HOT TOPICS in COMMERCIAL LEASING 2014 Copyright © 2014 Nancy Ann Connery All Rights Reserved
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HOT TOPICS IN LEASING by Nancy Connery, Esq. Schoeman Updike Kaufman & Stern LLP New York, New York HOT TOPICS IN COMMERCIAL LEASING 2014 Copyright © 2014 Nancy Ann Connery All rights reserved. Nancy A. Connery | Partner Schoeman Updike Kaufman & Stern LLP 551 Fifth Avenue, New York, NY 10176 (646) 723-1042 direct | (212) 661-5030 main (212) 687-2123 fax [email protected] | www.schoeman.com HOT TOPICS IN COMMERCIAL LEASING 2014 SELECTED ISSUES IN LEASES INVOLVING NOT-FOR PROFITS 1. AMENDMENTS TO NOT-FOR-PROFIT LAW a. Non-Profit Revitalization Act of 2013. The Non-Profit Revitalization Act of 2013 became effective July 1, 2014 (the “2013 Act”). b. Internal Consent Process. The 2013 Act facilitates the process of obtaining required consents. For example: i. Notices of meetings to members, member waivers of notices, member proxies, and member consents may be given by electronic mail. ii. Unanimous director consents and waivers of notices may now be given by electronic mail or in writing. iii. The provisions of the Not-For-Profit Corporation Law allowing directors to participate in meetings via conference telephone or similar communications equipment have been clarified and also expanded to add electronic video screen communication. c. Related Party Transactions. i. “Related party” transactions are now subject to strict scrutiny. Board members need to consider the “related party” rules if they are in any way involved in the transaction at issue. ii. In addition, many not-for-profit corporations must adopt policies governing conflicts of interest and policies protecting whistleblowers. d. Internal Approvals of Real Estate Transactions Involving the Sale, Lease, Exchange or Other Disposition of Real Property. i. Transactions Involving Less Than All or Substantially All of the Not-for- Profit’s Assets. Board approval requirements for real estate transactions that do not involve the sale, lease, exchange or other disposition of all or substantially all of the corporation’s assets have been relaxed. 1. Under the 2013 Act, the purchase of real property need only be authorized by a majority of the Board of Directors (or a majority of a Board-authorized committee) unless the purchased property would, upon purchase, constitute all or substantially all of the assets of the corporation. 2. Under the 2013 Act, the sale, mortgage, lease, exchange or other disposition of the corporation’s real property need only be authorized by a majority of the Board of Directors (or a majority of a Board-authorized committee) unless the property constitutes all or substantially all of the corporation’s property. ii. Transactions Involving All or Substantially All of the Not-for-Profit’s Assets. If the real property, if purchased, would constitute all or substantially all of the corporation’s assets, or if the real property being sold, mortgaged, leased, exchanged or otherwise disposed of constitutes all or substantially all of the corporation’s assets, the old rules apply (a two thirds vote of the Board is required unless the Board consists of more than 21 people, in which case a majority vote is sufficient). e. Attorney General and Court Approval. If the transaction involves the sale, lease, exchange or other disposition of all, or substantially all, the assets of a charitable corporation, the corporation may now obtain the approval of either the Attorney General or the Supreme Court (formerly, court approval was required, with notice given to the Attorney General’s office) unless the corporation is insolvent or would become insolvent as a result of the transaction (in which event Supreme Court approval is required) or unless the Attorney General determines that a court should make the determination. i. Note that the amendments to the Not-For-Profit Corporation Law with respect to Court approval did NOT modify the requirements of the Religious Corporation Law as to religious corporations. f. Financial Reporting. i. Financial thresholds for independent CPA audit reports and review reports have been raised. ii. New requirements are imposed requiring the Board or an Audit Committee of any corporation required to file an annual audited financial report to, among other things, oversee financial reporting and review audit results. 2. SPECIAL CONSIDERATIONS: LEASES BY AND TO NOT-FOR-PROFITS a. Negotiation Process 1. Decision making power is often exercised by a group. b. Due Diligence i. Internal Approval Process 1. Voting and decision making processes may be informal. 2. Charter documents may be old-fashioned, with voting requirements unclear or impossible to comply with. 3. If quorum requirement, as a practical matter, can’t be met because of diminishing membership, the Supreme Court may be petitioned for a modification of the quorum requirement. N.Y. NPC Law § 608(e). If quorum requirements, as a practical matter, can’t be met because of the large size of the membership (in excess of 500 members), cost of mailing, and inability to send notice by e-mail, consider publication and posting. N.Y. NPC Law § 605(a). ii. Consider whether amendments are needed to the Charter or By-laws. iii. Approvals: 1. Not-for-Profit Lease of Property from Third Party. a. No statutory requirement of a minimum Board vote or membership vote. b. Review corporation’s certificate of incorporation and by-laws. 2. Not-for-Profit Lease of its Real Property – Less Than All or Substantially All of the Corporation’s Assets. a. Requires authorization by a majority of the Board of Directors (or a majority of a Board-authorized committee). N.Y. NPC § 509. b. Review corporation’s certificate of incorporation and by- laws. 3. Not-for-Profit Lease of its Real Property -- All or Substantially All of the Corporation’s Assets: a. A two-thirds vote of the Board is required unless the Board consists of more than 21 people, in which case a majority vote is sufficient. b. If members are entitled to vote on the transaction, the Board must adopt a resolution recommending the transaction and submit the transaction to the members for vote. By two-thirds vote, the members may approve the transaction according to the resolution or may authorize the Board to modify the terms of the transaction. If members are NOT entitled to vote on the transaction, then Board approval (see subpar. (a) above) will suffice. c. Review certificate of incorporation and by-law requirements. d. Attorney General or court approval required, unless the corporation is insolvent or would become insolvent as a result of the transaction (in which event Supreme Court approval is required) or unless the Attorney General determines that a court should make the determination. e. After authorization, the Board may, at its discretion, abandon the transaction (subject to the rights of third parties to the transaction) without further action or approval. f. See N.Y. NPC §§ 509, 510. 4. Religious Corporation/Disposition of Assets (including a Lease of Church Property for a Term Exceeding 5 Years): a. General. i. Although the Not-For-Profit Corporation Law is generally applicable to religious corporations, not all of its provisions apply to religious corporations. RCL 2-b provides that the Not-For-Profit Corporation Law applies to every Religious Corporation, subject to specified exceptions. RCL 2-b further provides that if there is a conflict between the Not-For-Profit Corporation Law and the Religious Corporation Law, the Religious Corporation Law prevails. ii. Notices of Member Meetings and Proxies. Sections 603 (notice of member meetings) and 609 of the Not-For-Profit Corporation Law (proxies) do not apply to religious corporations. b. Court Approval/Notice to AG. i. Lease of Real Property By a Religious Corporation from a Third Party. Court approval and Attorney General approval are not required for leases by religious corporations of property. N.Y. RCL Section 6 specifically permits religious corporations to acquire property for, among other things, chapels, mission houses, school houses, housing for ministers, property for a home for the aged, and property for a day care center. Any disposition, however, must be effected in accordance with the N.Y. RCL §12. ii. Approval Required. RCL § 12(1) requires every religious corporation to obtain court approval pursuant to NFC Law § 511 (with notice to be given to the Attorney General) for each of the following transactions: 1. Sale of any of the church’s real property (except in connection with a foreclosure). 2. Mortgage of any of the church’s real property. 3. Lease of any of the church’s real property for more than 5 years. iii. Internal Approvals. 1. For certain hierarchical churches, designated bodies or parties must approve the lease. 2. Generally, for those churches whose trustees or governing body are elected by the congregation, approval of the members will be required. c. Certain Churches. RCL Section 2-B (d-1) exempts certain churches from the requirement that notice be given to the Attorney General, and RCL Section 12 (2) – (6) requires additional consents from the bishops, Presbyteries, etc. with respect to those churches. The churches include the Protestant Episcopal Church, Roman Catholic Church, Ruthenian Catholic Church, African Methodist Episcopal Zion Church, Incorporated Presbyterian Church, and the United Methodist Church. iv. Real Property Due Diligence 1. Confirm that the not-for-profit actually owns the property it is leasing. 2. Are there any restrictions on the use of the real property? v. For religious corporations, will approval of the church hierarchy be required or desirable? c. Below Market Rents i. It’s not unusual for a not-for-profit to grant a long term lease to a related not-for-profit whose activities support the activities of the owner of the real property. 1. Rent may be below-market. N.Y. RCL §12. 2. What if the tenant files for bankruptcy? a.