Real Estate

Friday, December 20, 2019

What are the Ways to Get Out of a Commercial Lease?

You found the perfect location for your business, retail store or office, and you are ready to sign the lease!  Unlike residential leases, which usually have a 1-year term, a commercial lease can be much longer, typically 5-10 years. Before signing a commercial lease, a business tenant should consider all the ways to get out of the lease should something go wrong with the business or the location.   

Commercial Tenant Exit Strategies

The first way to get out of a commercial lease is to simply walk away.  Close your doors and deal with the landlord. The landlord will keep your security deposit and, if you provided a personal guaranty, the landlord may go after the business and personal assets to recover the unpaid rent or damages.  

A business tenant should carefully review the lease to find out if the tenant is liable for the entire term of the lease (called a “rent acceleration” provision) or if the tenant is responsible for the balance of the lease until re-rented to a different tenant at the same or higher rent.  

It is also necessary to review the lease and the state specific law on the landlord’s duty to mitigate damages.  This duty requires a landlord to actively try to find a replacement tenant to “mitigate” the landlord’s damages. In states that do not impose such a duty (e.g. New York), the landlord can simply sit on the empty property and make the old tenant pay.  

Another exit strategy in a commercial lease can be found in the assignment and sublease provision. If the business tenant wants out of its commercial lease, it may assign the entire space for the entire term of the lease to an assignee via an assignment agreement.  Alternatively, a business tenant could sublease a portion of the space (or the entire space) for a portion of the term (which could be the term less one day via the sublease provision).  

Both an assignment and a sublease will likely require landlord’s review of the proposed assignment or sublease agreement, a review of the assignee’s or sublesee’s financials and landlord’s reasonable consent to the transfer.  The exit strategy of an assignment may provide for a full release of the business tenant’s obligations as well as release the original guarantor.  With a sublease, however, the business tenant remains on the hook for the lease if the subtenant doesn’t pay rent or breaches the lease in some way.  For these reasons, an assignment is a more effective exit then a sublease.  

Finally, another exit strategy is to negotiate a buy out. If real estate market rents are on the upswing, the landlord may be willing to let a tenant pay a lump sum payment to be released from the lease. This leaves the landlord with vacant space to rent to a new business tenant at a higher rent.  A win-win for both parties. 

In the end, a business tenant should carefully review the exit strategies with an attorney before signing a commercial lease agreement.

Friday, December 13, 2019

What is a "Good Guy" Guaranty?

A commercial landlord will want protections in the event that the tenant fails to pay the rent or otherwise breaches the lease. A landlord can obtain such protection by reviewing a tenant’s financials and requiring a security deposit in an amount that provides adequate assurances.

Another way a landlord can get protection is to request a guaranty from another individual or entity that is not the tenant under the lease.  Generally, there are three types of guaranties available under a commercial lease:

  1. Full payment and performance
  2. Full payment only (monetary only and no lease performance obligations)
  3. “Good Guy” Guaranty, commonly used in the New York market (sometimes also referred to as a “Good Gal” Guaranty)

Read more . . .

Friday, December 6, 2019

What is a Mechanic's Lean on my Real Property?

The law recognizes many types of liens on Real Property.  A lien is a claim or a means for enforcing the obligations of the owner of real property to pay for it.  Examples of liens placed on property include:

  • A judgment lien placed on real property because a judgment issued by a court was not paid
  • A tax lien on real property for the failure to pay to real estate taxes
  • A brokerage lien placed on the real property for failure to pay a broker a commission 
  • A mechanic’s lien which is a claim placed on real property by a party who provided labor or materials to improve the property and was not paid.   

Read more . . .

Friday, November 15, 2019

What is an SNDA and Why is my Landlord's Lender asking me to Sign it?

As a condition of a mortgage loan, a lender may require that the borrower (or landlord) obtain a signed Subordination, Non-Disturbance and Attornment Agreement (SNDA) from the tenants. A SNDA is a tri-party agreement between the lender (the mortgage), the borrower who uses the proceeds to purchase the property (the landlord) and the tenant. 

A SNDA will reference the lease, lease parties and execution date.  The purpose of the Agreement is the provide that the lease (and any modifications to the lease) will be “subject to” and “subordinate” to the mortgage lien.  This is the “S” in SNDA.  In exchange for the tenant’s agreement to remain behind the lender’s rights to the property, the lender agrees to give tenant protections in the event of a foreclosure. 

A foreclosure of the property would occur if the borrower/landlord failed to pay its mortgage or breached the loan documents and lender could take possession of the property.   In this situation, the ender agrees to leave the tenants in possession and not disturb the tenancy, provided that they have not breached the lease.  The covenant of non–disturbance is the “ND” in the SNDA.  

Read more . . .

Friday, October 25, 2019

What is the Difference Between a Commercial Lease and a License to Occupy Business Space?

When one party agrees to let another party use its business space, they must agree on the terms of use, the fee, the term and how the occupancy will come to an end.  This is referred to as a license to occupy space, which is different from a commercial lease.  A commercial lease is an agreement between a landlord/lessor and tenant/lessee to lease real property.  The landlord-tenant relationship creates a leasehold interest.  A license to occupy real property, on the other hand, is merely a privilege to use the real property and no property estate is created.  

A license is generally revocable by either party upon notice, at will – with or without cause and is usually not assignable the way a lease can be assigned to another entity with the landlord’s consent.  A license to occupy is generally a personal right of the party to the license. The tenant and landlord have a relationship governed by the terms of the lease, and all the rights and remedies available under landlord tenant laws (including the eviction laws), whereas the laws of contract govern a licensee and licensor.  

Generally, a license is for a shorter term than a lease.  The parties may prefer a license agreement for an event to be held in business space for a seasonal duration (such as a Halloween store or a Christmas shop) or as a “pop up store” (which is test run to see if the business location works).  Also, in the retail context, a license for space in a larger department store is often called a “concession.” An example of a concession is a makeup counter in a retail outlet. 

In the office context, a landlord may give a tenant a license to occupy space in the building while the tenant’s permanent leased space is being constructed/renovated, sometimes called “swing space.”  Another example of a license of space is when a company licenses a conference room for an industry conference event to another business entity which event will may be occurring over only a few days.  The parties do not need to enter into a full blown lease with long provisions for such a short duration.  

Both the license and lease agreements will, among other things, list the parties, a description of the space to be occupied, with a floor plan exhibit if applicable, the term (commencement date to expiration date), the fee (called rent or license fee) and the insurance to be carried by both parties. Note:  A license to use space for a one time event where food and drink will be served should include appropriate liquor coverage under the insurance coverage. 

The Bottom Line

A license offers more flexibility for parties wishing to occupy space for shorter durations, with a simpler form of agreement.  A lawyer can assist in reviewing whether a license or a lease is most appropriate in a given context. 

Friday, September 13, 2019

What You Should Know About A Brokerage Agreement Before You Sell Your House

When engaging a realtor to list a home, the realtor will ask a seller to sign a listing agreement which will detail the broker arrangement and the terms of paying the commission.  You should consult an experienced real estate attorney before you sign a brokerage agreement  

Key Terms of a Real Estate Brokerage Agreement

A brokerage agreement should properly identify the property (by address or block and lot) and the price the home is offered for sale.  Additionally, the agreement should list a term and expiration date. If the house doesn’t sell during this time (usually 6 months or less then a year) the seller may want to engage a new broker to sell the home.  

In any event, a seller should not enter into a brokerage agreement with no end. In addition, there will often be a “grace period” whereby if anyone that the agent showed the property to buys the property within thirty (30) days after the termination of the listing agreement, the agent is entitled to the commission.  The agreement should provide the percentage of commission the listing agent will receive as well as the commission the buyer’s agent will receive. A total commission of 2-6 percent of the sale price is customary and varies from locale to locale.   

An exclusive agency agreement means the realtor is entitled to a commission even if the seller brings the buyer.  In some instances a seller may ask for exclusions to the exclusive agreement, meaning the agent is not paid if a neighbor or relative of the seller’s buys the home after the seller showed the property.  

A seller will want to be clear if the agreement is with a particular agent at a real estate office.  If the seller enters into the agreement without a named agent (i.e. “Christian W. Breyers” of We Sell Homes Realty), anyone in the real estate office who consummates a sale is entitled the listing commission.   

When a listing agent who represents the seller also brings the buyer, that is called a “dual agency” and both parties (Seller and Buyer) must be notified that the agent represents both and that each party should provide written informed consent to any conflict of interest.  The agent’s fiduciary duties of disclosure and undivided loyalty will not be the same in a dual agency. 

The agreement should list the methods the agent will use to market the property, such as internet sites, newspaper listings, and open houses. The agreement should state who pays the expenses of marketing and photographing the property (generally the agent’s expense.)

The Takeaway

A listing agreement to sell a home is an important agreement in a real estate transaction that should be reviewed by your attorney for the foregoing issues.

Friday, August 23, 2019

What You Should Know About a Brokerage Agreement for the Lease of Commercial Space

A landlord and a broker typically enter into a brokerage agreement in connection with the leasing of commercial space. The best way to protect your interests is to consult an experienced real estate attorney before signing such an agreement. 

Key Terms of a Commercial Lease Broker Agreement

A broker who finds a tenant for a landlord of commercial space is entitled to a commission. The broker will want the agreement to be “exclusive” which means the broker gets paid the commission regardless of which party brings the tenant.

The landlord should verify that the broker is licensed in the state where the rental property is located. The agreement should identify the rental space (office or retail) and the building address. Generally, the commission will not be earned until a lease is signed, the tenant has paid the first month’s rent in advance and taken possession of the property.  

The agreement will describe the rate of commission for the initial term of the lease and any renewal periods. If a lease has an escalating rent provision, the parties may agree on a flat commission or a commission based on a percentage of ech years’ rent. Certain items that are not included in the rent may be excluded when calculating commissions such as the utility costs, any free rent or construction costs.  The agreement should also consider the rate of commission if the tenant takes on additional space in the building (whether adjacent or on another floor).  

An example a commission rate schedule for a five (5) year lease with an option to renew: 

For the first (1) year of the lease, or any fraction thereof               5%

For the second (2) and third (3) year, or any fraction thereof        4%

For the fourth (4) and fifth (5)year, or any fraction thereof            3%

Any renewals                                                                                  2%

While a commission rate may be calculated based on the changing rental rate, the commission is usually paid in one lump sum at the time of lease signing. It should be noted that if a tenant terminates, or violates a provision of, the lease, the landlord can sue the tenant to recover damages --  the amount the commission paid to the broker.

The agreement may provide a protective clause known as a broker indemnity whereby both parties state there are no other brokers entitled to the commission.  If the brokerage commission is not paid, the broker can place a lien on the property.  

A landlord may want certain key individuals in a brokerage agency to work on the lease the property and may name such individuals.  Then, a new broker can only be placed on the matter if the landlord consents to such broker.  

The Bottom Line

In the end, a commission agreement for the lease of property varies from a commission agreement for the sale of the property and the forgoing issues deserve serious consideration.

Friday, August 2, 2019

What You Should Know Before You SIgn a Co-Working Space Agreement

Co-working is a popular, flexible work style for sharing a workspace and reducing overhead costs for the users. Users can choose an unassigned seat at a desk or a more formal private office setting. Co-working is on the rise in many industries but special care and concern should be noted for professions such as law that require confidentiality.  

What is a user office agreement?

There are many companies that offer co-working facilities, especially in urban environments and these providers will often require the user to sign a User Office Agreement.  The agreement should clearly state that it is not a landlord/tenant lease. In fact, the landlord is the owner of the building, where as the co-work provider is the tenant and the member is a co-work user. 

Co-working agreements resemble a gym membership more then a lease agreement.   For example, the user agreement will list certain “house rules,” which give users the day-to-day rules regarding using the space and sharing it with other users.  Some of the key provisions to look for before signing a user agreement in addition to the fees to be paid are:

  • Term -- A user should review the term of the agreement. Is it month-to-month or annual?  How does a user cancel? Is there a notice period?  
  • Amenities -- A user will want to understand what amenities comes with the member’s agreement, such as use of copy machines (or is there a printing fee?), coffee, refreshments, mail delivery services, networking events and file storage/lockers.  
  • Access -- Can the user access the space 7 days a week/365 days a year (24 hours a day) with a key card or does the particular facility have closed hours.  
  • Relocation Rights --  If a user selects a formal office with walls and locked door, the user should be aware of any relocation rights the provider may have. Relocation rights basically give the provider the right to move the user to a different office, which may or may not have the same square footage, to accommodate a new user.
  • Internet -- The provider may provide free WiFi along with certain disclaimers regarding liability and damage to the user’s business.  Some providers will request users waive any rights in the event of a data breach.  This provision should be reviewed carefully especially for legal or financial industry users who may work with sensitive information.  
  • Disputes -- As with many other contracts, the method for resolving disputes -- arbitration, mediation or litigation -- should be specified.

The Bottom Line

Co-working is becoming a popular alternative to the traditional office lease. Users should review the user agreement to ensure that it provides for a productive and economical work style.

Friday, July 19, 2019

Why Does a Tenant Need to List "Additional Insureds" on its Insurance Policy for Leased Property?

When a landlord and tenant enter into a commercial lease for a retail store or office space, the lease will likely contain a long insurance provision as well as an indemnity provision.  An indemnity is a promise whereby one party promises to indemnify (or compensate) the other against some anticipated loss.  

The commercial lease insurance provision will state the types of insurance the landlord must carry on the building, such as casualty insurance for damage caused by fire, hazards or terrorism and liability insurance to cover damage to property, bodily injury or death. By contrast, the tenant will be required to obtain and pay for insurance covering casualty or liability occurring within the leased premises and coverage for the certain events that occur in common areas of the leased building, especially if due to the tenant’s negligence.  

The tenant is the named insured – that is the party paying for the insurance whose credit was reviewed when issuing the policy and determining the premiums.  The landlord will request certain types of insurance in certain amounts be on a “per occurrence” basis with permitted deductible amounts. Landlords will sometimes request a tenant to carry business interruption insurance.  The rationale behind this request is if an event occurs that interrupts tenant’s business, the tenant ymay lose revenue and then not have sufficient funds to pay the rent.

Why is the tenant being asked to add others to its insurance policy for casualty and liability ?

On most casualty policies (with the exception of business insurance), the landlord will ask to be named as an “additional insured” on the tenant’s casualty policy, together with other interested parties such as the landlord’s agents (e.g. the property management company, or the mortgage lender).

An “additional insured” is a person or entity other than the named insured who is protected under the terms of the insurance policy sometimes referred to as the “loss payee. “ Typically an endorsement to the policy is added to cover additional insureds.  Landlords feel this protection is like “a belt and suspenders.”

The landlord will sometimes request a full copy of the tenant’s insurance coverage, with an endorsement showing the additional insureds listed, but more commonly will request a “Certificate of Insurance” which is a one-page sheet showing the types of coverage, amounts and deductibles and the lists the parties covered as additional insureds. 

The Bottom Line

Both the tenant and landlord should have their attorney carefully review the insurance provisions of the lease and indemnity clause to determine that there is adequate protection for each party and reasonable coverage given the specific risks.

Friday, June 28, 2019

Why Landlords Want Tenants to Obtain Renter's Insurance

Residential landlords will often include a provision in the lease requiring the tenant to carry renter’s insurance. Landlords do not want be sued by tenants for damage to their possessions and want tenants to look to their own coverage. Tenants often balk at an additional cost and mistakenly assume that they are covered under the landlord’s policy. This is not the case. 

In fact, the landlord’s insurance will cover repairs to or replacement of the structure from things from fire, water or storm damage. Damage to or theft of the tenant’s possessions are not covered. Tenants will often believe their possessions are not worth much, when you make an inventory (TVs, computers, clothing, books, mattress, furniture) it adds up!  

A common lease provision reads as follows:

“The Tenant shall be responsible for obtaining at Tenant’s own cost and

expense, a tenant’s insurance policy for the Tenant’s furniture, furnishings,

clothing and other personal property.  The Tenant’s personal property shall not

be the responsibility of the Landlord, and will not be insured by the Landlord. 

The Tenant’s insurance policy must also include liability coverage.  Upon

request, the Tenant shall periodically furnish Landlord with evidence of

Tenant’s insurance policy.”  

Some savvy Landlords will go further and add: 

“Tenant shall provide a copy of renter’s insurance at the time of lease signing

and at each renewal of the lease.  Tenant shall provide written notice of any

interruption of Tenant’s insurance during the Lease term.”  

This additional provision prevents a tenant from letting the renter’s insurance lapse for non-payment or alerts the landlord if the insurance carrier dropped the tenant.  A failure to provide the insurance could be a breach under the lease.  

Tenants should consider who is listed on the insurance policy,  in particularl  roommates and couples, to be sure all occupants’ possessions are covered. Some renter’s policies can extend to possessions damaged or stolen while traveling.  A Renter’s policy can also cover a hotel stay or other interim housing if a tenant must leave its rental because of damage.  

In conclusion, renter’s insurance is not as costly as one may think and it is a good investment and protection tool for both the landlord and the tenant.

Friday, January 18, 2019

Buying A House After Bankruptcy

It is no secret that filing for bankruptcy can harm your credit. However, compared to simply letting your accounts go past due for months on end, bankruptcy may actually be better for your credit over the long term because there are no repeated “dings” on your credit score. Getting the bankruptcy finished allows you to start fresh and begin to rebuild your credit rating.

Your credit score is closely examined when you enter the home buying process, which means  that filing for bankruptcy may affect your ability to purchase a home in the future. Even if your credit score is not significantly harmed,  a bankruptcy discharge will remain on your credit report for up to ten years. That type of history can make lenders nervous about your creditworthiness.  Nonetheless, it is possible to purchase a house after bankruptcy, but it may take some additional time and extra steps.

Don’t Become a Boomerang Buyer!

After you discharge your debts, it can be very tempting to make large purchases because you may have extra income. You should not to give in to this temptation. It will take time to rebuild your credit after a bankruptcy, and if you decide to purchase too soon, you may end up getting denied entirely or obtaining an interest rate that just does not make financial sense. Nonetheless, some buyers are so excited about the possibility of being able to afford a home that they take on high-interest rate loans, often to their detriment. Unfortunately, this practice occurs so often that there is a term for it—“Boomerang Buyers.”

Biting off more than you can chew after bankruptcy can put you in financial hot water. This type of situation is especially troubling after bankruptcy because you do not have the option of filing for bankruptcy again for several years.

The Timeline for Buying After Bankruptcy

How quickly you can purchase after bankruptcy l depends on the type of bankruptcy you filed. If you have filed for Chapter 13 bankruptcy, the process can last up to five years. This  means you generally cannot purchase a house until long after your five-year repayment plan has been completed. Once you receive your discharge, most lenders will require you to go through at least a two-year waiting period before you can qualify for a conventional loan.

Read more . . .

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