Tenant Leasing Illustrated
June 2017
Issue #65
Hello,

One of the most valuable and heavily negotiated rights for a tenant is the ability to extend its lease for a renewal term. Landlords understandably include certain prerequisites in their leases to protect against having to renew with an undesirable tenant, but sometimes these prerequisites are too restrictive.

In today's issue, we suggest four protections for tenants with respect to excessive restrictions that can nullify a tenant's renewal option.

Sincerely,
Alan
Alan Katz
Mintz & Gold LLP

Renewals; The Wheel Is Come Full Circle.
Twitter is a world I do not fully understand.

Okay, it is a world about which I have no clue.

But I did recently come upon the "Basketbard", a twitterer (twitterer?) covering NBA basketball in the language of Shakespeare.

Clearly, someone with too much time on his hands (of course, the same could be said about someone who writes newsletters about commercial leases), but some of the tweets are very well done.

On the failure of Dwight Howard to stop a dunk: "Not since the city of Troy doth open'd its doors for the gigantic wooden steed, hath I seen such a lapse in one's defense."

On the oldest active NBA player: "I pray thee. How old was thine grandfather, when Sir Vincent Carter was a rookie? Was he yet born, or was he but a child?"

And my favorite as a beaten down Knicks fan: "Ay. 'Twas a good year. The last year in which the Knickerbockers of York Anew doth won a game in a meaningful setting."

But Basketbard , if you want to write of battles, intrigue and danger, bring your talents to the world of commercial leasing.

The fault, dear Basketbard, is not in our stars, but in ourselves, that we cannot all be commercial leasing attorneys.

And in the world of commercial leasing, tenants know that sometimes they must screw their courage to the sticking place and renew their lease.

We have talked in past newsletters about the methodology for determining the fair market rent during a tenant's renewal term and how a properly drafted lease renewal clause gives the parties every incentive to avoid arbitration and negotiate a mutually acceptable business deal.

For the tenant, renewing allows it to avoid having to find a new home and live through a disruptive move.

For the landlord, it is able to avoid a vacancy and turnover costs (broker commissions, tenant incentives, etc.) while retaining a known quantity in its building.

Yet, before a tenant can exercise its renewal option, landlords require that certain prerequisites be met.

For example, a landlord is not going to want to renew with a tenant that is behind in its rent or has allowed its insurance to lapse, or to allow a tenant that is subleasing much of its space to remain and compete with the landlord in the market.

Tenants, on the other hand, must be sure that such prerequisites are reasonable and not a vehicle to nullify a valuable negotiated right.

Swear not by the moon, the inconstant moon, that monthly changes in her circled orb, and instead cover the following four protections in your lease renewal provision:
  • "I am a man more sinned against than sinning" (King Lear) It is reasonable for your landlord to require that you not be in default in order to exercise your renewal option, but the requirement must allow for the expiration of all applicable notice and cure periods and must only refer to then continuing defaults (not past defaults that have been cured). Ideally, such defaults should be limited to "monetary and material non-monetary" defaults so an unscrupulous landlord cannot catch you with a minor (or trumped up) default.
  • "Come what may, time and the hour runs through the roughest day" (Macbeth) Your landlord will require prior notice which, depending on the estimated time to re-rent your space if you do not renew, can range from between six and 30 months. But make sure that you have sufficient time to test the market and still renew at your current space.
    • Clearly delineate the format of your required notice (e.g., written notice by personal delivery, overnight courier, certified mail, etc.) and what must accompany your notice (e.g., your proposed renewal term rental).
    • Some leases provide tenants with flexibility in various lease terms, such as the length of the renewal term (e.g., five or ten years) or the right to renew for all or specified portions of its space (i.e., the option to renew on any one or more contiguous floors or on portions of a single floor provided that the balance of the floor is reasonably marketable). If that is the case, your lease should be clear that failure to identify the selected option in your notice will not nullify the exercise of the option, but instead either (i) result in a period of time to make your selection or (ii) provide for the deemed selection of one of the options.
  • "Misery acquaints a man with strange bedfellows" (The Tempest) Your landlord may include a minimum occupancy requirement so that it does not have to provide a renewal right to a tenant that is subleasing much of its space. Your initial position may be that it should not matter how much space you are occupying as long as you are paying your rent and not in default. But at a minimum, you should have the flexibility to sublease some portion of your space (e.g., 10%, 20%, 30%) without losing the extension option. Whatever minimum occupancy requirement you agree upon, make sure to address the following:
    • Perhaps obvious, but "occupancy" should mean space that you have not affirmatively subleased. You may be warehousing unused space for future use.
    • Include "occupancy" by the Tenant entity and all of its affiliates and permitted successors and assigns. Too often leases provide for occupancy of the "named tenant" only.
    • Remember to include "desk space users" and licensees as part of your occupancy (i.e., entities or individuals that are not formal subtenants but share your space without separate demising, such as a law or accounting firm that rents out offices to similar or related professionals with whom they have a business relationship).
    • If you have negotiated the option to renew for a portion of your space, your occupancy requirement should be tied to the space actually being renewed (i.e., you can be occupying only one-half of the space if you are renewing only one-half of your space).
    • If you have negotiated and exercised a space contraction option, such exercise should not disqualify you from renewing if your renewal is for the reduced space.
  • "All that glisters is not gold" (The Merchant of Venice) Some landlords will limit a tenants' renewal rights, particularly for a headquarters lease, if the tenant has entered into a "relocation lease" elsewhere (i.e., a lease intended for the same purposes and otherwise capable of accommodating a relocation of all or substantially all of tenant's business operations). Your landlord does not want to tie up your space until your notice period ends if it is clear that you are moving, but you need to make sure that such a clause does not limit your flexibility if more than one lease may be needed.
Shakespeare wrote "O heaven! that one might read the book of fate, and see the revolution of the times". I think that Yogi had it better when he said "the future ain't what it used to be". Either way, a tenant cannot know its future leasing needs so a renewal right is essential. If you follow the suggestions above, you can keep your landlord (that knave!) from limiting your ability to exercise this valuable right.



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Mintz & Gold prides itself on providing the highest quality legal representation often associated with large law firms with the attention and reasonable costs of a smaller law firm. Mintz & Gold's Real Estate Department has a national practice specializing in a broad range of commercial real estate law, with a particular focus on commercial leasing. We have extensive experience with respect to office, retail and shopping center leasing, and have represented major Manhattan landlords, national and multinational institutional tenants and national retail chains. Most of our attorneys practiced for many years at large institutional law firms before joining Mintz & Gold.

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Contact:
Alan Katz
katz@mintzandgold.com
Telephone: (212) 696-4848
Fax: (212) 696-1231

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