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3 3 HOW TO REDUCE EXPOSURE FOR MY CLIENT? Ensure the Lease reflects the deal made by your client (memoranda; letter of intent); Legal activists; Broker activists; Client activists. Team in place early; The right team for the deal; Start early; the time necessary to do a fully negotiated transaction is often underestimated.

4 4 SOME LEASE PROVISIONS ARE MORE EQUAL THAN OTHERS? Each Lease is a unique transaction and the forces that will govern the negotiation are as varied as the Landlord, Tenant and the property at issue. The Parties need each other but their respective positions in a Lease negotiation can be diametrically opposed. Negotiations by and between the Landlord and Tenant are controlled by many factors and all must be considered.

5 5 HOT MARKET - LANDLORD IS LORD The hotter the market the less likely a Landlord will negotiate its standard form Lease ; If you will not sign the Lease the Landlord has five other Tenants that will; When the market is hot the Landlord will desire to minimize its costs by reducing attorneys fees; Time is money and if another viable Tenant will take the Lease as is, why spend the time negotiating.

6 6 COLD MARKET – TENANT IS KING The cooler the market the more precious a viable Tenant becomes; The Tenant now has several options and if this Landlord will not negotiate the next one will; The Landlords standard Lease form becomes highly negotiable.

7 7 NORMAL MARKET - EQUAL AS IT GETS Alternatives may be available but not desirable; In this situation the Landlord and Tenant still need each other, time becomes a critical factor; The Landlords standard Lease form is negotiable but all issues are vigorously defended.

8 8 FINANCIAL WHEREWITHAL He who has the gold makes the rules; Large well funded Tenants - own parameters for any real estate transaction; Sophisticated in house real estate department - certain legal and financial parameters; Real estate department exceptions. Exceptions are rare but not unheard of. governing committees; or different operational executives with the organization. The larger and more sophisticated the Parties, the more demanding they will be during the Lease negotiations.

9 9 ORDER OF MAGNITUDE Small Transaction a lease less than 5,000 rsf with a duration (including options) of less than 3 years would be considered by most a relatively small lease transaction. Medium Transaction a lease greater than 5,000 rsf up to 30,000 rsf with a duration of at least 5 years. Large Transaction a lease greater than 60,000 rsf with a duration of at least 5 years would be considered by most a major transaction.

10 10 DIRECT VS INDIRECT Direct Leases - more hotly negotiated than assignments and subleases; Landlords are not excited about expending extensive legal fees and time to accommodate an assignee or subtenant. As between the Sublandlord-Assignor- Subtenant the Assignor-Sublandlord will be reluctant to make major changes from the Master Lease.

11 11 DURATION OF LEASE The longer the commitment the more likely that the parties will vigorously negotiate. The shorter the commitment the less likely either party will expend considerable time and effort negotiating; Even a small lease could be fully negotiated if for a relatively long duration.

12 12 BUILD OUT VS. EXISTING Two types of build-out; Entire Building; Tenant Improvements. The more complex transaction involves the construction of a new Building; Tenant Improvements to raw space; Tenant Improvements to finished space; Minor improvements to finished space.

13 13 OWNERSHIP The more parties involved the more complex the negotiations; When the Landlord owns the Building and the Land upon which the Premises sits; the Landlord controls its own destiny and can be more flexible in its negotiations.

14 14 SOPHISTICATION OF REPRESENTATION Representation by a sophisticated broker and attorney is essential; If one party is well represented and the other is not then anything can happen; a great deal of time and effort over issues of little import or significance; While spending little to no time on issues of great significance. When both parties to the transaction are properly represented by experienced brokers and counsel there is at least a fair opportunity to address most of the major issues.

15 15 THE XV COMMANDMENTS I. The perfect Lease does not exist; II. Most provisions of a Lease assume bad things are going to happen; III. Entrance strategy fun to negotiate exit strategy a dread; IV. Landlords know their standard form Lease very well; V. No such thing as a pure legal or business provision; VI. Most standard form Leases are drafted by Landlords and greatly favor Landlords (what a shocker);

16 16 THE XV COMMANDMENTS VII. Landlords do not sign Tenants standard form Lease; VIII. Never say never; or take it or leave it; IX. Do not concede a point because of the current law; X. What does the Lease say; XI. Do not ignore boilerplate;

17 17 THE XV COMMANDMENTS XII. Statutes that favor Landlord are sacred; and statutes that favor Tenant are evil or vice versa; XIII. Leases should be read at 4:00 a.m. slowly with strong coffee; XIV. Most provisions are written in a lawyers blood. XV. Leases are not written for the lawyers but the users.

18 18 BIG NINE OR MORE 1. Description of Premises 2. Use; 3. Lease Term and Lease Commencement Date; 4. Rent and Operating Expenses; 5. Assignment and Subleasing; 6. Damage and Destruction; 7. Parking; 8. Options (Additional Space and extension of the Lease Term); and 9. Tenant Improvement.

19 19 PREMISES Related provisions. Rent, Operating Expenses, Use, Rules and Regulations, Insurance, Parking, Damage and Destruction, Condemnation, Property Taxes, Signs, Compliance with Law and Options (Space and Term); One of the most overlooked provisions of the Lease.

20 20 PREMISES - TENANT Must specify what you are getting; Common areas - how important? Telecommunication access - needs; Measurement of space. Rentable tied to Rent; Usable tied to Tenant Improvement Allowance; Architects, BOMA; Other standards (NYC, D.C., Industrial etc.)

21 21 PREMISES - LANDLORD Common areas - must have the flexibility to meet the needs of the market; Telecommunications access – reasonable; Measurement of space; The Rent is what it is; Measure now or waive.

22 22 PREMISES - RESIDENTIAL Typically not an issue in the residential Lease. The typical residential Lease will provide a street address only and very little else.

23 23 USE Related Provisions. Description of Premises, Building Services and Utilities, Rules and Regulations, Assignment and Subleasing, Hazardous Waste, Damage and Destruction, Condemnation, Indemnity, Insurance, Abatement of Rent, Non-Competition, Tenant Improvements, Compliance with Law and Options (Space and Term) ; The importance of this provision cannot be overstated; Entrance and exit strategy.

24 24 USE - TENANT any legally permitted use. most Tenants would not want a Topless Bar across from their business office; any legally permitted purpose that is consistent with the character of the Tenants in the Building and that is not prohibited via another tenants exclusive use. Warranty fit for use; Buildings Systems (HVAC, electrical, structural, plumbing, lighting, etc.); Zoning. Assignment & Subletting - Use provision to be as permissible as possible.

25 25 USE - LANDLORD Control of Tenant mix; Maintain the quality and character of their Building; Class A Building where professionals are housed; Exclude Tenants that are inconsistent (e.g. drug rehabilitation center).

26 26 USE - RESIDENTIAL Landlord must at all times be wary of use that he does not desire on the Premises. prohibit illegal activities; prohibit many undesirable activities which may be legal (e.g. kennel, child care, telemarketing, etc.). Home office - technology - Tenants have computers, printers, fax etc., and some operate a business out of the residence. overload on the electrical or HVAC system of the residence. Waterbed or other water filled furniture, California Civil Code § An owner or an owner's agent shall not refuse to rent a dwelling unit in a structure which received its valid certificate of occupancy after January 1, 1973, :……………

27 27 USE - RESIDENTIAL As a general rule animals can be restricted except a seeing-eye dog or signal dog for the hearing impaired; Occupancy limits - discriminatory against families with children? When business to business disputes occur the Courts and Arbitrators are less likely to become judicial/arbitrator activists, than in the residential arena.

28 28 Related Provisions. Rent, Operating Expenses, Tenant Improvements, Options, Default, Damage and Destruction, Condemnation, Assignment and Subletting, Notices, and Hold Over. Leases contain several dates of importance. LEASE TERM

29 29 LEASE TERM - DATES for reference purposes only – for identification; The Effective Date – Lease is viable and enforceable; Lease Commencement Date – the date the Term commences; Rental Commencement Date – the date Tenant must commence the paying Basic Rent under the Lease Additional Rent Date – the date the Tenant must commence the payment of operating expense pass throughs; Operating Expense Adjustment Date – the date upon which the Landlord may adjust the operating expense pass–throughs;

30 30 LEASE TERM - DATES Beneficial Occupancy Date - the date in which the Tenant is allowed to occupy the Premises; Free Rent Period – the period of time in which no Basic Rent and/or Additional Rent is payable under the Lease; Delivery Date - the date the Premises are delivered to the Tenant to occupy or to commence the construction of Tenant Improvements; Option Date – the date upon which Tenant must exercise an option set forth in the Lease; Expiration Date – the date the Lease Term ends on its own terms.

31 31 LEASE TERM - TENANT During any Early Occupancy Period or Beneficial Occupancy Period – clarify what is payable if anything; Date Confirmation - the ability to dispute any Landlord confirmation of a Lease/Rent Commencement Date or any other rental trigger date in the Lease; Lease Extensions discussed in more detail below.

32 32 LEASE TERM - LANDLORD Tenant occupies – must pay Rent The most sacred provision in the Lease to the Landlord is Rent Commencement Date. Does not desire to debate this issue with their Tenants. May allow some sort of ADR process so long as the Tenant pays the Rent (even if he pays it under protest).

33 33 LEASE TERM - RESIDENTIAL Most of the time the Term of the Lease is not an issue in a residential situation; exception poor documentation. Notice requirements for termination have changed. The month to month tenancy only required one months prior written notice to terminate. The California Civil Code § requires the owner of a residential dwelling to provide at least sixty (60) days' notice of termination if the Tenant has lived in the residence for a year or more.

34 34 ACCEPTANCE Existing Space – No TIs - walk through by Tenant and Landlord – confirmed in writing; TIs – Tenant constructs – walk through on Delivery by Landlord; Landlord constructs – walk through on completion.

35 35 ACCEPTANCE Defects Patent; Latent; Punch list. Documentation is King – Honeymoon vs. Divorce

36 36 ACCEPTANCE - TENANT Latent defects excluded; Patent defects some grace period; Punch list – Diligently Timely No disruption Off Tenant hours Fumes Noise Access Large vs. small transaction

37 37 ACCEPTANCE -LANDLORD Latent defects – Tenant must Promptly report when discovered; Diligently investigate; Not cause loss of warranty. Patent defects – one time shot. Punch list – Reasonable During Building Hours Minimize disruption Memorialize Cannot be Tenant caused (move in) Large vs. small transaction

38 38 ACCEPTANCE RESIDENTIAL Very seldom documented Exception – property managers No inspections Mostly visual walk through Punch list usually carpet, paint and necessary repairs

39 39 RENEWAL, EXPANSION AND TERMINATION Related Provisions. Premises, Parking, Term, Rent, Security Deposit, Use, Hazardous Waste, Tenant Improvement Allowance, Brokers Fees, Notices, Default, Surrender and Hold Over. This provision normally takes an inordinate portion of the time devoted to Lease negotiations. Rarely exercised as set forth in the Leases. Each party is insistent that the rights are clearly defined; The process of exercising these Options must be specifically identified with a timetable that actually works.

40 40 RENEWAL, EXPANSION AND TERMINATION Types Renewal & Expansion ROFR ROFO NEGOTIATE Early Termination

41 41 RENEWAL - TENANT The extension and expansion options can be very critical to the Tenant. When committed? Transferable to an Assignee or a Subtenant? What is the expansion size? All or a part thereof?

42 42 RENEWAL - TENANT How many extension options? Is it a real option or does it only occur if space becomes available? Is it a right of first refusal or a right of first offer? What triggers this right? Types: (i) expand or reduce the Premises, (ii) extend or early terminate of the Lease Term, In Options (i) and (ii) the first issue that must be resolved is the Rent.

43 43 RENEWAL - TENANT In Option (i) & (ii) if during the Lease Term or any renewal or extension period thereof, the Rent should be the lower of the Rent in the Lease; or the Fair Market Rental Rate; a percentage of the Fair Market Rental Rate (e.g. 90%). Transferable to Any Transferee; Subtenant/Assignee; Affiliates/Subsidiaries.

44 44 RENEWAL - TENANT Disputes as to Rent. Negotiation, Mediation, Arbitration Baseball; Averaging; Arbitrator determined. Fair Market Rental Rate - comparable: Premises, Buildings, size, location, floor, Term of Lease, parking, brokers fee and other privileges and all forms of market concessions currently available. Additional Space and Upgrades Sign rights; Parking privileges


46 46 RENEWAL - LANDLORD Landlords are not in the business of selling options in their Buildings; Landlords are often forced to concede this point to a significant Tenant that anticipates growth and longevity in the Building. Landlords generally attempt to restrict the Tenants options assuming that nothing has changed, that is extension of Term OK if Tenant has not sublet or assigned and occupies all of the Premises.

47 47 RENEWAL - LANDLORD Expansion of space only if Tenant has not sublet or assigned. No right to reduce space. At Landlords then applicable Building Rent. No Transfer of rights. No upgrades. Will agree to negotiation, mediation and arbitration. Must take – is this really an option. Early determination – timing Lack of default. Never vs. oops but cured

48 48 RENEWAL - RESIDENTIAL Tenants are seldom granted a right to renew; Most become month to month rentals pursuant to the Terms of a written Lease.

49 49 RENT, ADDITIONAL RENT, SERVICES Related Provisions. Description of Premises, Tenant Improvements, Security Deposit, Operating Expenses, Damage and Destruction, Condemnation, Abatement of Rent, Assignment and Subletting, Late Charge, Interest on Past Due Obligations, Compliance with Law, Repairs and Maintenance, Utilities and Services, Insurance, Transfer of Landlords Interest and Options.

50 50 RENT, ADDITIONAL RENT, SERVICES Types Base Rent – this number is generally the absolute bottom line figure that the Landlord desires to recover on a monthly basis and all other Rents are in addition to this Rent. As a result this is the first real number the Tenant and Landlord discuss and frequently the most negotiated Rent in a Lease. Unfortunately the myriad of Lease forms that call themselves Gross or Net (labels mean little) make it impossible to determine exactly what the Tenant gets for the payment of the Base Rent, without a thorough reading of the Lease. Caution – in a long Term Lease it is not unheard of for the Operating Expenses, Additional Rent to exceed the Base Rent.

51 51 RENT, ADDITIONAL RENT, SERVICES Additional Rent – generally consists of several Rents due under the Lease: Operating Expense – is Rent intended to reimburse the Landlord for the operating costs of the Building; CAM Charges – most lease forms include the common area maintenance charges in the Operating Expenses but sometimes they are separate. Services and Utilities – most Lease forms provide that if the Tenant requires additional services (special events or needs) or additional utilities (after HVAC), the Landlord shall bill for those additional charges as part of the Additional Rent provision.

52 52 RENT, ADDITIONAL RENT, SERVICES Percentage Rent – mostly seen in shopping centers Leases in addition to all other Rent payable under the Lease whereby the Tenant is to pay the Landlord a percentage of gross revenues. Parking fees – sometimes part of the Rent at other times a separate and distinct fee. Visitor parking always an issue to be discussed. Hidden Rent – this is the type of Rent that many new entrepreneurs simply forget to include in their business plans. These would include the obligations to provide repairs and maintenance, insurance, comply with a law, shortfalls in the Tenant Improvement Allowance, if any.

53 53 RENT, ADDITIONAL RENT, SERVICES On smaller leases the Rent is generally very ascertainable. In larger more complex Leases often it is unclear what is included in the Base Rent and what is an Additional Rent item. Each Lease should address: Where paid; When paid: What happens if paid late; Prorations for partial months; When and how Rent is adjusted. The Building services included in the Basic Rent or Operating Expense pass throughs must be specified Janitorial specifications What is extra

54 54 RENT, ADDITIONAL RENT, SERVICES - TENANT Tenants prefer certain methodology Modified Gross Lease or a Modified Net Lease – Large Lease Full Service Gross – Small Lease (since small keep it simple). Flat Rent - Short duration. Basic Rent adjustment: fixed amount; annual CPI adjustment; fair market rental rate; Landlords determination; Rent in the Building; favored nations clause.

55 55 RENT, ADDITIONAL RENT, SERVICES - TENANT Basic Rental in a Lease - Right of offset for any Abatement of Rent. Dispute as Rent - the right to pay any Basic Rent, Additional Rent and Rent set forth in the Lease under protest. Assignment of Lease - the Landlord should not be allowed to assign the Lease until Landlord has paid for or escrowed the dollar value of all of the Rental concessions. Landlords will strongly resist any restriction on Landlords right to assign.

56 56 RENT, ADDITIONAL RENT, SERVICES - TENANT Rental Concessions – free Rent; discounted Rent; moving allowance; relocation allowance; sign allowance; FF&E; advertising and promotion; assumption of existing leases; Tenant Improvement Allowance (design and construction) Free parking and Visitor validations Documentation: specifically set forth; or cross-referenced in this provision.

57 57 RENT, ADDITIONAL RENT, SERVICES - TENANT Operating Expense. The Base Year methodology sets forth a calendar year which serves as the base line for operating expense increases. The Base Years should be grossed up as if the Building was 100% (or another agreed upon percentage) occupied during such Base Year. Only increases over this Base Year will be added to the Rent. If the Base Year is to be the last year of the previous tenants occupancy, then first and foremost, you must ensure that the previous tenant in the Building was fully occupied and had similar use of the Premises and requirements for all the utilities in the Building. If not, then the Base Year (depending on which one is used) may be insufficient to handle Tenants needs.

58 58 RENT, ADDITIONAL RENT, SERVICES - TENANT Ideally, the Base Year operating expense should be the first full year that Tenant is in the Premises fully grossed-up and the pass-throughs do not commence until after a full year of occupancy. This will hopefully establish a realistic basis from which to increase the Rent. Types of Protections – Base Year (implied cap); Expense Stop; Stipulated Base; Hybrids.

59 59 RENT, ADDITIONAL RENT, SERVICES - TENANT Additional Rental. Here the Tenant is paying for any additional charges he may incur for after hours utilities and non standard services. The biggest issue here is the determination when these charges are triggered. utilities are generally triggered on what is commonly referred as after-hours or over standard use (discussed under metering). Landlords and Tenants often conflict on what services are provided as part of the Base Rent, Operating Expenses and what is an Additional Rent item. Who does the catch – all favor?

60 60 RENT, ADDITIONAL RENT, SERVICES - TENANT Proposition 13 & 8 reassessments. Tenant also desires to avoid Operating Expense increase resulting from a change of ownership California Revenue and Taxation Code §§ 60 – 69.5 (especially in an escalating market). In such circumstance the Rent will be increased without any benefit to the Tenant. If the Base Year is low due to a Proposition 8 reduction for that year, the Base Year shall be grossed up retroactively when an if the Proposition 8 reduction expires. In other words the Base Year should be a valid number. Exclusions and Inclusion Lists - All real estate professionals have lists of operating expense exclusions. I have seen some as short as 5 (for small leases) and as numerous as 75 (for larger transactions). It is important that the list of exclusions and inclusions are appropriate for the transaction at hand. For an excellent sample list see

61 61 RENT, ADDITIONAL RENT, SERVICES - TENANT Tenants desire the right to audit the Landlord for compliance with those exclusions and inclusions to the operating expenses. (a) for how long; (b) at what point does the cost of the audit shift; (c) how are audit results handled (solicitation, confidentiality); (d) who can audit; (e) what the Landlord must provide, when, where and how. Shopping center leases caution, some Tenants may be restricted by law from paying a percentage rent although such rents are typical for shopping centers.

62 62 RENT, ADDITIONAL RENT, SERVICES - TENANT Shopping Center and Triple Net form leases – harshest of the Landlord standard forms. Why; Anchors. Metering. Why Tenant is a low utility user and the other tenants in the Building are high utility users. Landlord initiates: Tenant is not using excess utilities, Landlord pays; Tenant is using excess utilities, Tenant will have the option of: (a) paying such excess and costs of the metering, or (b) challenging independently metering same. Tenant initiates Landlord overcharging, Landlord pays; Landlord is not overcharging, Tenant pays; Retroactive?

63 63 RENT, ADDITIONAL RENT, SERVICES - TENANT Assignment and Subletting. On those occasions where the Tenant has a very favorable Rent, the Tenant will want that favorable Rent to be passed on to an Assignee or Subtenant (see below Assignment and Subletting).

64 64 RENT, ADDITIONAL RENT, SERVICES - LANDLORD Basic Rental. Landlords need their Basic Rent in order to pay their mortgages and to make a profit. Rights of offset will be very narrowly defined if allowed at all. The right for the Tenant to Abate Rent should only be in those cases where the Tenant has exhausted a very onerous notice and right to cure process set forth in the Lease. In many circumstances the Landlord may be restricted from allowing Abatement of Rent due to: (a) insurance policies and (b) Lender requirements. Dispute as to Rent. Landlords as a general rule do not overly object to the Tenants paying any Rent under protest, so long as timely paid. Some Landlords will require certain information be provided when paying Rent under protest and that the Tenant must take action within a specified period of time after the protest or waive its rights concerning the particular payment under protest.

65 65 RENT, ADDITIONAL RENT, SERVICES - LANDLORD Rental Concessions. Landlords will often go out of pocket for rental concessions in order to obtain a particular Tenant for their Building. In the event the Tenant terminates the Lease prematurely or assigns or sublets the Landlord will desire to recover the cost of the rental concessions on an amortized basis. On occasion the Landlord will specifically set forth the payment of the unamortized portion of the Tenant concessions as a condition precedent to any assignment or sublease of space in the Premises.

66 66 RENT, ADDITIONAL RENT, SERVICES - LANDLORD Additional Rental. Applies to: After hours utilities, Overstandard utilities and services; Late charges and backcharges. Proposition 13 & 8 reassessments ability to transfer their asset at its highest value. Landlord may accept some prohibition on Proposition 13 pass through for a limited period of time (3-5 years). If Landlord agrees to seek Proposition 8 property tax reductions, it must only be obligated to do so when in Landlords good faith judgment the benefit will exceed the cost of obtaining the reduction.

67 67 RENT, ADDITIONAL RENT, SERVICES - LANDLORD Tenants desire the right to audit the Landlord for compliance with the operating expense provision. There are many issues raised here: (a) for how long; (b) at what point does the cost of the audit shift; (c) how are audit results handled; (d) who can audit. Metering. If Landlord meters he wants the Tenant to pay for so long as Landlord had a reasonable suspicion of over use. If the Tenant is found to be a high utility user the Landlord will either: (a) a fair allocation of the utility costs; (b) direct pass through. Capital Expenditures. Take time to define. Often during the Term of a Lease (the longer the Lease Term the more likely), a Landlord will make improvements to the Building and the Common Areas. Landlords will vigorously oppose any opposition to the passing on of Capital Improvements, however they will generally concede to amortization over the useful life of the Capital Improvement.

68 68 RENT, ADDITIONAL RENT, SERVICES - RESIDENTIAL Unlike in commercial Leases, where market conditions always dictate what the Rent will be residential Landlords have the additional challenge imposed in those jurisdictions where rent- control applies. Notice requirements are dictated by state law for month-to-month and other tenancies that do not have a fixed term. Those procedures for increasing Rent must be strictly complied with otherwise the Landlord could face a viable challenge. In fixed Term Leases Rent increases are generally governed by the provisions of the Lease. Again in those jurisdictions in which Rent control does not apply, the Lease may specify automatic rent increases, at any time specified in the Lease.

69 69 REPAIRS AND MAINTENANCE Related Provisions. Hazardous Materials, Tenant Improvements, Compliance with Laws, Alterations and Additions, Use, Abatement of Rent, Building Services and Utilities, Parking, Damage and Destruction, Consents, and Assignment and Subletting. Three categories Tenant Responsible; Landlord Responsible; Landlord does, Additional Rent.

70 70 REPAIRS AND MAINTENANCE Landlords will perform certain repair type services and then charge the Tenant for the cost of such services plus a fee. Many Leases attempt to segregate the responsibilities so that the Tenant is responsible for the Premises Systems and the interior of the Premises and the Landlord is responsible for the Building Systems and everything external to the Premises. Even then some of the items interior to the Premises are customarily Landlord duties (e.g., light bulbs, fixtures etc.). In such event the only question is whether or not chargeable to Tenant and what charge.

71 71 REPAIRS AND MAINTENANCE - TENANT Repair and maintenance obligations should be limited to the Premises Systems, and the interior walls, ceiling tile and suspension system therefor, and all systems or equipment that serve only the Premises regardless of where they are located (roof, common areas). Contractors. A point of contention between the Landlord and the Tenant is the use of certain contractors and suppliers. any qualified and competent supplier and contractor, union or not, who will not void any warranty applicable to theBase Building Systems, or any part thereof.

72 72 REPAIRS AND MAINTENANCE - TENANT Timing of the Tenant repairs. Tenant, prior to being in default of the Lease, must have written notice thereof and thirty (30) days to complete the repair and/or maintenance. If more than thirty (30) days are required to complete the repair and/or maintenance of such item, then Tenant should be given a reasonable amount of time to complete such repair/maintenance so as long as Tenant commences the repair as soon as reasonably possible and pursues the repair/maintenance in a diligent fashion. Chargeback. In either event, after thirty (30) days notice and the party notified of their repair and/or maintenance responsibility has not complied with the terms of the Lease, the other party, that is, the non-breaching party, shall have the right to self-help to effectuate the repair and charge back the other party. Additional Rent Offset Emergency

73 73 REPAIRS AND MAINTENANCE - LANDLORD Landlords have a vested interest in making sure that a Tenants space is in good order and repair. The interior and exterior of a Building must remain attractive and in good order to attract Tenants that the Landlord desires. Control over day to day appearance janitorial, light bulbs, lights etc. Although the Landlord may perform all of these some may be backcharged as Additional Rent.

74 74 REPAIRS AND MAINTENANCE - RESIDENTIAL Tenants have a statutory right of self help set forth in the California Civil Code §1942 to self help under certain conditions set forth in the statute. Uninhabitable; Cannot Waive this right; exceed more than one month's Rent; and be used more than twice in any consecutive twelve month period.

75 75 REPAIRS AND MAINTENANCE - RESIDENTIAL In many circumstances if the habitability of the Premises are impacted by significant problems the cost of repairs could be in excess of one months Rent (HVAC, roof, sewer, electrical etc.). Although well intended I would personally caution any Tenant to use this only as a last ditch effort. It is not going to thrill the Landlord, what happens if the repairs are defective? What if someone is later injured? What happens if the repairs are negligently performed and they actually harm the Building (make roof leak worse).

76 76 SECURITY DEPOSIT & LEASE GUARANTIES Related Provisions. Rent, Transfer of Landlords Interest, Options, Assignment and Subletting, Notices, and Hold Over. Landlords will always ask for a security deposit and poorly represented Tenants pay as a mandatory and customary fee. Often Tenants prefer to provide alternative security (see below): Credit checks Commercial – small entities Residential – almost all

77 77 SECURITY DEPOSIT & LEASE GUARANTIES The California Civil Code § provides in part. (a) This section applies only to commercial leases and nonresidential tenancies of real property. (b) It shall be unlawful for any person to require, demand, or cause to make payable any payment of money, including, but not limited to, "key money," however denominated, or the lessor's attorney's fees reasonably incurred in preparing the lease or rental agreement, as a condition of initiating, continuing, or renewing a lease or rental agreement, unless the amount of payment is stated in the written lease or rental agreement.

78 78 SECURITY DEPOSIT, LEASE GUARANTIES AND CREDIT CHECKS - TENANT Most of the Tenants that are represented by sophisticated practitioners will ask the question is a security deposit really necessary? Tenants do not desire to pay a security deposit Earn interest and segregated. Use of the security deposit must be very narrowly defined (e.g., delinquent rent, repairs etc.).

79 79 SECURITY DEPOSIT & LEASE GUARANTIES - TENANT Alternative Security: Letter of credit, Corporate guarantee, Personal guarantee, Lease Bond, CD pledge, Stock pledge. Triggering events – careful drafting

80 80 SECURITY DEPOSIT & LEASE GUARANTIES - TENANT Transfer or sale of the Building. Estoppel Certificate - something is happening The whereabouts of the security deposit can become an issue. Nondisturbance, Subordination and Attornment Agreement for the benefit of Tenant and a Recognition Agreement for the benefit of any Subtenant in a form acceptable to the Tenant and its Subtenant, as the case may be.

81 81 SECURITY DEPOSIT & LEASE GUARANTIES - TENANT Additionally, the Landlord cannot transfer the property and security deposit to a new Landlord as a subterfuge to limit Landlords liability under the Lease. Upon termination of the Lease, the security deposit is to be returned to Tenant within thirty (30) days after the expiration of the Lease (Civil Code (c) (3)). In the event there is a dispute on the amount of the security deposit to be returned to Tenant, the Landlord should pay to Tenant the undisputed portion of the security deposit.

82 82 SECURITY DEPOSIT & LEASE GUARANTIES - TENANT Use of any security deposit must be in strict compliance with the California Civil Code § Any dispute will be subject to Alternative Dispute Resolution provision of the Lease. Personal guarantees. Loss of corporate shield To be avoided if possible Burn off

83 83 SECURITY DEPOSIT & LEASE GUARANTIES - LANDLORD The Landlord will always desire a security deposit. No matter how sound the entity. Previously invincible entities. Tenet Dotcoms The more volatile the industry the more likely this problem can arise (e.g. Internet, Healthcare, Defense etc.). New entities personal guarantees Letter of credit Lease bond Use during the Term of a Lease - the Landlord will desire that the Tenant restore the security deposit within a few days of notice.

84 84 SECURITY DEPOSIT & LEASE GUARANTIES - RESIDENTIAL It is not unusual for a residential Landlord to ask for a security deposit. Over legislated? problem tenant, bad credit, bad everything but has convinced you the Landlord that he/she has made a new start in life. However the legislature has protected these Tenants so well that they may not be able to Rent a place from you. The legislature limited the total security demanded or received by a landlord for a residential rental; it may not exceed an amount equal to two months' rent for an unfurnished Premises and an amount equal to three months' rent on a furnished Premise, see the California Civil Code §1950.5(c) Alternative solution. This subdivision does not prohibit an advance payment of not less than six months' rent if the term of the lease is six months or longer.

85 85 SECURITY DEPOSIT & LEASE GUARANTIES - RESIDENTIAL Confusion can occur by and between advance Rent paid and the actual security deposit. Advance rent is not part of the security deposit. Some jurisdictions, require payment of interest regardless of whether the deposit is characterized as a security deposit or as last month's rent. Many residential Lease forms provide how and when the interest will be paid. Often these provisions have a sunset provision that basically provides that Landlord will pay this interest only as long as the Landlord is legally required to do so.

86 86 SECURITY DEPOSIT & LEASE GUARANTIES - RESIDENTIAL Arguably the Landlords use of the security deposit is limited to: (i) delinquent Rent; (ii) damages to the Premises in excess of normal wear and tear; and (iii) any necessary cleaning of the Premises after Tenant vacates. Some Landlord counsel advise their clients that the use of the security deposit is much broader and actually intended to cure any default by Tenant, others take the more conservative route.

87 87 CREDIT CHECKS Credit checks are seldom used by and between major entities. Landlords obtain the necessary prescreening and permission to run a credit check via the use of a written Tenant Application. must be signed by all parties that intend on being a Tenant under the Lease or month to month rental. Some applications provide for multiple applicants and other forms are intended for a married or individual applicant.

88 88 CREDIT CHECKS Several entities or individual applicants should each complete a separate Tenant Application. Non-refundable screening fee. False information entities named as references, including but not limited to former Landlords, employers, etc; contents of the Tenant Application; credit report; release the Landlord from any liability that may be incurred during the application review and investigation process.

89 89 CREDIT CHECKS The typical information set forth in a Tenant Application is substantial similar to any credit application you may encounter with some additional information that is pertinent to a Lease. Primarily the Landlord desires to rent to a party who is stable (job and debts), has ability to pay the rent stated in the Lease. The other problem a residential Landlord must be wary of whom the Tenant is and who has rights. The law tends to punish nice guy Landlords.

90 90 CREDIT CHECKS The Law concerning the use of credit report information is complex and provides many triggers beyond the purview of today's seminar. In general the residential applicant is very protected under various sections of the California Civil Code California Civil Code §§ ) commonly known as the The Consumer Credit Reporting Agencies Act, and §§ ) commonly known as the Investigative Consumer Reporting Agencies Act control the use of consumer credit or investigative reports as a basis for accepting or rejecting Tenants of a dwelling For Tenants seeking to Lease a commercial unit the same protections are not available

91 91 CREDIT CHECKS Landlord must within three (3) days of requesting an investigative consumer report: (a) disclose to the Tenant(s) that an investigative consumer report will be prepared on the applicant's character, general reputation, personal characteristics, and mode of living; and (b) provide the Tenant(s) with the name and address of the agency preparing the report and a summary of the provisions of the California Civil Code § , which governs the Tenant(s) right to inspect the agency's files that contain information about the Tenant(s).

92 92 CREDIT CHECKS If the residential applicant is rejected or the Rent is increased based on an investigative report, the California Civil Code § (a) Whenever insurance for personal, family, or household purposes, employment, or the hiring of a dwelling unit involving a consumer is denied, or the charge for that insurance or the hiring of a dwelling unit is increased, under circumstances in which a report regarding the consumer was obtained from an investigative consumer reporting agency, the user of the investigative consumer report shall so advise the consumer against whom the adverse action has been taken and supply the name and address of the investigative consumer reporting agency making the report.

93 93 CREDIT CHECKS On occasion a Landlord will desire to report a defaulting Tenant to a credit reporting agency. If the Landlord is going to do this he/she must give notice to the Tenant, prior to or within thirty (30) days after the Landlords transmittal of such credit information. This notice must be provided by personal delivery or first class mail to the tenant's last known address California Civil Code § (c).

94 94 ASSIGNMENT AND SUBLETTING Related Provisions. Use, Rent, Term, Security Deposit, Consent, Brokers Fees, Tenant Improvements, Alterations, Repairs and Options. In small leases of relatively short duration Landlord tends to hang very tough on these issues. In a large leases be prepared to spend a lot of time negotiating the rights and obligations during an Assignment, Subletting or Transfer. Unless the Lease specifies to the contrary the Tenant is generally free to transfer (assign or sublet) all or any portion of its interest in the Lease, California Civil Code §§ , (b) and §1044.

95 95 ASSIGNMENT AND SUBLETTING California Civil Code § Allows for an absolute restriction but this is rare. Often you will see language in the Landlords sole and absolute discretion which sounds fairly harsh. The effect of this language is somewhat tempered by the California law which requires the Landlord to act "reasonably" when granting or withholding consent to a proposed transfer. Since the California law favors transferability Courts to often narrowly construe restrictions and any ambiguity in a Lease will favor of transferability California Civil Code § There is no doubt that the sophisticated and Landlord and Tenant fully recognize that in a long Term Lease of significant magnitude an Assignment, Subletting or other Transfer are highly likely to occur during the Term. Therefore these provisions are a battleground for much wordsmithing. Although the Landlords and Tenants interest are not clearly diametrically opposed that certainly can be.

96 96 ASSIGNMENT AND SUBLETTING - TENANT E + E = E 2 Exit strategy = Entrance strategy. Recapture Timing and Profit Sharing. Consent. Assignments by operation of law are not to be prohibited. Landlord must consent or provide Tenant all its objections in reasonably sufficient detail within five (5) business days. Cure improper transfer. Where no consent is to be required, Tenant will provide a sufficient prior written notice of transfer [affiliates and subsidiaries). Transfer Fee. Recognition Agreement. Release – contingent liability. Expansion/Term Options. Vacancy Credit

97 97 ASSIGNMENT AND SUBLETTING - LANDLORD Landlords Right to Collect Rent from Subtenant/Assignee. The right to collect Rent directly from a Subtenant/Assignee if Tenant is in default of the Lease. CAUTION: material vs. technical default. Recognition Agreement. Landlord will only sign a Recognition Agreement with each and every Subtenant of a material nature. Release. Releasing of the Assignor is never an easy issue for the Landlord to accept. The Landlord sees little incentive in releasing the Assignor unless there is some direct benefit to the Landlord, e.g., the Assignee will extend the Lease, and the Assignee is financially sound and desires to commence negotiations for a direct deal but desires the Assignor out of the way. Of primary concern to the Landlord is an economically viable tenant that can meet the obligations under the Lease. Great Assignee/Subtenant and Landlord more flexible.

98 98 ASSIGNMENT AND SUBLETTING - LANDLORD Profit Sharing. Landlords position is simple. We leased this space to you the Tenant, real estate is our business not yours. We are not asking for the original deal to be changed but we are asking that you adhere to the original deal. We are happy to accommodate you but it is our Building and any profits must be ours. We do not desire to share in costs that you have initiated. Expansion/Term Options. On most occasions the Landlord will not desire that the Assignee receive options for either Term or Expansion. If Landlord concedes these points it will not desire to release the Tenant. Once a Tenant desires to leave the Landlords Building the Landlord desires to maintain optimum control over the tenant mix and Use of the space. The more financial security for the Landlord the better. Vacancy Credit. Although hard to argue the logic, most Landlords do not maintain accounting or Building Systems that are capable of accommodating this request. As many Landlord and Property Managers have confided in me that it cost them more to comply with this provision that it would benefit the Tenant.

99 99 ASSIGNMENT AND SUBLETTING - RESIDENTIAL Although the absolute prohibition on transfer to the Lease is permitted pursuant to the California Civil Code § this right may be limited due to local ordinances. Given the law, Landlord may decide to absolutely prohibit any assignment or subleasing or to require the Landlords prior written consent. If the Landlord should determine to absolutely prohibit transfer of the Lease he will forfeit his remedy set forth in the California Civil Code § "The lessor has the remedy described in California Civil Code Section (lessor may continue lease in effect after lessee's breach and abandonment and recover rent as it becomes due, if lessee has right to sublet or assign, subject only to reasonable limitations)." As with commercial Leases I would recommend specifying what circumstances would allow the Landlord to withhold its consent in the Lease.

100 100 COMPLIANCE WITH LAW Related Provisions. Representations and Warranties, Maintenance and Repair, Tenant Improvements, Rules and Regulations, Hazardous Waste, Default, Entry by Landlord, Notices, Rent, Operating Expenses, Alterations, Indemnity, Insurance, and Abatement of Rent. That darn boilerplate! In 1994 Hadian v Schwartz (1994) 8 C4th 836, 35 CR2d 589, and Brown v Green (1994) 8 C4th 812, 35 CR2d 598, by the California Supreme Court. The Court considered whether the Landlord or the Tenant is responsible for certain repairs to the Premises. The issue at hand was whether or not the Compliance with Law required certain repairs or renovations to Premises. The Leases at issue were standard form Leases contained essentially identical clauses concerning responsibility for Repair and Maintenance of the Premises and Compliance with Laws. The oddity is that the Court found that the Landlord was responsible for repair in one case and the Tenant in the other case.Hadian v Schwartz (1994) 8 C4th 836, 35 CR2d 589 Brown v Green (1994) 8 C4th 812, 35 CR2d 598

101 101 COMPLIANCE WITH LAW In the Hadian case, the Court developed a six-factor test as to whom will bear the burden of the repair: (i) The relationship of the cost of the curative action to the rent reserved under the lease; (ii) The term for which the lease was made; (iii) The relationship of the benefit to the tenant to that of the landlord; (iv) Whether the curative action is structural or nonstructural in nature; (v) The degree to which the curative action will interfere with the tenant's enjoyment of the premises; and (vi) The likelihood that the parties, especially the tenant, anticipated the application of the law or order in question. In Hadian the Court held that the Landlord must pay for seismic work required by law because the Lease, taken as a whole, indicated that the parties did not intend the Landlord to forgo the advantages of ownership and the Tenant did not anticipate having to reconstruct the Building during the short Term of its Lease.

102 102 COMPLIANCE WITH LAW In the Brown case, the Court ruled that the Tenant must pay for asbestos abatement work required by law because the Lease indicated that the parties intended to transfer substantially all the responsibilities of ownership (including government-ordered asbestos cleanup) to the Tenant (Brown).

103 103 HAZARDOUS WASTE AND SICK BUILDING SYNDROME Related Provisions. Representations and Warranties, Compliance with Law, Use, Landlords Right of Entry, Alterations, Indemnification, Repairs and Maintenance, Default, Rules and Regulations, Insurance, Indemnity, Abatement of Rent, Landlords Right of Entry and Assignment and Subletting. We have now come to the understanding that all Buildings and homes have Hazardous Materials in them. The only real question is whether or not they are harmful. The extreme fright that use to be associated with Hazardous Materials and Sick Building Syndrome has somewhat subsided. Landlords, Tenants, Contractors and their Attorneys have now had several years to deal with these issues. Although most of us know what Hazardous Waste is many of us are confused on what we call Sick Building Syndrome.

104 104 HAZARDOUS WASTE AND SICK BUILDING SYNDROME Further adding to the confusion is that Hazardous Waste can cause a Sick Building Syndrome but you can have Hazardous Waste without a Sick Building Syndrome. Sick Building Syndrome occurs when the occupants of the Building are experiencing fatigue, allergic reactions, headaches, sinus problems, eye irritation, breathing issues as a result of some material in the Building. This material can be Hazardous Material or it can be a naturally occurring substance that just happens to be in higher quantities in the Building than external to the Building.

105 105 HAZARDOUS WASTE AND SICK BUILDING SYNDROME The biggest challenge in this area is bad science, overreaction to an issue and the ongoing onslaught of scientists claiming a new substance causes problems. I often receive a call from a client (Landlord or Building owner) advising that one of its Tenants or employees has claimed a problem with a Building. On some occasions the employee or Tenant has a Dr. report that implies it must be the Building causing the problem. Naturally we then commence our due diligence and spend thousands of dollars investigating the Building only to find that the environment in the Building is cleaner and safer than the environment the Tenant or employee enjoys outside of the Building or in its home.

106 106 AMERICAN WITH DISABILITIES ACT Disabled individuals now enjoy protection under several laws provisions of the California Civil Code, Government Code, Title 24 of the California Code of Regulations and of the federal statute commonly known under the Americans with Disabilities Act of The intent of these laws is to provide the disabled with full and equal access to: (a) public accommodations; (b) housing; and (c) commercial facilities. "public accommodation" includes several typical office tenants, e.g., offices for doctors, dentists, lawyers, travel agencies, insurance companies, banks etc.. "commercial facility" means spaces intended for nonresidential use with operations that affect commerce, including warehouses, factories, and offices not held open to the general public. "housing accommodation" includes any real property used or intended to be used as a home, residence, or sleeping place. California Civil Code §54.1(b)(2). Exempted are single-family residences in which no more than one room is rented. California Civil Code §54.1(b)(2).

107 107 AMERICAN WITH DISABILITIES ACT What must be done: architectural and structural barriers in existing buildings must be removed if removal is readily achievable or provide a readily achievable alternative means of access; new facilities and alterations to existing facilities must be designed and constructed so that they are accessible to and usable by disabled individuals, unless the entity can demonstrate that it is "structurally impracticable" to do so; and Ensure that new construction and alterations comply with the requirements listed in the ADA Accessibility Guidelines for Buildings and Facilities. A violation of an individual's rights under the ADA also constitutes a violation of California Civil Code §54.2, and nothing in California Civil Code §54.1 may be construed to limit an individual's access in violation of the ADA. Although commercial facilities generally are not subject to the barrier- removal requirement, privately owned buildings financed in whole or in part by public funds must comply with the access requirements for "public accommodations" if they are intended for use by the general public.

108 108 NONDISTURBANCE, SUBORDINATION & ATTORNMENT Related Provisions. Default, Repair and Maintenance, Notices, Estoppel, Assignment and Subletting, Damage and Destruction. Triggering events: Refinance Sale Property Tenant Landlord Influenced by Market Magnitude

109 109 NONDISTURBANCE, SUBORDINATION & ATTORNMENT Attornment – is more or less act of accepting the transferee as the new Landlord (Lender, ground lessor or new Landlord). Subordination – is a priority issue and what it basically accomplishes is that notwithstanding what took place first the ground lessor and/or Lenders interest has a position of priority over the Lease. Nondisturbance – says OK, I am attorning and subordinating but my Lease is still valid and the operative agreement. Do what you may but I stay. Therefore the agreement that addresses these issues is commonly referred to in many ways, Subordination, Nondisturbance and Attornment Agreement; Attornment, Subordination and Nondisturbance Agreement; Nondisturbance Subordination and Attornment Agreement. NDSA vs. SNDA

110 110 NONDISTURBANCE, SUBORDINATION & ATTORNMENT Tenants and the Landlords Lenders have a very legitimate concerns. What Lender can and will do Self - help carte blanche uninhabitable Premises dangerous condition

111 111 NONDISTURBANCE, SUBORDINATION & ATTORNMENT Major Damage occurs to the Real Property. More than likely the Lease will set forth a provision that provides for the re-construction of the Building. However, the Lease is subordinate to the Loan, and this superior position may give it the right to have its language prevail in the event of a dispute. Notwithstanding this perceived right see Schoolcraft v Ross (1978) 81 CA3d 75, 146 CR 57, which restricts the Lender's rights in using these funds: We hold that the right of a beneficiary to apply insurance proceeds to the balance of a note secured by a deed of trust must be performed in good faith and with fair dealing and that to the extent the security is not impaired the beneficiary must permit those proceeds to be used for the cost of rebuilding. Notwithstanding this case law, which can change from time to time I highly recommend that the Landlord, Tenant and Lender specifically address the reconstruction issue directly in the NDSA. Prior to the real estate market downturn of the late 1980s and early 1990s not many paid much attention to this provision of the Lease. Since that time most do pay close attention to this provision.

112 112 DEFAULTS AND REMEDIES Related Provision. This is the one provision of the Lease that generally relates to most of the Lease provisions in one fashion or another. There are generally several events of Default. Payment of Rent Late Non Tenants failure to provide documents as specified in the Lease (Estoppel, NDSA etc.) in a timely manner. Catch – all; failure to cure any breach of the Lease in a timely manner. The standard default provision in Leases favors Landlords and I suppose that should be expected since we are dealing with a breach of Lease situation.

113 113 DEFAULTS AND REMEDIES By the time the parties get to the Default provision it is difficult to give it the attention it deserves. This is clearly a dooms day provision and many Tenants would like to go on to the meatier provisions of the Lease. Once the parties are upset with one another they often focus their immediate attention on the Default provision of the Lease. I find that often very little negotiation takes place over the Default provision for many reasons: Landlord resistance; Tenant resistance; Third party resistance; the counsel employed do not possess the skills necessary to draft and prepare a complex Lease.

114 114 DEFAULTS AND REMEDIES Most remedies set forth in Leases somewhat mirror image the remedies set forth in the California Civil Code §1951. This is probably in good order for small Leases but for Leases of significant magnitude both the Landlord and Tenant should carefully review each of those remedies to ensure they are in fact what they desire.

115 115 DEFAULTS AND REMEDIES - TENANT I have often heard: All I am asking for is what is in the statute, what is your problem? After I smile widely (almost past my ears I respond): Counsel your brilliance is only exceeded by your generosity, when you are right; you are right! Lets put all of the statutes back in this Lease and we can go on to the next issue.

116 116 DEFAULTS AND REMEDIES - TENANT On occasion ambiguities occur in that we have general times for breach of any provision in the Lease and then Tenant and Landlord have a specific time frame to provide the signed Estoppel Certificate. Now here is where the ambiguity occurs. Lets say you send an Estoppel Certificate, you want it back in ten (10) days. It doesnt come back and you call Shafthem Hy your attorney and he sends out a demand letter. The Landlord counsel Buy I. Won replies: Hy, this is Buy I thank you for your notice and I assume that you are informing me I may have performed a non monetary breach; therefore pursuant to the default provision of the Lease and I now have thirty (30) days to provide an executed Estoppel Certificate. I will be in contact soon next month. Buy I. Won. Such inconsistencies create ambiguities. Normally, Landlords would like the notices set forth in their Lease to be in substitution of the statutory provisions. I do not feel strongly either way. Perhaps it is best from a Tenants perspective to keep both notices, but this could also be very confusing.

117 117 DEFAULTS AND REMEDIES - LANDLORD Landlord speech: This only comes into to play when you have breached your deal with us and I want to retain all rights and remedies I may have to minimize my damages. I will negotiate with you fairly and be generous but lets not spend too much time on this provision, you do not plan on defaulting do you? Tenant speech: I totally trust you it is your successor I am worried about; nobody is as good, kind and generous as you!

118 118 DEFAULTS AND REMEDIES Self-Help. Both the Landlord and Tenant desire certain self help rights and each strongly desires that the other not have any. Tenant The right to repair if Landlord doesnt; Cure other Landlord defaults example provision of utilities, janitorial; and Emergencies. Landlord Effectuate Tenant repairs; Remove Tenant licensees, invitees etc.; Turn off utilities; and Emergencies. Caution – both sides should be extremely careful in considering self-help remedies. In other words, there should be no draconian self-help remedies granted to either side unless necessary to enjoy the benefit of the bargain.

119 119 DEFAULTS AND REMEDIES Recognition Agreement. Tenants Perspective. Tenant will desire to have its subtenants and assignees recognized and remain undisturbed if Tenant breaches via the terms of a Recognition Agreement. Landlords Perspective. If Tenant breaches the Lease, Landlord will desire the right to review each Sublease and Assignment and examine it on its own merits.

120 120 DEFAULTS AND REMEDIES Cumulative Default (not remedies). A cumulative default provision provides that if the Tenant fails to timely pay the Rent within five (5) days when due on three (3) occasions within a twelve (12) month period; then the Tenant is in default. The same should apply to the Landlord. In the event the Landlord fails to timely pay some amount when due more than twice in any twelve (12) month period, the Landlord should be in default. You might ask why the frequency is less often for the Landlord. The Landlord very seldom has to pay anything to the Tenant, other than rental concessions and operating expense overcharges.

121 121 DEFAULTS AND REMEDIES Landlord Default. In the event of a Landlord default and Notice is given to the Landlord, Landlord must cure within a reasonable time period not to exceed thirty (30) days. Most provisions provide that the Landlord has (30) days to cure. In most circumstances thirty (30) days are totally unnecessary. If the Landlord cannot cure within thirty (30) days, the same type of provision that is applicable to the Tenant should apply to the Landlord; that is, Landlord must commence to cure the default as soon as possible and cure the default as soon as possible using diligent efforts. If Landlord has to pay the Tenant any money the timeframe should be much shorter, possibly ten (10) days. Landlord Monetary Default. If a Landlord monetarily defaults, some time limit should be placed on the Landlord, similar to the concept of Tenants rent, except this trigger will start after notice from the Tenant.

122 122 DEFAULTS AND REMEDIES Tenant Remedies. Most leases do not provide or set forth the remedies of a Tenant in the event that the Landlord should breach. Although seldom granted (custom of industry) on occasion I have seen Leases with these types of provisions. Why and why not? I believe it is justifiable from a logic and business point of view. Remedies delineated: terminate the Lease and surrender and vacate the Premises by any lawful means; recover interest on all of our damages including cost of leasing other space, real estate commissions and fees, attorneys fees, the cost of new Tenant Improvements, relocation costs, and any other reasonable and foreseeable costs caused by the Landlords breach of the Lease.

123 123 DEFAULTS AND REMEDIES Tenant may choose to maintain the Lease. Tenant may sue for: specific performance Injunction all damages plus interest, cost to mitigate damages Self-help Repairs Insurance Loan

124 124 DEFAULTS AND REMEDIES Often the Landlords counsel will provide the argument that Tenant has all of these rights under the law why insert them into the Lease? When I represent the Tenant I quickly point out that the Landlord has all the rights under the default provision under the law so why insert them into the Lease? Cumulative Remedies. Musketeer Prevision, all for one and one for all. Use all or one as you determine. Often this provision is written where it is mutual so not as much of an issue as it was once upon a time.

125 125 DEFAULTS AND REMEDIES Right to Terminate Lease. Landlords or Tenants ability to terminate the Lease is becoming more complex and simple with the advent of alternative dispute resolution as a viable alternative to litigation. Many Leases now use the American Arbitration Association; National Arbitration Forum, JAMS etc. for Mediation and Arbitration in the event a dispute should arise (See Dispute Resolution, Negotiation, Arbitration, Mediation and Litigation below).

126 126 DEFAULTS AND REMEDIES CC § Lessor's Recovery for Lessee on Termination (a) Except as otherwise provided in Section , if a lessee of real property breaches the lease and abandons the property before the end of the term or if his right to possession is terminated by the lessor because of a breach of the lease, the lease terminates. Upon such termination, the lessor may recover from the lessee: (1) The worth at the time of award of the unpaid rent which had been earned at the time of termination; (2) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the lessee proves could have been reasonably avoided; (3) Subject to subdivision (c), the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the lessee proves could be reasonably avoided; and (4) Any other amount necessary to compensate the lessor for all the detriment proximately caused by the lessee's failure to perform his obligations under the lease or which in the ordinary course of things would be likely to result therefrom.

127 127 DEFAULTS AND REMEDIES (b) The "worth at the time of award" of the amounts referred to in paragraphs (1) and (2) of subdivision (a) is computed by allowing interest at such lawful rate as may be specified in the lease or, if no such rate is specified in the lease, at the legal rate. The worth at the time of award of the amount referred to in paragraph (3) of subdivision (a) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus 1 percent. (c) The lessor may recover damages under paragraph (3) of subdivision (a) only if: (1) The lease provides that the damages he may recover include the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award, or for any shorter period of time specified in the lease, exceeds the amount of such rental loss for the same period that the lessee proves could be reasonably avoided; or

128 128 DEFAULTS AND REMEDIES (2) The lessor relet the property prior to the time of award and proves that in reletting the property he acted reasonably and in a good-faith effort to mitigate the damages, but the recovery of damages under this paragraph is subject to any limitations specified in the lease. (d) Efforts by the lessor to mitigate the damages caused by the lessee's breach of the lease do not waive the lessor's right to recover damages under this section. (e) Nothing in this section affects the right of the lessor under a lease of real property to indemnification for liability arising prior to the termination of the lease for personal injuries or property damage where the lease provides for such indemnification.

129 129 NEGOTIATION, MEDIATION, ARBITRATION Carve-outs Judicial or non-judicial foreclosure or other action or proceeding to enforce a deed of trust or other security instrument, or real property sales contract of any kind whatsoever; unlawful detainer actions; actions to foreclosure on a mechanics lien; any matter within the jurisdiction of the probate court; any matter within the jurisdiction of the bankruptcy court; any matter within the jurisdiction of a small claims action; court actions for: filing of a lis pendens; filing for an order of attachment; filing for a receivership; filing for an injunction; or other provisional remedies available under law or equity.


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