 The Regulatory Framework and Landscape . . 16A-5 [1] FCC Regulations ...... 16A-5 [2] State Laws and Regulations...... 16A-8 [3] Local Regulatory Issues...... 16A-17 § 16A.03 Perspective of Commercial Property Owner in Negotiating Terms of a Telecommunications License Agreement...... 16A-18 [1] In General...... 16A-18 [2] Landlord Considerations When Negotiating Rooftop Rights...... 16A-18 [a] Using a License vs. a Lease. . . . 16A-19 [b] The Implications of an Exclusivity Clause...... 16A-19 [c] Allocating and Designating the Licensed or Leased Rooftop Space...... 16A-20 [d] The Building Roof’s Physical Capacity...... 16A-20 [e] Assignment and Subletting Rights and Obligations...... 16A-20 [f] Compliance with Applicable City, State and Federal Laws. . . . . 16A-21 [g] Indemnification Clause...... 16A-21 [h] Tax Implications...... 16A-21 [i] Insurance Coverage...... 16A-22 [j] Providing Rooftop Access. . . . . 16A-22

(Rel. 49) lii OFFICE LEASES [k] Commencement of Rent Obligations...... 16A-22 [l] Interference Considerations. . . . . 16A-23 [m] Equipment Removal ...... 16A-24 § 16A.04 Key Terms of a Rooftop License or Telecommunications License Between the Property Owner and the Telecommunications Service Provider...... 16A-25 [1] Nature of the Agreement...... 16A-25 [2] Term and Fees...... 16A-25 [3] Relocation Rights...... 16A-26 [4] Access to the Building and Telecommunications Spaces. . . . . 16A-26 [5] Plans, Construction, Installation and Alterations ...... 16A-26 [6] Insurance and Subrogation...... 16A-27 [7] Indemnification...... 16A-27 [8] Electricity...... 16A-27 [9] Assignment...... 16A-27 [10] Interference...... 16A-27 [11] Subordination...... 16A-28 [12] Rights on Termination and Obligation to Remove Abandoned Cable ...... 16A-28 [13] Miscellaneous Provisions...... 16A-28 § 16A.05 Telecommunications Inside and Outside the Premises...... 16A-29 [1] In General...... 16A-29 [2] Form of Telecommunications License Agreement Between a Building Owner/Licensor and a Communications Service Provider/Licensee (for Rooftop Antenna) with Commentary . . . . . 16A-30 [3] Form of Telecommunications License Agreement Between a Tenant/Licensor and a Communications Service Provider/Licensee...... 16A-62 § 16A.06 Rooftop Solar Panel Rights and Obligations. . 16A-74 [1] Reaping the Benefits ...... 16A-74 [2] Evaluating the Viability of Installation. . . 16A-75 [3] Importance of Maximizing Warranty Coverage...... 16A-77 § 16A.07 Licensing/Leasing Considerations ...... 16A-78 TABLE OF CONTENTS liii CHAPTER 17

Electricity

§ 17.01 Character of Electrical Services Available . . . 17-1 [1] Determination of Essential Information. . 17-2 [2] Definition of Terms...... 17-3 [3] Electrical Service Clauses...... 17-4 [a] Dangerous Imprecision...... 17-4 [b] A General Approach...... 17-5 [c] Alternative Electrical Clauses. . . . 17-7 [d] Specific Drafting...... 17-10.2 § 17.02 Cost of Electrical Services...... 17-11 [1] Breakdown of Charges...... 17-11 [a] Rent Inclusion Electricity. . . . . 17-11 [b] Operating Expenses...... 17-11 [c] After Hours Charges...... 17-12 [2] Metering and Submetering...... 17-13 [3] Electrical Services as Landlord Profit Centers...... 17-14 [4] Profit-Maximizing Electricity Clause. . . 17-16 § 17.03 Landlord’s Exculpation...... 17-22 § 17.04 Summary...... 17-23

CHAPTER 18

Custom of Dealing, Waivers and Modifications

§ 18.01 Practices of the Parties...... 18-1 [1] Requirement of a Writing to Amend Lease...... 18-1 [2] Nonwaiver Provisions ...... 18-2 [3] Entire Agreement and No Waiver. . . . 18-3 [4] Exceptions to the General Rule. . . . . 18-5 § 18.02 Substance of Modifications and the Modification Agreement ...... 18-6.1 [1] Basic Principles ...... 18-6.1 [2] Form of Lease Modification Agreement ...... 18-8 § 18.03 Informal Accommodations and Waivers. . . . 18-11 § 18.04 Summary...... 18-13

(Rel. 49) liv OFFICE LEASES CHAPTER 19

Rent

§ 19.01 Office Lease Rent...... 19-5 § 19.02 Base Rent ...... 19-6.2 [1] Price Per Square Foot ...... 19-6.2 [a] Rentable vs. Usable Square Feet . . 19-6.2 [b] Cost Components...... 19-6.3 [c] Increases...... 19-7 [2] Analyzing Base Rent Components. . . . 19-7 § 19.03 Escalations...... 19-10 [1] Net and “Not So Net” Leases...... 19-11 [2] Cost Comparisons Between Buildings . . 19-11 [3] Taxes...... 19-12 [a] Definition...... 19-12 [b] Method of Calculation...... 19-13 [c] Fluctuations...... 19-15 [d] Timing of Payments ...... 19-16 [e] Tenant’s Proportionate Share. . . . 19-16 [f] Payment in Lieu of Taxes. . . . . 19-18 [g] Tax Increase Clause ...... 19-18 [4] Operating Expenses...... 19-21 [a] Porter”s Wage or Penny Wage Formula...... 19-22.1 [b] Pass Throughs...... 19-22.7 [i] Definition of “Operating”. . . 19-22.7 [ii] Capital Improvements/ Capital Expenditure. . . . 19-27 [iii] Types of Leases ...... 19-31 [c] Insurance Coverage...... 19-32 [d] Exclusions ...... 19-34 [e] Costs of Landlord Negligence . . . 19-35 [f] Other Operating Expense Issues. . . 19-35 [i] Capping Expenses...... 19-35 [ii] Cumulative vs. Compound Formula...... 19-36 [iii] Definition of Capital. . . . . 19-36 [iv] Management Fee vs. Corporate Overhead. . . . 19-37 [v] Passing on Garage Expenses as Operating Expenses. . . 19-37 [vi] Costs Associated with Maintaining Good Tenant Relations...... 19-38 [vii] Management Office Rent. . . 19-38 TABLE OF CONTENTS lv [g] Tenant’s Proportionate or Pro Rata Share...... 19-39 [h] “Grossing Up”...... 19-40 [i] In General...... 19-40 [ii] Gross Ups for Operating Costs...... 19-41 [iii] Establishing an Appropriate Occupancy Threshold. . . . 19-43 [iv] When Tenants Should Insist on Gross Up...... 19-43 [v] Potential for Abuse When Determining and Allocating Gross Up Expenses . . . . 19-44 [vi] Gross Ups—Schools of Thought Regarding Shifting Costs...... 19-44 [vii] Gross Ups for Realty Taxes . . 19-50.4 [viii] Gross Ups Relating to Rentable Area...... 19-50.5 [ix] BOMA Measurement Standards...... 19-50.5 [x] Imposing a Cap on Area Gross Ups...... 19-50.10 [i] Building Occupancy ...... 19-50.10 [j] Calculating the “Gross Up” . . . . 19-50.11 [i] Base Year Lease...... 19-50.11 [ii] Expense Stop Lease. . . . . 19-50.13 [iii] Stipulated Base Amount Lease...... 19-50.14 [iv] Office Triple Net Lease. . . . 19-50.14 [k] Operating Expense Statements. . . 19-50.16 [4A] Changes to Accounting Reporting. . . . 19-50.16 [5] Tenant’s Right to Audit...... 19-50.17 [a] Audit Procedures...... 19-59 [b] The Standstill Agreement. . . . . 19-60 [c] Interpreting the Agreement. . . . . 19-63 [i] Escalations...... 19-63 [ii] Estoppel and Conclusivity Clauses ...... 19-66 [d] Various Causes of Action. . . . . 19-68 [i] Breach of Contract...... 19-68 [ii] Fraud...... 19-69 [iii] Negligent Misrepresentation. . 19-73 [iv] Negligence...... 19-75 [v] Conversion ...... 19-75 [vi] Unconscionability...... 19-76

(Rel. 49) lvi OFFICE LEASES [vii] Restitution and Unjust Enrichment...... 19-76 [viii] Actions for Declaratory Judgment and Reformation of Contract...... 19-76 [e] Must Potential Claims Against a Landlord Be Submitted to Arbitration?...... 19-77 [f] Guidance on Conducting a Successful Audit...... 19-77 [i] Draft Carefully and Clearly. . 19-77 [ii] Bring the Audit Team in Early...... 19-78 [iii] Use the Best Team Possible. . 19-78 [iv] Beware of Dangers and Hidden Pitfalls in Lease Drafting...... 19-78 [v] Conduct Audits Early and Frequently...... 19-79 [vi] Avail Yourself of the Benefits of Technology...... 19-79 [vii] Be Aware that Most Lease Errors Are the Result of One or Both Parties Not Understanding the Clause. . 19-79 [viii] Be Prepared to Explain and Persuade the Trier of Fact or Persons Resolving Disputes...... 19-80 [ix] Generally Lease Audit Issues Are Best Resolved Through Negotiation and Settlement...... 19-80 [x] The Lease Audit Process Is Still Evolving...... 19-80 [6] Monitoring Landlord’s Escalation Calculations...... 19-80 [7] Escalations Checklist...... 19-93 § 19.04 Consumer Price Index...... 19-94 § 19.05 Rent Concessions ...... 19-98 [1] In General...... 19-98 [2] Below Market and Free Rent ...... 19-100 [3] Work Allowances...... 19-100 [4] Early Buyouts or Renegotiation . . . . . 19-101 [5] Government Participation...... 19-103 [6] Other Rent Concessions...... 19-104 [7] Pass Through Clauses ...... 19-104.1 TABLE OF CONTENTS lvii [8] Transfer Rights...... 19-104.1 [9] Equity Participation...... 19-105 § 19.06 Rent Deferral Arrangements...... 19-106 [1] Introduction...... 19-106 [2] Landlord Considerations When Deciding Whether to Grant a Deferral. . . . . 19-106 [3] Renegotiating Existing Unfavorable Lease Terms...... 19-108 [a] Estoppels and Releases...... 19-108 [b] Confidentiality...... 19-108 [c] Right to Recapture...... 19-109 [d] Tax Implications...... 19-109 [4] Conclusion ...... 19-109 § 19.07 Using the Accounts Stated Doctrine to Establish that Rent Is Owed ...... 19-110 [1] In General...... 19-110 [2] Account Stated in the Commercial Leasing Context...... 19-110 [3] Account Stated Defenses...... 19-111 [4] Drafting Strategies...... 19-112 [5] Account Stated to Collect Rent. . . . . 19-113 [6] Defensive Account Stated...... 19-113 § 19.08 Sale-Leaseback Arrangements—An Alternative to the Traditional Lease...... 19-115 [1] In General...... 19-115 [2] Advantages and Disadvantages of Sale-Leaseback Arrangements. . . . . 19-116 [3] Factors to Consider...... 19-118 § 19.09 Owning vs. Leasing—Factors to Consider. . . 19-119 § 19.10 Summary...... 19-120

CHAPTER 20

Superior Interests

§ 20.01 Superior Title Interests...... 20-3 § 20.02 Subordination Agreements...... 20-4 [1] Impact of Subordination ...... 20-4 [2] Agreement to Subordinate...... 20-6 [3] Subordination, Non-Disturbance and Attornment Agreements...... 20-6.2 [a] In General ...... 20-6.2 [b] The Importance of a Subordination, Non-Disturbance and Attornment Agreement in a Troubled Economy...... 20-6.5

(Rel. 49) lviii OFFICE LEASES [i] Consequences of an SNDA. . 20-6.6 [ii] Consequences of Foreclosure. . 20-6.6 [iii] Lender and Lessee Protections...... 20-6.7 [iv] Other Litigation...... 20-6.7 [v] Recording SNDAs ...... 20-6.7 [4] The Non-Disturbance Agreement as an Important Corollary Subordination Agreement ...... 20-6.8 [a] Non-Disturbance Protection . . . . 20-6.8 [b] The Timing of Rights and Obligations...... 20-6.9 [c] Mortgagee Obligations and Exceptions...... 20-6.10 [d] Landlord’s Defaulted Obligations. . 20-6.10 [e] The Problem of Prepaid Rent. . . . 20-6.11 [f] Other Mortgagee Obligation Exemptions ...... 20-6.11 [g] Mortgagee’s Rights to Cure. . . . 20-6.12 § 20.02A Collateral Agreement with a Lender. . . . . 20-6.13 § 20.02B Loan Underwriting...... 20-6.14 § 20.02C Financial Challenges...... 20-6.15 [1] In General...... 20-6.15 [2] Tenant Protections...... 20-6.15 [3] Bankruptcy Code Protection for Tenant Improvement Allowances ...... 20-6.17 [4] Security Deposits/Letters of Credit. . . . 20-6.17 [5] Tenant Due Diligence Considerations. . . 20-6.18 § 20.02D Leasehold Mortgages ...... 20-6.19 § 20.03 Non-Disturbance Agreements...... 20-7 [1] Importance and Purpose...... 20-7 [2] Lender’s Perspective ...... 20-8 [3] Negotiability...... 20-9 [4] The Basic Non-Disturbance Agreement ...... 20-9 [5] The Overkill Agreement ...... 20-18 [6] Landlord and Lender Requirements . . . 20-20.1 [7] Tenant Requirements...... 20-20.2 [8] Tenant’s Leasehold Lender...... 20-20.3 § 20.04 Attornment...... 20-21 § 20.05 Reasonable Contractual Requirements. . . . . 20-23 § 20.06 Estoppel Certificates...... 20-25 [1] Sample Estoppel Certificate...... 20-26 [2] Landlord Uses...... 20-28 [3] Tenant Pitfalls...... 20-29 [4] Tenant’s Wedge...... 20-31 [5] Timing...... 20-31 TABLE OF CONTENTS lix [6] Remedies...... 20-32 [7] Landlord’s Wedge ...... 20-33 [8] Benefits, Burdens and Protections. . . . 20-33 § 20.07 The Document Trap—Lease Amendment by Later Documents...... 20-34 [1] Fee Mortgage Provisions from a Ground Lease...... 20-34 [2] Proposed Subordination of Mortgage and Attornment Agreement...... 20-37 [3] Revisions to Proposed Subordination of Mortgage and Attornment Agreement ...... 20-43 [4] Comments on Revisions to Proposed Subordination of Mortgage and Attornment Agreement ...... 20-50 § 20.08 Summary...... 20-54

CHAPTER 21

Transferability of Leasehold Interests

§ 21.01 Transferability...... 21-2 [1] Types of Transfers...... 21-2 [1A] Rights to Assign or Sublease...... 21-3 [a] In General ...... 21-3 [b] Assignments Pro Tanto...... 21-8 [c] Inferred Restrictions on Transfer Rights...... 21-9 [2] Consent to Assign or Sublease. . . . . 21-10 [a] Prohibitions to Assign or Sublet Without Consent...... 21-11 [b] Changes in Tenant’s Corporate or Partnership Structure...... 21-12 [c] Waivers ...... 21-14 [d] Sample Clause Requiring Landlord’s Consent...... 21-14 [3] Standard of Reasonableness...... 21-16 [a] Common Law ...... 21-16 [b] Statutory...... 21-17 [4] Implied Reasonableness Standards. . . . 21-18 [5] Interaction with the Use Clause . . . . . 21-18.1 [6] Tax Consequences of Assignments and Subleases...... 21-18.2 [7] One State’s Legislative Response— California...... 21-18.2 [8] Free Assignability...... 21-18.4

(Rel. 49) lx OFFICE LEASES [8A] Conditions for Transfer...... 21-18.5 [9] Restricting Transfers and Other Changes in Control...... 21-18.6 [10] Addition of Tenant Entity...... 21-18.9 § 21.02 Right to Acquire or Dispose of Space. . . . . 21-18.11 [1] Reacting to Business Cycles and Normal Growth ...... 21-18.11 [2] Excess Space ...... 21-18.11 [a] Space Acquired for Future Expansion ...... 21-18.11 [b] Right to Sublease Excess Space Acquired at Landlord’s Initiative...... 21-18.11 [c] Transferring Excess Space Acquired During the Lease Term. . . . . 21-20 [3] Landlord Recapture of Excess Space. . . 21-20 [a] Landlord’s Right to Review, Approve or Recapture...... 21-20 [b] Recapture to “Landlord or Its Designee”...... 21-22 [c] Protecting Tenant’s Use and Enjoyment...... 21-22 [d] Legal Form Landlord Recapture. . . 21-22 [e] Surviving Tenant Obligations to Restore...... 21-23 [f] Other Recapture Issues...... 21-23 [4] Marketing the Excess Space...... 21-23 [a] Landlord’s Exclusive Right to Market the Premises...... 21-23 [b] Marketing Restrictions ...... 21-24 [c] Marketing to Potential Subtenants and Assignees...... 21-24 [5] Sharing Profits with Landlord...... 21-25 [6] Competitive Protections for Landlord. . . 21-27 § 21.03 Summary...... 21-28

CHAPTER 22

The Covenant of Quiet Enjoyment

§ 22.01 Quiet Enjoyment...... 22-2 [1] Scope...... 22-2 [2] History of the Covenant...... 22-3 § 22.02 Construction of the Covenant...... 22-4.2 TABLE OF CONTENTS lxi [1] The Terms of the Covenant as Expressed in the Lease...... 22-4.2 [2] Limiting the Landlord’s Liability. . . . 22-5 [3] Successor Rights and Obligations. . . . 22-5 [4] Fairly Expressing the Covenant in the Lease ...... 22-6 § 22.03 Theories of Liability...... 22-7 [1] Actual Eviction...... 22-7 [a] Generally...... 22-7 [b] Partial Actual Eviction ...... 22-8 [2] Constructive Eviction...... 22-8.2 [a] Substantial Interference...... 22-8.3 [b] Quitting the Premises ...... 22-9 [c] Abandonment Related to Landlord’s Transgressions...... 22-11 [d] Radiation Contamination and the Tenant’s Due Diligence Obligation ...... 22-13 [e] Remedies...... 22-15 [3] Partial Constructive Eviction...... 22-16 § 22.04 Remedies for Breach of the Covenant of Quiet Enjoyment...... 22-17 § 22.05 Summary...... 22-18

CHAPTER 23

Restrictive Clauses

§ 23.01 Examples of Restrictive Clauses...... 23-1 [1] Exclusives...... 23-2 [2] Restrictive Covenants...... 23-4 [3] Radius Clauses...... 23-4 § 23.02 Antitrust Implications...... 23-5 [1] Under the Sherman Act in General...... 23-5 [2] The Current Climate ...... 23-6 [3] Relevant Geographic Market...... 23-7 [4] Relevant Product Market...... 23-9 § 23.03 Tortious Interference...... 23-11 § 23.04 Summary...... 23-12

(Rel. 49) lxii OFFICE LEASES CHAPTER 24

Renewals and Options

§ 24.01 Options to Renew or Extend...... 24-2.1 [1] Why Obtain an Option?...... 24-3 [2] Definitions ...... 24-4 [3] Essential Option Terms...... 24-6 [4] The Right to Renew...... 24-7 [5] Timeliness of Exercise...... 24-10 [6] Notice of Intention to Exercise Option. . 24-11 [7] The Renewal Rate...... 24-13 [a] Option Prices...... 24-13 [b] Fair Market Value...... 24-13 [c] Determining Fair Market Value. . . 24-14 [i] In General...... 24-14 [ii] The Average Method. . . . . 24-15 [iii] The Three Broker Method. . . 24-15 [iv] The Baseball Arbitration Method ...... 24-16 [d] Calculating the Rent Increase— Indexes Used...... 24-16.2 [e] Minimizing the Impact of CPI and Porter’s Wage Increases. . . . . 24-16.3 [f] A Balanced Renewal Option Clause...... 24-16.4 [8] Comments...... 24-16.5 § 24.02 Impact on Escalation Rentals...... 24-16.7 § 24.03 Holdover and Expansion Options ...... 24-17 [1] The Holdover Option...... 24-17 [2] The Expansion Option...... 24-19 [3] Operation of the Options...... 24-21 [4] Rights of First Offer ...... 24-22 § 24.04 Purchase Options...... 24-25 [1] Introduction...... 24-25 [2] Comment...... 24-25 [3] Case Studies...... 24-28 [a] Richard Barton Enterprises, Inc. v. Tsern ...... 24-28 [i] Case Summary ...... 24-28 [ii] Case Comment...... 24-29 [b] Ruffolo v. Jordan...... 24-30 [i] Case Summary ...... 24-30 [ii] Case Comment...... 24-30 [c] Rich v. Rosenthal ...... 24-31 [i] Case Summary ...... 24-31 TABLE OF CONTENTS lxiii [ii] Case Comment...... 24-32 [d] Summa Corporation v. Richardson. . 24-32 [i] Case Summary ...... 24-32 [ii] Case Comment...... 24-33 [e] Pitman v. Sanditen ...... 24-33 [i] Case Summary ...... 24-33 [ii] Case Comment...... 24-34 [f] Madison v. Marlatt...... 24-34 [i] Case Summary ...... 24-34 [ii] Case Comment...... 24-35 [g] Koppelman v. Barrett ...... 24-35 [i] Case Summary ...... 24-35 [ii] Case Comment...... 24-36 [h] Twelfth Ave. Investments, Inc. v. Smith...... 24-36 [i] Case Summary ...... 24-36 [ii] Case Comment...... 24-37 [i] Atlantic Richfield Co. v. Couture. . 24-37 [i] Case Summary ...... 24-37 [ii] Case Comment...... 24-38 [j] Wolk v. Widlansky...... 24-38 [i] Case Summary ...... 24-38 [ii] Case Comment...... 24-38 [k] Conclusion...... 24-39 § 24.04A Assignment and Subletting...... 24-41 § 24.05 Termination Options and Buyouts...... 24-42 [1] Termination or Cancellation Options . . . 24-42 [2] Buyouts...... 24-44 § 24.06 Summary...... 24-47

CHAPTER 24A

Rent Reset Clauses in Long-Term Leases

§ 24A.01 Introduction...... 24A-1 § 24A.02 Arbitration Clause, Valuation Clause or Both?. . 24A-3 § 24A.03 What Should the Valuation Experts Value?. . 24A-9 § 24A.04 Summation of Questions to Be Considered. . . . 24A-14 § 24A.05 Suggested Solution: Clauses Representing Intent of the Parties and Understood by Appraisers...... 24A-15 § 24A.06 One Way to Avoid All of This...... 24A-19

(Rel. 49) TABLE OF CONTENTS

Volume 2

CHAPTER 25

Casualty and Insurance

§ 25.01 Allocation of Risks and Responsibilities. . . . 25-5 [1] Introduction...... 25-5 [2] Common Law Standards...... 25-5 [3] The “Hub and Spokes” View of Casualty and Insurance...... 25-6 [4] A Modern Perspective...... 25-10 [a] Obligation to Restore the Premises. . 25-11 [b] Timing of the Casualty...... 25-12 [c] Landlord’s Notice to Tenant Regarding Restoration...... 25-12.1 [d] Abatement During Restoration. . . 25-12.1 § 25.02 Modern Liability...... 25-13 [1] In General...... 25-13 [2] Tort...... 25-13 [3] Contract or Lease Covenant ...... 25-14 [4] Indemnification...... 25-16 [5] Vicarious Liability...... 25-17 [6] Fraud or Misrepresentation...... 25-17 [7] Environmental Insurance...... 25-18 [a] The Pollution Exclusion...... 25-18 [i] The History...... 25-18 [ii] Terrorist Acts and the Pollution Exclusion . . . . 25-22 [iii] Arguments that the Pollution Exclusion Only Applies to Traditional Environmental Pollution Cases...... 25-24 [iv] Arguments for Excluding “Terrorism Pollution”. . . . 25-25 [v] Expectations for the Future. . 25-26 v (Rel. 48) vi OFFICE LEASES [b] Pollution Legal Liability Insurance...... 25-26.1 [c] Commercial Pollution Legal Liability Insurance...... 25-26.1 [d] Commercial Real Estate Pollution Legal Liability Insurance. . . . 25-26.2 [e] Property Transfer Insurance. . . . 25-26.2 [f] Brownfields Restoration and Development Insurance. . . . . 25-26.3 [g] “Cleanup Cap” or “Stop Gap” Insurance...... 25-26.3 [h] Closure/Post Closure Insurance . . . 25-26.3 [i] Secured Creditor Impaired Property Insurance...... 25-26.4 [j] Contractor’s Pollution Liability and Errors and Omissions Insurance. . 25-26.4 [k] Finite Risk Coverage...... 25-26.4 [8] Mold: The Associated Risks and Insurance Coverage...... 25-26.4 [a] Introduction...... 25-26.4 [b] Insurance Coverage Mold Exclusions...... 25-26.7 [c] Exceptions to the Mold Exclusions. . 25-26.9 [d] Avoiding Liability—Allocating Responsibility ...... 25-26.11 [e] The Effect of the Mold Exclusion in the Claims-Made Liability Insurance Context...... 25-26.12 [f] Types of Claims ...... 25-26.13 [i] First-Party Claims...... 25-26.13 [ii] Third-Party Claims...... 25-26.14 [g] Maximizing Insurance Coverage for Mold...... 25-26.15 [h] Concluding Comment...... 25-26.15 [9] Notifying the Insurer About Material Changes in Circumstance ...... 25-26.16 [10] Defective Construction...... 25-26.17 [a] Whether Construction Defects Qualify as “Occurrences”. . . . 25-26.17 [b] Addressing the Construction Defect “Occurrence” Issue Through Legislation...... 25-26.19 [c] Case Law Regarding Faulty Workmanship and the Occurrence Issue...... 25-26.23 [d] What the Future Holds...... 25-26.26 TABLE OF CONTENTS vii § 25.03 Types of Coverage...... 25-26.28 [1] Property Coverage...... 25-28 [a] Direct Losses...... 25-28 [b] Indirect Losses...... 25-31 [2] Property Endorsements...... 25-33 [3] Liability Coverage...... 25-34 [a] In General ...... 25-34 [b] Claims-Made Coverage...... 25-35 [c] Common Beneficiary Designation. . 25-36 [d] Policy Limits...... 25-38 [3A] Self Insurance/Captive Insurance Companies...... 25-39 [a] Self-Insurance ...... 25-39 [b] Captive Insurance Companies. . . . 25-39 [c] Landlord’s Concerns and Protections...... 25-41 [d] Sample Lease Provision ...... 25-42 [e] Conclusion...... 25-43 [4] Post 9/11 Changes...... 25-43 [a] Generally...... 25-43 [b] Policies and Coverage...... 25-44 [5] The Terrorism Risk Insurance Act of 2002 (TRIA)...... 25-47 [6] Terrorism Risk Insurance Program Reauthorization Act of 2007. . . . . 25-50 [6A] TRIA’s Program Reauthorization Through 2020...... 25-53 [7] Evidencing that Coverage Exists. . . . . 25-54 [a] Business Personal Property Form (CP 00 10)...... 25-79 [i] Analysis of the 2012 Versions of the Form...... 25-88.32 [b] Business Income and Extra Expense Form (CP 00 30) and Other Time Element Forms ...... 25-88.36 [c] Important Exclusions...... 25-88.37 [d] Commercial General Liability Coverage...... 25-88.38 [e] Various Other Types of Coverage. . 25-88.56 [8] Insurance Coverage for Tenant Improvements...... 25-88.57 [a] The Policy Terms ...... 25-88.59 [b] The “Other Insurance” Provision. . 25-88.60 [9] Casualty and Insurance Issues Related to Green Leases...... 25-88.61 [a] In General ...... 25-88.61 [b] The Tenant’s Perspective . . . . . 25-88.61 [c] The Landlord’s Perspective. . . . . 25-88.62

(Rel. 49) viii OFFICE LEASES [d] Insurance Coverage as Investment Protection...... 25-88.62 [e] Insurance Coverage Factors to Consider...... 25-88.63 [10] The Effect of COVID-19 on Lease Negotiations...... 25-88.64 [a] Force Majeure Claims...... 25-88.66 [b] Other Common Law Remedies. . . 25-88.67 [i] Frustration of Purpose . . . . 25-88.67 [ii] Impossibility or Impracticability...... 25-88.68 [iii] Quiet Enjoyment...... 25-88.69 [c] Proving Force Majeure...... 25-88.69 [d] Guidance from Bankruptcy Court Decisions...... 25-88.74 [e] Applicable Insurance Policy Provisions ...... 25-88.77 [f] Other Potential Protections. . . . . 25-88.78 [g] Conclusion...... 25-88.79 [11] Additional Insured...... 25-88.79 [a] In General ...... 25-88.79 [b] Cross-Liability Exclusions . . . . . 25-88.86 [c] Assuring Adequate Coverage. . . . 25-88.86 [d] Contractual Indemnification. . . . 25-88.87 § 25.04 Coinsurance...... 25-88.88 [1] Express Coinsurance ...... 25-88.88 [2] Implied Coinsurance...... 25-89 [a] In General ...... 25-89 [b] Commentary...... 25-91 § 25.04A Determining the Adequacy of Insurance Coverage...... 25-96 [1] Coverage Layers...... 25-97 [2] Defense Within Limits Policies. . . . . 25-97 [3] Enforceability...... 25-98 [4] Establishing an Insurance Coverage Plan and Understanding Forms of Coverage...... 25-99 [a] In General ...... 25-99 [b] Establishing a Plan ...... 25-101 [i] Before a Loss...... 25-101 [ii] After a Loss ...... 25-101 [iii] The Steps to Take...... 25-103 [c] Conclusion...... 25-108 § 25.05 Subrogation and Waivers of Subrogation. . . 25-109 [1] Principles of Subrogation Law . . . . . 25-109 [2] Waivers of Subrogation...... 25-110 § 25.06 Indemnification and Exculpatory Clauses. . . 25-113 [1] In General...... 25-113 TABLE OF CONTENTS ix [2] Drafting the Indemnity Clause— What to Include and Why...... 25-117 § 25.07 The “No Fault” Approach ...... 25-121 [1] In General...... 25-121 [2] A Sample “No Fault” Clause ...... 25-123 § 25.08 Arbitration of Insurance Disputes ...... 25-129 [1] In General...... 25-129 [2] States Limiting Arbitration of Insurance Policies...... 25-129 [3] Venue Provisions...... 25-130 [4] Choice of Law Provisions...... 25-130 § 25.09 Summary...... 25-132

CHAPTER 26

Work Letters

§ 26.01 Preparing the Work Letter...... 26-2 [1] Importance of a Work Letter...... 26-2 [2] Essential Definitions...... 26-4 [a] Delivery Condition of the Premises and Building ...... 26-4 [b] Possession ...... 26-5 [c] Substantial Completion...... 26-5 [d] Work Allowances ...... 26-6 [3] Existing Conditions Within Demised Premises...... 26-7 [4] Materials and Labor Provided by the Landlord...... 26-8 [5] “Turnkey” Work Letter...... 26-9 [a] Building to Specifications and Drawings...... 26-10 [i] Timing for Plans and Specifications...... 26-10 [ii] Plans and Specifications—Cost Considerations...... 26-11 [iii] Plan Changes...... 26-12 [iv] Materials Costs and Other Expenses...... 26-12 [b] Completion and Delivery . . . . . 26-12 [c] Protecting Abatement Periods. . . . 26-13 [d] Waivers, Warranties and Indemnity. . 26-14 [6] Timing Concerns ...... 26-14 [a] Developing a Critical Path Schedule. . 26-14 [b] Tenant Delays...... 26-15 [c] Landlord Reviews and Approvals. . 26-16 [d] Tenant’s Blow-Out Date...... 26-17

(Rel. 49) x OFFICE LEASES [7] Landlord Involvement with Tenant’s Plans and Specifications ...... 26-18 [8] Landlord Credits in a “Modified Turnkey”...... 26-18 [9] Effective Use of Consultants...... 26-19 [a] Prior to Negotiation...... 26-19 [b] Project and Construction Management ...... 26-19 § 26.02 Insulating Parties from Liability ...... 26-21 [1] Unanticipated Claims and Liens. . . . . 26-21 [2] Distancing the Parties from Project Control...... 26-21 [a] Project Owner...... 26-21 [b] Tenant...... 26-22 [c] Ten Factor Test...... 26-22 [3] Contractor Agreements...... 26-23 [a] Construction Contracts: Basic Issues and Forms...... 26-23 [i] Standard Contracting Agreement...... 26-27 [ii] Architectural Agreement. . . . 26-51 [b] Description of the Project Work. . . 26-96 [c] The Contract Price...... 26-97 [d] Progress Payments...... 26-97 [e] Mechanic’s Liens and Lien Waivers. . 26-98 [f] Final Payment...... 26-99 [g] Subcontracts...... 26-99 [h] Changes in the Work...... 26-100 [i] Delays...... 26-100 [j] Hazardous Materials and Safety. . . 26-101 [k] Indemnity and Insurance...... 26-101 § 26.03 Summary...... 26-106

CHAPTER 27

Financing Real Estate Development Through Participation Leases

§ 27.01 Introduction...... 27-1 § 27.02 How Participation Leases Work...... 27-3 [1] What Is a Participation Lease?. . . . . 27-3 [2] Working with the Numbers: An Example...... 27-3 [3] Landlord Benefits...... 27-5 [4] Tenant Benefits...... 27-6 § 27.03 Structuring an Equity Participation...... 27-8 TABLE OF CONTENTS xi [1] Joint Venture and Lease ...... 27-8 [2] Phantom Equity Arrangements. . . . . 27-9 [3] Condominiums...... 27-10 [4] Tenants-in-Common Arrangements. . . . 27-11 [5] Special Leases ...... 27-11 § 27.04 Environmental Concerns...... 27-12 § 27.05 Summary...... 27-14

CHAPTER 28 Bankruptcy

§ 28.01 The Bankruptcy Code and Rules: An Overview...... 28-4 [1] The Bankruptcy Code and Court System ...... 28-4 [a] History and Structure of Bankruptcy Code...... 28-4 [b] The Benefits of Voluntary Bankruptcy Relief...... 28-6 [2] Chapter 7 Cases—Types of Bankruptcy Cases Affecting Commercial Leases. . 28-7 [3] Chapter 11 Cases...... 28-9 [4] Chapter 9, 12, 13, and 15 Cases. . . . . 28-10 [5] Landlords and Tenants...... 28-10 § 28.02 Principal Bankruptcy Code Sections and Rules Applicable to Commercial Leasing Transactions ...... 28-11 [1] Introduction...... 28-11 [2] Bankruptcy Concepts...... 28-12 [a] Property of the Estate...... 28-12 [b] Exclusions from Property of the Estate...... 28-13 [3] Claims...... 28-13 [4] The Automatic Stay...... 28-17 [a] Bankruptcy Code Section 362(a). . 28-17 [b] Landlords/Tenants and the Automatic Stay...... 28-19 [c] Obtaining Relief from the Automatic Stay: Statutory Requirements...... 28-19 [d] The Effect of Dismissal, Discharge, Plan Confirmation and Other Code Provisions on the Automatic Stay...... 28-21 [e] Bankruptcy Code Section 363 . . . 28-22

(Rel. 49) xii OFFICE LEASES § 28.03 Leases and Contracts: The Effect of Bankruptcy...... 28-23 [1] Options Available to Trustee/ Debtor-in-Possession...... 28-23 [2] Underlying Disputed Contract Issues. . . 28-24 [3] Is a Certain Lease or Contract “Executory” or “Unexpired” for the Purposes of Bankruptcy Code Section 365?. . . . 28-24 [a] “Executory Contracts” and “Unexpired Leases”— No Statutory Definitions. . . . . 28-24 [b] The Countryman Definition . . . . 28-25 [c] The Functional Approach. . . . . 28-25 [d] Application of Section 365— Only to Contracts and Leases In Effect Upon a Bankruptcy Filing...... 28-27 [e] Single or Multiple Agreements. . . 28-30 [f] True Real Estate Lease or “Something Else” in Disguise . . 28-31 [4] Assumption or Rejection of Commercial Leases by Debtor...... 28-32 [a] Timing...... 28-32 [b] The Effect or Failure to Timely Assume, Reject or Seek an Extension ...... 28-34 [c] Waiver by Landlord ...... 28-34 [d] Performance Prior to Assumption or Rejection...... 28-34 § 28.04 Assumption and Its Effects on Landlords and Tenants...... 28-45 [1] Assumption of the Lease by the Tenant— Adequate Assurance...... 28-45 [a] General Rule...... 28-45 [b] Prompt Cure...... 28-45 [c] What Must Be Cured ...... 28-46 [d] Actual Pecuniary Loss...... 28-47 [e] Can the Landlord Recover Attorneys’ Fees?...... 28-48 [f] Third-Party Damages...... 28-50 [g] Interest on Delinquent Rent . . . . 28-50 [h] The Concept of Adequate Assurance...... 28-50 [2] Legal Standards Governing Assumption; Procedural and Evidentiary Matters. . 28-51 [a] Business Judgment ...... 28-51 [b] Burden of Proof...... 28-51 TABLE OF CONTENTS xiii [c] Assumption and Assignment. . . . 28-52 [3] Invalidity of Restrictions on Assignment...... 28-52 [4] Contesting a Proposed Assignment of the Commercial Lease...... 28-53 [5] Appealing an Assignment...... 28-54 § 28.05 Rejection and Its Effect on Landlords and Tenants...... 28-55 [1] Character of Rejected Contracts or Leases ...... 28-55 [a] Mortgage Lender Protection. . . . 28-56 [b] Surrender of Premises...... 28-57 [2] Effect of Rejection on Subtenants and Leasehold Mortgages...... 28-58 [a] Legal Standards Governing Lease Rejection...... 28-59 [b] Refusal to Authorize Rejection. . . 28-60 [c] Effective Date of Rejection. . . . . 28-60 [d] Landlord as Debtor...... 28-61 [3] Rejection Damages ...... 28-64 [a] Nature of Rejection Damages. . . . 28-64 [b] Quantifying Rejection Damages. . . 28-64 [c] Calculations on Rejection Damages Claims—Nonresidential Real Property...... 28-66 [d] Risks from Post-Rejection Sale of Leased Property...... 28-70 [e] Third-Party Credit Support and the Section 502(b)(6) Damage Cap ...... 28-73 [f] Use of Letters of Credit to Assure Payment of a Tenant Lease Obligation ...... 28-74 [g] Effect of Assumption and Post-Assumption Rejection. . . . 28-79 § 28.05A Bankruptcy Risks Associated with Pre-Filing Date Lease Termination Agreements...... 28-80 [1] The Risk that an Entire Transaction Memorialized in a Termination Agreement Will Be Voided in a Subsequently Filed Bankruptcy Case as a Preferential or Fraudulent Transfer. . 28-80 [2] The Preferential Transfer Risk—Payments...... 28-81 § 28.06 Sample Bankruptcy Clause...... 28-82 § 28.07 Bankruptcy Definitions and Terms of Art. . . 28-85

(Rel. 49) xiv OFFICE LEASES § 28.08 What to Do When a Petition Is Filed by a Tenant ...... 28-93 § 28.09 Bankruptcy Code Amendments to Section 365. . 28-95 [1] The Bankruptcy Reform Act of 1994. . . 28-95 [2] The 2005 Bankruptcy Act Amendments. . 28-96 § 28.10 Summary...... 28-100

CHAPTER 28A

Can You Draft a Fair Lease?

§ 28A.01 Introduction...... 28A-3 § 28A.02 Traditional Clauses...... 28A-4 [1] Who Are the Parties?...... 28A-4 [2] What Are the Premises? ...... 28A-4 [3] Does the Building Exist When the Lease Is Signed?...... 28A-6 [4] How Long Should the Term of the Lease Be?...... 28A-7 [5] What Is a Fair Rent?...... 28A-8 § 28A.03 The Premises...... 28A-13 § 28A.04 Transfer of Interest...... 28A-16 § 28A.05 Remedies...... 28A-19 § 28A.06 Getting the Lease Signed...... 28A-23

CHAPTER 28B

Tenant’s Checklist of Silent Lease Issues (Third Edition)

§ 28B.01 Introduction...... 28B-2 § 28B.02 Tenant’s Checklist of Silent Lease Issues. . . 28B-9

CHAPTER 28C

Landlord’s Checklist of Silent Lease Issues (Third Edition)

§ 28C.01 Introduction...... 28C-3 § 28C.02 What Is Included in a Standard Form Lease. . 28C-4 [1] Getting Around to the Standard Form Lease...... 28C-4 [2] How This Checklist Was Born. . . . . 28C-4 TABLE OF CONTENTS xv § 28C.03 What the Checklist Does...... 28C-6 [1] Does the Checklist Give Landlords an Unfair Advantage?...... 28C-6 [2] Intended for Major Commercial Space Leases...... 28C-6 [3] Caveats, Warnings, Disclosures. . . . . 28C-8 [4] Notes on Style...... 28C-8 [5] The Case Law ...... 28C-8 [6] Beyond the Four Corners of the Lease. . . 28C-9 [7] Have at It...... 28C-9 § 28C.04 The Landlord’s Checklist of Silent Lease Issues...... 28C-10 [1] Alterations and Build-Out...... 28C-10 [2] Assignment and Subletting: Consent Requirements...... 28C-14 [3] Assignment and Subletting: Implementation...... 28C-17 [4] Bankruptcy...... 28C-21 [5] Bills and Notices...... 28C-22 [6] Compliance with Laws ...... 28C-23 [7] Consents...... 28C-24 [8] Default ...... 28C-26 [9] Destruction, Fire and Other Casualty. . . 28C-27 [10] Development and Asset Management. . . 28C-28 [11] Electricity...... 28C-31 [12] End of Term...... 28C-32 [13] Environmental...... 28C-34 [14] Escalations ...... 28C-36 [15] Estoppel Certificates...... 28C-41 [16] Failure to Deliver Possession ...... 28C-42 [17] Fees and Expenses...... 28C-43 [18] Future Documents, Deliveries, Events, and Information...... 28C-44 [19] Guaranty...... 28C-46 [20] Inability to Perform...... 28C-48 [21] Initial Alterations...... 28C-48 [22] Insurance...... 28C-49 [23] Landlord’s Access ...... 28C-53 [24] Landlord’s Liability...... 28C-54 [25] Landlord’s Representations...... 28C-55 [26] Maintenance and Repairs...... 28C-56 [27] Occupancy ...... 28C-57 [28] Options (Expansion/Renewal/Reduction/ Termination)...... 28C-57 [29] Percentage Rent and Radius Clause. . . 28C-60 [30] Quiet Enjoyment...... 28C-62 [31] Real Estate Taxes...... 28C-62

(Rel. 49) xvi OFFICE LEASES [32] Recognition of Subtenants...... 28C-64 [33] Remedies...... 28C-65 [34] Rent...... 28C-69 [35] Rules and Regulations...... 28C-71 [36] Security Deposit...... 28C-71 [37] Services...... 28C-73 [38] Subordination and Landlord’s Estate. . . 28C-75 [39] Tenant’s Equipment and Installations. . . 28C-76 [40] Use ...... 28C-78 [41] Vault Space...... 28C-81 [42] Due Diligence, External Considerations...... 28C-82 [43] Other Documents and Deliveries. . . . . 28C-85 [44] Post Closing; Monitoring...... 28C-90

CHAPTER 29

Negotiating the Lease § 29.01 Negotiation Basics ...... 29-3 [1] In General...... 29-3 [1A] Negotiating on Behalf of a Small Tenant—Issues and Strategies. . . . . 29-6.1 [2] Negotiating Techniques...... 29-6.5 [a] Good Guy/Bad Guy...... 29-7 [b] Insignificant Concessions. . . . . 29-8 [c] Playing One Party Off Against the Other...... 29-8 [d] Wearing Down...... 29-9 [e] Squeeze Play...... 29-9 [f] Guilt Trip...... 29-10 [g] Walking Out ...... 29-10 [h] Splitting Down the Middle. . . . . 29-10.1 [i] Intimidation...... 29-10.1 [j] Winning Is Everything ...... 29-10.1 [k] Do Lots of Deals; Worry Later . . . 29-10.2 [l] “Deal Maker” Strategy...... 29-10.3 [m] Cooperation and Compromise. . . . 29-10.4 § 29.02 Negotiation Players...... 29-11 [1] Developer...... 29-11 [2] Real Estate Consultant...... 29-12 [3] Real Estate Brokers...... 29-12 [4] Advertising Company...... 29-13 [5] Tenant’s Representatives...... 29-14 [6] Architects, Designers and Engineers. . . 29-14 [7] Attorneys...... 29-14 § 29.03 Negotiation Objectives...... 29-15 TABLE OF CONTENTS xvii [1] Landlord’s Objectives ...... 29-15 [a] Credit Worthy Tenants...... 29-15 [b] Acceptable Tenant Image. . . . . 29-15 [c] Satisfy Project’s Financial Requirements...... 29-15 [d] Favorable Timing of Concessions. . 29-17 [2] Tenant’s Objectives...... 29-17 [a] Good Location...... 29-18 [b] Favorable Business and Political Environment ...... 29-18 [c] Best Deal for Tenant’s Needs. . . . 29-18 [d] The Importance of Timing. . . . . 29-19 [i] Entering the Market. . . . . 29-19 [ii] Lease Renewal ...... 29-19 § 29.04 Net Present Value Analysis...... 29-20.1 [1] Terms of Potential Deals Under Consideration...... 29-20.1 [2] Method of Comparison for Competing Properties...... 29-22 [a] Initial Assumptions...... 29-22 [b] Setting Up Net Present Value Table ...... 29-23 [c] Net Present Value Calculations. . . 29-26 [d] Analysis of Data...... 29-29 [e] Importance of Data in Negotiations...... 29-30 § 29.05 Negotiation Process...... 29-31 [1] Preliminary Preparation...... 29-31 [2] Interaction of Negotiation Participants. . 29-31 [3] Threshold Negotiation Points ...... 29-31 [4] Tenant’s Proposal Letter...... 29-32 [a] Sample Proposal Letter...... 29-34 [b] Analysis of Sample Proposal Letter...... 29-44 [i] Premises ...... 29-44 [ii] Term ...... 29-44 [iii] Use...... 29-44 [iv] Base Rent ...... 29-46 [v] Additional Rent...... 29-46 [vi] Transfer Rights...... 29-47 [vii] Landlord’s Work and Contribution ...... 29-47 [viii] Building Plans and Specifications; Architectural and Engineering...... 29-47 [ix] Environmental Issues and Legal Compliance. . . . . 29-48

(Rel. 49) xviii OFFICE LEASES [x] Repairs and Landlord Services. . 29-48 [xi] Parking; Signage...... 29-49 [xii] Options; Rights of First Refusal ...... 29-49 [xiii] Miscellaneous Rights. . . . . 29-50 [5] Letter of Intent...... 29-51 [6] Exchanging Lease Drafts...... 29-53 [7] Comment Letter...... 29-53 [8] Finalizing the Negotiation...... 29-53 [9] Work Letter and Working Drawings. . . 29-54 § 29.06 A Study of Negotiating Strategies and Styles...... 29-55 § 29.07 Summary...... 29-58

CHAPTER 29A

Lease Brokerage

§ 29A.01 General Considerations...... 29A-2 [1] Concerns Specific to Leasing Transactions...... 29A-2 [2] Broker Liens for Commissions. . . . . 29A-10.4 [3] Ethical Standards...... 29A-10.7 § 29A.02 Basic Provisions of the Leasing Brokerage Agreement...... 29A-11 § 29A.03 The Leasing Situation: Creation of the Leasehold ...... 29A-12 § 29A.04 The Calculation of Commission...... 29A-17 [1] Base Rent...... 29A-17 [2] Additional Rent: Reimbursement of Landlord’s Costs ...... 29A-18 [3] Additional Rent: Percentage Rent. . . . 29A-19 [4] Additional Commission-Generating Events...... 29A-19 [a] Extension of Term; Right to Expand Premises...... 29A-19 [b] Option to Purchase Property. . . . 29A-20.2 [c] Lease Assignment...... 29A-20.3 [d] Early Termination of the Lease. . . 29A-20.3 [e] Legal Issues...... 29A-20.4 § 29A.05 Subleasing...... 29A-20.6 § 29A.06 Other Transactions ...... 29A-20.7 § 29A.07 Lease Provisions Relating to Brokers. . . . . 29A-20.8 § 29A.08 Form of Brokerage Agreement for Services to Landlords...... 29A-20.10 [1] Issues of Scope...... 29A-20.10 TABLE OF CONTENTS xix [2] Form of Brokerage Agreement. . . . . 29A-20.10 [3] A Special Twist on Indemnity...... 29A-53 § 29A.09 Brokerage Services on Behalf of Tenants. . . 29A-54.2 [1] In General...... 29A-54.2 [2] Form of Brokerage Agreement for Services to a Tenant ...... 29A-56 § 29A.10 Co-Brokerage in the Commercial Setting. . . 29A-66 [1] In General...... 29A-66 [2] Form of Co-Brokerage Agreement. . . . 29A-68

CHAPTER 29B

The Appraiser’s View of the Lease: Appraisals 101

§ 29B.01 Introduction...... 29B-1 § 29B.02 What Is an Appraisal? ...... 29B-3 [1] Cost Approach...... 29B-5 [2] Sales Comparison Approach...... 29B-5 [3] Income Capitalization Approach. . . . . 29B-6 [a] Direct Capitalization Method. . . . 29B-6 [b] Discounted Cash Flow (DCF) Method...... 29B-7 [c] The Income Capitalization Approach and the Lease. . . . . 29B-8 § 29B.03 The Relationship Between the Lease Agreement and the Income Approach Analysis. . . . . 29B-9 § 29B.04 Who Are Appraisers?...... 29B-10 § 29B.05 How to Select an Appraiser...... 29B-12 § 29B.06 How Is an Appraiser Hired? ...... 29B-14

CHAPTER 30

Subleasing, Assignments and Swaps

§ 30.01 What Is a Sublease, an Assignment and a “Swap”? ...... 30-3 [1] In General...... 30-3 [2] Critical Distinction: Sublease or Assignment?...... 30-5 [3] Key Issues to Consider When Negotiating the Terms of an Assignment or Sublease Clause and Reservations of Rights for Future Space, Lease Swaps or Cross Occupancy via Cross Licenses. . 30-6.1

(Rel. 49) xx OFFICE LEASES [4] Additional Considerations on Swaps via Cross Assignments or Cross Subleases ...... 30-6.5 § 30.02 Limitations...... 30-6.7 [1] Legal Limitations...... 30-6.7 [a] Sublease Bounded by Scope of the Overlease ...... 30-6.7 [b] Enforceability of Covenants. . . . 30-6.7 [c] Sublessee’s Rights to Remedy Sublessor’s Defaults Under the Overlease...... 30-6.8 [d] Sublessee’s Renewal Rights Limited by Tenant’s Option. . . 30-7 [2] Practical Limitations...... 30-7 [3] Protecting a Tenant’s Sublease Rights— The Importance of Nondisturbance and Recognition Agreements. . . . . 30-8 § 30.02A Landlord Considerations Following a Tenant’s Request to Sublease...... 30-8.1 [1] Creating a Sublease Strategy...... 30-8.1 [2] The Prime Lease and the Sublease. . . . 30-8.1 [3] Obtaining an Express Covenant . . . . . 30-8.2 [4] Estoppel-Like Statements...... 30-8.2 [5] Subtenant Bargaining Power...... 30-8.3 [6] Restoration Provisions...... 30.8.4 § 30.02B Subtenant Considerations and Concerns When Entering into a Sublease Arrangement...... 30-8.5 [1] The Sublease Terms...... 30-8.5 [2] Insurance Coverage and Liability Concerns...... 30-8.5 [3] Shared Services ...... 30-8.5 [4] Potential Problems Under the Master Lease...... 30-8.6 [5] Landlord’s Obligation to Provide Services for a Sublet Space...... 30-8.6 [6] Protecting Subtenant from a Sublandlord’s Default ...... 30-8.6 [7] Protecting Subtenant Against a Landlord’s Default...... 30-8.7 [8] Issues Regarding Improvements. . . . . 30-8.7 [a] Ownership of Improvements. . . . 30-8.7 [b] Tax Implications of Receiving an Allowance for Improvements ...... 30-8.8 [c] Retaining the Right to Monitor Construction...... 30-8.8 TABLE OF CONTENTS xxi [d] Consent to Alterations...... 30-8.8 [e] Restoration Obligations...... 30-8.8 [f] Condition of the Subleased Premises...... 30-8.9 § 30.03 The Sublease Document...... 30-9 [1] Form of Sublease Agreement ...... 30-9 [2] Analysis of the Sublease Agreement. . . 30-25 [a] No Representations and Warranties Regarding Status of the Lease. . . 30-25 [b] Commencement of the Term . . . . 30-26 [c] Base Rent...... 30-26 [d] Rent Restrictions...... 30-26 [e] Additional Rent...... 30-27 [f] Bootstrapping to the Lease. . . . . 30-29 [g] Use Clause...... 30-29 [h] Sublessee Covenants and Indemnification...... 30-29 [i] Services ...... 30-30 [j] Foreclosure...... 30-31 [k] Consents...... 30-31 [l] Holding Over...... 30-32 [m] Claims for Injury, Damages or Loss; Indemnification of Sublessor...... 30-32 [3] Additional Considerations—Retaining Parts of the Subleased Premises. . . . 30-33 § 30.04 Landlord’s Consent to the Sublease...... 30-37 [1] Generally...... 30-37 [2] Forms of Landlord’s Consent...... 30-38 [a] Short Form Consent ...... 30-38 [b] Consent Coupled with Restrictive Covenant in Favor of Tenant. . . 30-39 [c] Consent Coupled with Nondisturbance and Attornment by Sublessee . . . . 30-42 § 30.05 Conclusion...... 30-51

CHAPTER 31

Responding to a Tenant’s Assignment or Subletting Request

§ 31.01 Introduction...... 31-3 § 31.01A Transfer Clauses...... 31-5 § 31.02 The Various State Laws and Views...... 31-8

(Rel. 49) xxii OFFICE LEASES [1] Alabama...... 31-8 [2] Alaska...... 31-10 [3] Arizona...... 31-11 [4] Arkansas...... 31-12 [5] California ...... 31-13 [6] Colorado...... 31-17 [7] Connecticut...... 31-18 [8] Delaware...... 31-19 [9] Florida...... 31-20 [10] Georgia...... 31-21 [11] Hawaii...... 31-23 [12] Idaho...... 31-24 [13] Illinois...... 31-25 [14] Indiana ...... 31-26 [15] Iowa ...... 31-27 [16] Kansas...... 31-29 [17] Kentucky...... 31-29 [18] Louisiana...... 31-30 [19] Maine ...... 31-31 [20] Maryland...... 31-32 [21] Massachusetts...... 31-34 [22] Michigan...... 31-35 [23] Minnesota...... 31-36 [24] Mississippi ...... 31-37 [25] Missouri ...... 31-38 [26] Montana ...... 31-39 [27] Nebraska...... 31-40 [28] Nevada ...... 31-41 [29] New Hampshire...... 31-42 [30] New Jersey...... 31-42 [31] New Mexico...... 31-44 [32] New York...... 31-45 [33] North Carolina...... 31-47 [34] North Dakota ...... 31-48 [35] Ohio ...... 31-49 [36] Oklahoma...... 31-50 [37] Oregon ...... 31-51 [38] Pennsylvania...... 31-52 [39] Rhode Island...... 31-53 [40] South Carolina...... 31-54 [41] South Dakota ...... 31-55 [42] Tennessee...... 31-56 [43] Texas...... 31-57 [44] Utah...... 31-59 [45] Vermont ...... 31-60 [46] Virginia...... 31-60 [47] Washington...... 31-61 TABLE OF CONTENTS xxiii [48] Washington, D.C...... 31-63 [49] West Virginia...... 31-64 [50] Wisconsin...... 31-65 [51] Wyoming ...... 31-66 § 31.03 Jurisdictional Table Covering the State Views on a Tenant’s Right to Assign or Sublease. . 31-68

CHAPTER 32

Preparing for an Effective Subleasing Program While Negotiating the Lease

§ 32.01 Introduction...... 32-2 § 32.02 Remarketing Issues...... 32-4 [1] The Ability to Market and Offer Space with a Minimum of Lead Time, Pricing Limitations and Other Regulation by the Landlord...... 32-4 [2] The Ability to Eliminate the Need for the Landlord’s Consent or Assure Consent Quickly When the Landlord’s Consent Is Required...... 32-7 [3] The Ability to Trigger Consent Through Intentions Rather than Formal Offers or Fully Executed Sublease Documents...... 32-8 [4] The Ability to Offer Space Through Commercial Channels of the Tenant’s Choice Without the Landlord’s Interference or Limitations ...... 32-8 [5] The Ability to Demise, Alter and Install Fixtures in the Space Without Inappropriate Limitations, Roadblocks or Delayed Landlord Consents. . . . 32-9 [6] The Ability to Preclude Landlord Limitations on or Added Criterion for Pricing or Marketing the Space . . . . 32-10 [7] The Absence of Limitations on Type of Use or Type of Subtenant for the Space ...... 32-12 [8] The Ability to Preclude Artificial Limitations on the Extent and Duration of the Landlord’s Recapture Rights...... 32-13

(Rel. 48) xxiv OFFICE LEASES [9] The Right to Recoup All Installation and Subleasing Related Costs Before the Landlord’s Profit-Sharing Rights Kick In...... 32-14 [10] The Ability to Reoccupy the Space and Collapse the Sublease in the Event of Economic Cycle Recovery Without Landlord Consents or Further Economic Sharing with the Landlord...... 32-15 [11] The Ability to Maximize the Subleasing Target Market by Providing for an Increase in the Tenant’s Security Under the Direct Lease to Offset or Alleviate Any Landlord Concerns About the Creditworthiness of the Tenant’s Proposed Subtenant . . . . . 32-16 [12] The Ability of the Subtenant to Further Remarket and Sublet the Space . . . . 32-16 § 32.03 Lease Articles Addressing Assignment, Mortgaging and Subletting Rights. . . . . 32-18 [1] Introduction...... 32-18 [2] Restrictions on the Tenant’s Assignment, Mortgaging and Subletting Rights— An Onerous Provision...... 32-18 [3] A Somewhat “Kinder and Gentler” Version of the Assignment, Mortgaging and Subletting Provision...... 32-42 § 32.04 Conclusion...... 32-60

CHAPTER 33

Leases vs. Licenses

§ 33.01 Introduction...... 33-1 [1] Understanding the Distinctions. . . . . 33-1 [2] The Importance of the Distinctions. . . . 33-6 § 33.02 Form: Standard License Agreement...... 33-6.1 § 33.03 Form: License for Temporary Use of Premises for Storage...... 33-13 § 33.04 Form: Limited Purpose License (“Early Access to Space”)...... 33-25 TABLE OF CONTENTS xxv CHAPTER 34

The Killer Lease: What It Is and Why It Exists

§ 34.01 Introduction to the Killer Lease Form. . . . . 34-2 § 34.02 The “Neutered” Form with Commentary . . . 34-5 [1] Permitted Use...... 34-5 [2] Demised Premises and Appurtenances. . 34-7 [3] Commencements of Rent, Term and Delivery Condition of Premises. . . . 34-10 [4] Completion and Occupancy...... 34-13 [5] Restrictions on Use of the Premises. . . 34-18 [6] Appurtenances, Etc., Not to Be Removed...... 34-20 [7] Various Covenants...... 34-23 [8] Changes or Alterations by Landlord. . . 34-43 [9] Damage by Fire, Etc...... 34-47 [10] Condemnation...... 34-57 [11] Compliance with Laws ...... 34-61 [12] Accidents to Plumbing and Other Systems ...... 34-68 [13] Notices and Service of Process. . . . . 34-70 [14] Conditions of Limitation Defaults. . . . 34-72 [15] Re-Entry by Landlord ...... 34-75 [16] Damages...... 34-78 [17] Waivers by Tenant...... 34-84 [18] Waiver of Trial by Jury...... 34-85 [19] Elevators, Cleaning, Heating, Air Conditioning, Services, Etc...... 34-85 [20] Lease Contains All Agreements— No Waivers ...... 34-45 [21] Parties Bound...... 34-48 [22] Curing Tenant’s or Landlord’s Defaults ...... 34-100 [23] Inability to Perform...... 34-103 [24] Adjacent Excavation—Shoring. . . . . 34-104 [25] Article Headings...... 34-105 [26] Electricity and Water...... 34-105 [27] Assignment, Mortgaging, Subletting, Etc...... 34-130 [28] Escalations ...... 34-161 [29] Subordination...... 34-269 [30] Miscellaneous...... 34-292 [31] Layout and Finish ...... 34-308

(Rel. 48) xxvi OFFICE LEASES [32] Insurance [Risk Management to Review for Tenant]...... 34-317 § 34.03 Costs to Owners of Killer Leases ...... 34-415

Appendices

APPENDIX A: Analysis Checklist ...... A-1 APPENDIX B: Tenant’s Quick Checklist of Lease Points ...... B-1 APPENDIX C: Landlord’s Quick Checklist of Lease Points ...... C-1

GLOSSARY OF COMMERCIAL LEASING TERMS WITH PRACTICE POINTERS...... G-1

INDEX ...... I-1