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The Practical, Plain-English Monthly Newsletter for Owners, Managers, Attorneys, and Other Real Estate Professionals

Agree to ‘Landlord Leasing Covenant’ to Keep Center Free of ExclusivesIf you have a desirable center in a prime location, you may have the bar-gaining power to refuse to give any tenant an exclusive. But a strong tenant may not be so willing to lease space at your “no-exclusives” center without an exclusive.

As a compromise, a new concept—called a landlord leasing covenant—has emerged in shopping center leasing, says Atlanta attorney R. Robinson Plowden. On behalf of a national developer, Plowden is currently putting leasing covenants in tenants’ leases at centers in North Carolina and Ala-bama. With this type of covenant, you promise the tenant that you will set some restrictions on your ability to rent space to the tenant’s competitors in the future.

This covenant is not as comprehensive as a tenant exclusive because it applies only to you, and not to any of your other tenants. However, a tenant

(continued on p. �)

Trouble with a Tenant? Consider Mediation Before You ArbitrateAs the owner of a commercial property, the leases you enter into probably require you to settle your differences with tenants out of court, using what are known as “alternative dispute resolution” methods. Traditionally, these contracts have required you to resolve your disputes using a certified arbi-trator. These days, however, commercial parties more often are entering into contracts that require them to first turn to mediation—arbitration’s less formal cousin.

“There has been a recent push in favor of clauses that require parties to mediate a dispute before they hire an arbitrator,” says Navndu Joshi, an attorney with Camarillo, Calif.-based Lingl & Joshi, PLC. Why the shift? Mediation allows the disputing parties to come up with a mutually satisfac-tory solution, because a neutral third party facilitates the dialogue. “There is no winner and loser,” Joshi says.


a u g u s t 2 0 0 7

FEATUREAgree to ‘Landlord Leasing Covenant’ to Keep Center Free of Exclusives . . . . 1We will give you 11 tips to follow in drafting a covenant that is not overly restrictive to you. ➤ Model Lease Clause: What to Say in

Landlord Leasing Covenant (p. 3)

RESOLVING DISPUTESTrouble with a Tenant? Consider Mediation Before You Arbitrate . . . . . 1More owners are favoring mediation over arbitration to resolve disputes and control costs.

War Stories . . . . . . . . . . . . . . . . . . . . . . 7➤ Negotiating CAM-Cost Provisions

CLLI CHECKLISTGet Seven Protections if Tenant Leases Furnished Office Space . . . . . . 7These protections will help you avoid disputes with a tenant over its duties regarding the furnishings, and who owns them.➤ Model Lease Clause: Add

Furnishings Clause to Lease (p. 9)

Recent Court Rulings . . . . . . . . . . . . . 10➤ Owner Must Exercise Right to

Consent to Lease Assignment in Good Faith

➤ Tenant Can’t Use Bankruptcy Law Solely to Avoid Eviction

➤ Owner Can’t Require Assignee to Abide by Lease Terms

Dos & Don’ts . . . . . . . . . . . . . . . . . . . . 12➤ Don’t Order Tenant to Get Terrorism

Coverage When Lease Is Silent

i n t h i s i s s u e

IN FUTURE ISSUES

n Limiting Special Tenants’ Rights

n Filling Retail Space with Nonprofits

F e a t u R e

R e s o l v i n g d i s p u t e s

may view the covenant as the next best thing to getting an exclusive, and agree to lease space at your no-exclusives center.

Unfortunately, if you don’t draft the landlord leasing covenant properly, it can severely limit your ability to rent space to prospective tenants—as an exclusive would. That is why CLLI, with Plowden’s help, will give you a checklist of 11 tips to follow in your covenant, so that it will not come back to bite you. We also give you a Model Lease Clause, on p. 3, that includes those tips and that you can adapt and use. And we will tell you about addi-tional representations that the tenant may want you to make in the clause.

FoLLow 11 Tips whEn DrAFTing CovEnAnT

Follow these 11 tips when drafting your landlord leasing covenant, says Plowden.

q set Conditions Tenant Must MeetNeither a deadbeat tenant nor one that has not opened for business should benefit from a landlord leasing covenant that restricts your ability to rent space to other tenants, says Plowden. He advises you to agree to the terms of the covenant, but only if the tenant meets these two conditions:

n The tenant is not in default of the lease past any applicable grace period; and

n The tenant is open for business, and fully stocked and staffed [Clause, par. a].

q Define Tenant’s primary BusinessThe landlord leasing covenant makes you agree not to rent space to a new tenant that has the same primary use as the tenant getting the covenant. Therefore, you should define “Tenant’s Primary Use.” Plowden recom-mends defining the primary use by the type of store the tenant will oper-ate—for example, a modern toy store.

Avoid using the more restrictive approach often found in exclusives aimed at preventing competition in the specific products that the tenant will sell—for example, toys, children’s clothing, and other items used by chil-dren [Clause, par. a].

q Terminate Covenant near Lease EndIf the tenant’s lease term is about to end and it is going to leave your cen-ter, you should not remain bound by the landlord leasing covenant and barred from leasing to whomever you wish. Make it clear that the covenant will terminate several—for example, six—months before the lease term ends, says Plowden [Clause, par. a].

EDiTor’s noTE: A tenant may balk at this early termination of the cov-enant, especially if its biggest sales season is near the end of its lease term. Depending on the tenant’s bargaining power, you may have to reduce the number of months that the covenant will end before the lease, or eliminate that requirement.

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� C O M M E R C I A L L E A S E L A W I n S I d E R ® August �007

Landlord Leasing Covenant (continued from p. �)

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BoaRd oF advisoRsJacob Bart, Esq.Stroock & Stroock & Lavan LLP New York, NY

Stuart D. Byron, Esq.New York, NY

Harvey M. Haber, QC, LSMGoldman, Sloan, Nash & Haber Toronto, ON Canada

Abraham Lieberman, Esq.Stumphauzer, O’Toole, McLaughlin, McGlamery & Loughman Co., LPA Sheffield Village, OH

Marek W. Ludwig, Esq.General Growth Properties, Inc. Chicago, IL

Susan Fowler McNally, Esq.Gilchrist & Rutter PC Santa Monica, CA

Stephen J. Messinger, Esq.Minden Gross LLP Toronto, ON Canada

Jeffrey A. Moerdler, Esq.Mintz, Levin, Cohn, Ferris Glovsky and Popeo, PC New York, NY

Richard F. MuhlebachKennedy Wilson Properties Bellevue, WA

Neil T. Neumark, Esq.Schwartz Cooper Chartered Chicago, IL

Neil B. Oberfeld, Esq.Isaacson Rosenbaum, P.C. Denver, CO

Carole L. Pechi, Esq.Laude Pechi Law LLC Glen Ellyn, IL

Robert P. Reichman, Esq.Siller Wilk LLP New York, NY

Marc L. Ripp, Esq.Mack-Cali Realty Corp. Edison, NJ

Mark A. Senn, Esq.Senn Visciano Kirschenbaum Merrick PC Denver, CO

Winnifred C. Ward, Esq.Downey Brand LLP Sacramento, CA

q prevent Covenant from Barring Leases with ‘open’ Use ClausesMake it clear that the covenant will not bar you from signing a lease with an “open” use clause—such as a clause that lets a tenant use its space for “any lawful use,” says Plowden [Clause, par. c]. Typically, strong tenants want open use clauses because they may decide in the future that it makes financial sense for them to switch to another use, he explains.

q Agree only to not ‘Knowingly and intentionally’ sign Lease with CompetitorSome tenants will balk at letting you sign another tenant’s lease with an open use clause. They fear that the tenant with the open use clause could switch to a use that directly com-petes with them. As a compromise, agree that you will not “knowingly and intentionally” sign a lease with a new tenant with the same primary use as the tenant getting the covenant [Clause, par. a]. This way, if you didn’t know, at the time you signed the other tenant’s lease, that the new tenant intended to operate a compet-ing store, you will not have violated the covenant, explains Plowden.

If this sounds as if it could lead to a policy of “don’t ask, don’t tell,” that’s a possibility. However, Plowden cautions against being “willfully ignorant” of a new tenant's proposed use, because doing so might create liability under the land-lord leasing covenant. That is, the tenant that is benefiting from the leasing covenant could claim that you “should have known” that the new tenant was planning to use its space in violation of the covenant, he explains.

q set Conditions for Application of CovenantMake sure that the landlord leasing covenant applies only to:

Tenants with big spaces. Don’t let the landlord leasing covenant block you for renting space to small or midsize tenants—even if they have a use that competes with your exist-ing tenants. Make the covenant apply only to tenants of a certain size—for

example, at least 5,000 to 10,000 square feet, says Plowden [Clause, par. a].

Parcels you own. The landlord leasing covenant should not apply to parcels at your center that you don’t own—for instance, parcels owned by big-box retailers. After all, you have no control over how those parcels are used. State in the lease that the cov-enant applies only to parcels that you


August �007 C O M M E R C I A L L E A S E L A W I n S I d E R ® 3

a . Landlord Leasing Covenant . So long as Tenant is:

(i) Not in default of the Lease beyond any applicable cure period and

(ii) Open for business fully staffed, stocked, and fixtured as a [insert type of use, e.g., modern toy or children’s specialty store] (“Tenant’s Primary Use”), Landlord hereby covenants and agrees that from and after the date of full exe-cution of this Lease through the date that is [insert #, e.g., six (6)] months prior to the expiration of the Term of this Lease, it will not knowingly and intentional-ly enter into a lease as to premises containing more than [insert #, e.g., 10,000] square feet within that portion of the Shopping Center in which the Landlord owns a fee simple or leasehold interest to a tenant for use as a [insert use, e.g., modern toy or children’s specialty store].

b . No Exclusive . The covenant in Paragraph a hereof (the “Covenant”) is not an “exclusive” granting Tenant the right to be the only [insert use, e.g., modern toy or specialty children’s store] in the Shopping Center, but rather a personal covenant between Landlord and Tenant. Landlord’s representations and cov-enants contained in the Covenant shall not be binding on or apply to any third party.

c . Restrictions on Covenant . The Covenant shall not:

(i) Restrict any tenant from changing its use to one that competes with the Tenant’s Primary Use, or subletting its premises or assigning its lease to a party that will compete with Tenant’s Primary Use;

(ii) Prohibit Landlord from entering into a lease containing an “open” use clause or other use clause not restricting a tenant’s use (i.e., a provision permit-ting any use or any lawful use or words of similar import); or

(iii) Restrict Landlord from renting any premises to a tenant that [insert use, e.g., sells toys, children’s clothing, or other merchandise intended to be used by or for children], provided that such tenant is not [insert prohibited use, e.g., operating a modern toy or children’s specialty store].

d . Termination of Covenant . If, at any time during the Term of this Lease, Tenant is in default beyond any applicable cure period or Tenant ceases to use the Premises for Tenant’s Primary Use, the Covenant shall be of no further force or effect.

m o d e l l e a s e c l a u s e

what to say in Landlord Leasing Covenant

Atlanta attorney R. Robinson Plowden recommends using the following lease clause when giving a tenant a landlord leasing covenant.

Show this clause to an attorney in your area before putting it into your lease.


own, advises Plowden [Clause, par. a].

q state that Covenant is not ExclusiveExpressly state in the lease that the landlord leasing covenant is not an exclusive, nor will it bind any other tenants, says Plowden [Clause, par. b]. This way, the tenant should not have any expectation that it is get-ting an exclusive, he explains. Plus, stating that the other tenants will not have to comply with the covenant further drives home the point that the covenant is not an exclusive.

q Covenant is personal to TenantMake it clear that the landlord leas-ing covenant is personal to the ten-ant, says Plowden [Clause, par. b]. That means that only the tenant can enforce the covenant against you. The tenant can’t transfer the covenant to anyone else.

q Bar Covenant from restricting Changes to other Tenants’ UsesState in the lease that the landlord leasing covenant will not restrict any other tenant from changing its use to one that competes with the tenant’s primary use. Nor will the covenant bar another tenant from subletting its space or assigning its lease to a competitor of the tenant getting the covenant [Clause, par. c].

q Don’t Let Covenant Bar Leases with new Tenants that sell same itemsState that the landlord leasing cov-enant will not bar you from renting space to a new tenant selling items that the tenant getting the covenant sells, as long as the new tenant will not operate the same type of store as the existing tenant. For example, if the tenant benefiting from the cov-enant is a toy store, state that you can rent space to another tenant that sells toys, as long as it does not operate a toy store, explains Plowden [Clause, par. c].

q End Covenant if Tenant Defaults, stops primary UseIf the tenant becomes a deadbeat in the future or stops using the space for the specified primary use, make sure that it can no longer benefit from the landlord leasing covenant, advises Plowden [Clause, par. d].

possible Tenant ModificationsExpect a savvy tenant to demand certain modifications to the landlord leasing covenant. For example, it may want you to represent the following:

You don’t intend to grant exclusives. The tenant may require you to represent that you have not nor do you intend to agree to give any other new or existing tenants an exclusive. Try to avoid giving this

representation, because you may decide later that giving exclusives may make sense to attract very desir-able tenants.

You will not consent to use changes that could create com-petition. The tenant may demand that you represent that you will not consent to letting an existing or a new tenant change its use, or assign or sublet, so that it (or its assignee or subtenant) can operate a com-peting store. Note that giving in to this demand could hurt you if a use change, sublet, or an assignment can occur automatically under a lease.

For example, if an existing or a new tenant’s lease lets it assign its lease without your consent to an affil-iate that operates a toy store—and that assignment actually occurs—you could end up violating the covenant, and that would be unfair.

You agree to “springing” exclu-sives. Expect a tenant to demand that you put a “springing” exclusive clause in the lease. This clause says that if you decide to grant exclusives to future tenants, then this tenant will also get its exclusive. In essence, the tenant’s exclusive “springs” into effect when the first exclusive is granted to a future tenant. Own-ers typically have to agree to give a springing exclusive to a strong ten-ant, notes Plowden.

CLLI SourceR . Robinson Plowden, Esq .: Partner, Suther-land Asbill & Brennan LLP, Atlanta, GA



Landlord Leasing Covenant (continued from p. �)

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That can be a real benefit to par-ties—such as owners and tenants—whose relationship may continue after their differences are resolved. Arbitration doesn't give the parties to a contractual dispute that freedom.

“In arbitration, both parties place the facts of their position before the arbitrator, who necessarily chooses one position over the other,” says Joshi. “It does not provide for middle ground or alternative solutions,” he adds.

how Mediation worksJoshi uses a hypothetical example to illustrate the difference between the alternative dispute resolution methods. If a tenant has complaints about the building’s housekeeping services and the parties resolve the dispute using a mediator, creative solutions are avail-able to them. For example, the tenant may agree to contract for housekeep-ing on its own, and the owner may agree to reduce the rent accordingly.

“Such a solution would not be viable in an arbitration setting,” Joshi says. “The arbitrator would decide whether or not the building’s house-keeping services are acceptable and render a decision that would be unfa-vorable to one of the sides.”

John Horn, director of FORUM Dispute Management, a provider of alternative dispute resolution ser-vices, experienced the benefits of the flexibility of mediation firsthand when he moved out of a building before his lease had run out.

“We negotiated, and I found out that what the owner really wanted was just for me to get out as soon as possible,” says Horn. He further reports that he and the owner reached an agreement that, among other things, didn’t require him to pay the full amount of rent for the remainder

of the lease. The agreement also pro-vided that if Horn found another ten-ant, he could recover some of the rent he would be obligated to pay.

In addition to allowing owners and tenants to reach more creative resolutions, mediation is often less expensive than arbitration. According to Horn, mediation generally doesn’t take more than a day, and requires no evidence and objections formalities. “With arbitration, the potential range of costs is greater,” he says. Media-tion can help an owner and a tenant cut down on costs when it’s used as a precursor to arbitration, too.

“If an owner and a tenant are unable to resolve all issues, media-tion may help them at least to narrow the list of disputes they need an arbi-trator or judge to decide,” says Joshi.

when Not to Use MediationMediation isn’t always the optimal way for owners and tenants to resolve their disputes. When an owner and a tenant are certain they disagree on a single, clear-cut issue—such as whether the owner has grounds to force the tenant to vacate the prem-ises—arbitration may be the best place to start, Horn says. In such a situation, mediation—most useful for helping parties identify the crux of their feud—really isn’t necessary.

Also, if the parties involved in mediation don’t reach a mutually acceptable resolution, the conflict will remain unsettled. Arbitrators, on the other hand, necessarily render a decision. Whether that decision is appealable depends on the rules of the organization that conducts the arbitration.

Still, in Horn’s opinion, when it comes to disputes between own-ers and tenants, mediation has very few downsides. It doesn’t limit the parties’ post-mediation procedural

options in any way; if an owner and a tenant don’t resolve their differences after having used a mediator, they are free to arbitrate or take their disagree-ment to court.

Add Mediation Clause to LeaseIf you want to mediate your disputes with tenants before you resort to more formal—and often more expen-sive—dispute resolution methods, Joshi suggests including the follow-ing in your leases:

MODEL LEASE LANGUAGEMediation . Except for the nonpay-ment of rent as specified in this Agreement, Landlord and Tenant agree to mediate any dispute or claim arising between them under this Agreement prior to arbitra-tion or any court action. Mediation fees, if any, shall be split equally between the parties.

Joshi explains why he excludes nonpayment of rent disputes from the Model Lease Language: “If a tenant stops paying rent, almost all jurisdic-tions around the country have spe-cific means of ejecting or removing the tenant,” Joshi explains, referring to the first clause of the Model Lease Language. “The danger in mandating mediation is that it could potentially delay the right to eject the nonpaying tenant.”

Joshi further suggests that own-ers have their attorney tailor media-tion clauses to meet the owner’s needs. “For example, an owner could add the method of notice to be given regarding the mediation,” he says. “In addition, a provision could be added stating that if a party should commence arbitration or court action without first partici-pating in mediation, the party filing the suit would not be entitled to attorney fees.”

CLLI SourceNavndu Joshi, Esq .: Lingl & Joshi, PLC; Camarillo, CA

Mediation (continued from p. �)



By Neil T. Neumark

One of my clients, the owner of 360,000 square feet of retail space in a Minnesota shopping center, requested a typical common area maintenance (CAM) clause: one that requires the tenant to reimburse the owner for the tenant’s pro rata share of the expenses the owner incurs to maintain and operate the shopping center’s common areas.

However, the tenant, a big box national retailer, wanted a fixed CAM contribution equal to its pro rata share of the then-current actual CAM costs for the shopping center. The tenant would then agree to a 5 percent compounded annual CAM increase over the life of the lease. In other words, each year the fixed CAM contribution would increase by

an amount equal to 5 percent of the prior year’s fixed CAM contribution.

The owner hesitated, concerned that because the lease allowed for a potential 30-year term, the actual CAM expenses eventually could significantly exceed 5 percent com-pounded annual increases.

I recommended that the parties resolve the conflict by agreeing that the fixed CAM contribution would apply to the initial 10-year term only. If the tenant exercised any of its renewal options, the fixed CAM contribution would be “readjusted and rebalanced” to an amount equal to the actual CAM expenses for the center for the year immediately preceding the commencement of the renewal term. For the remaining four years of the applicable renewal term, the rebalanced fixed CAM contribu-tion would increase at a 5 percent compounded annual rate.

The parties thought the CAM rebalancing idea was a good compro-mise, but the owner was concerned about the possibility of the parties’ having to use a year with abnormally

low CAM expenses as the basis for future CAM payments.

I then recommended that the rebalanced fixed CAM contribution be an amount equal to the actual CAM expenses for the center for the year immediately preceding the com-mencement of the applicable renewal term. I recommended that the par-ties further agree that the rebalanced fixed CAM contribution could not be less than the average of the actual CAM expenses for the center for the three years immediately preceding the commencement of that renewal term. Over the remaining four years of the applicable renewal term, the rebalanced fixed CAM contribution would again be increased at a 5 per-cent compounded annual rate.

By averaging the actual CAM expenses over a three-year period, the owner would be assured of a “floor” on the rebalanced fixed CAM contribution.

Neil T. Neumark is a partner with Schwartz Cooper Chartered, a Chi-cago law firm, and member of the CLLI Board of Advisors. He can be reached at (312) 845-5402.

w a R s t o R i e s

negotiating CAM-Cost provisions

Lease Type: Retail

Property: 3�0,000 SF neighborhood shopping center in Minnesota

Premises to Be Leased: Big box (55,000 SF)

Tenant: National retailer

Lease Term: 10 years, with four five-year renewal options

If you are like many owners, you often rent furnished office space to tenants. But even though the tenant might pay little or nothing for the furnishings, the furnishings prob-ably have significant value to both you and the tenant, notes New Jersey attorney Marc L. Ripp. The furnish-

ings may also be the main reason why the tenant wants to lease that space, he adds.

However, if your lease is like many we have seen, it probably doesn’t spell out the tenant’s duties with respect to the furnishings. As a result, you could get burned at the

end of the lease by being left with damaged or an incomplete set of fur-nishings. Or the tenant might try to claim ownership of the furnishings.

With Ripp’s help, we will give you seven protections to cover in a furnishings clause to avoid disputes

C L L I c h e c k l i s t

get seven protections if Tenant Leases Furnished office space


A CLLI Advisor shares a recent unusual or challenging lease problem and how he solved it.

with a tenant over its duties regarding the furnishings, as well as who owns the furnishings. Ripp just finished negotiating a furnishings clause that included these seven protections for a big office lease in New Jersey. There is a Model Lease Clause on p. 9 that includes these protections, which you can adapt and add to your lease too.

sEvEn proTECTionsMake sure your furnishings clause, like our Model Lease Clause, includes these seven protections:

q Tenant Must Make Key AcknowledgmentsRequire the tenant to make certain key acknowledgements concern-ing the furnishings in the lease, says Ripp. These acknowledgments address, among other things, the tenant’s maintenance, repair, and replacement duties; the furnish-ings’ condition; and that you did not manufacture the furnishings, says Ripp. For example, have the tenant acknowledge that:

n It will maintain and repair the furnishings in a first-class manner;

n It will replace the furnishings, if necessary;

n It has thoroughly inspected the furnishings and is satisfied with their physical condition;

n The furnishings are clean, func-tional, and in good order;

n It has not relied on any state-ments, promises, or warranties by you regarding the furnishings; and

n You are not a manufacturer or vendor of all or any of the furnish-ings [Clause, par. a].

Why are these acknowledgments important? Without them, the tenant could argue that you must maintain, repair, and replace the furnishings.

Or the tenant might claim that it was not able to inspect the furnishings before the lease started, and that the furnishings are sub-standard and need to be replaced.

q You Are not required to Make representationsPut several key protections in the furnishings clause, says Ripp. For instance, state in the lease that you are not making any express or implied promises or representations regarding the design, condition, qual-ity, or suitability of the furnishings, or that the furnishings will perform any function, advises Ripp. Other-wise, the tenant could claim that you made promises that you didn’t keep regarding the furnishings.

Also, state that the tenant bears the risk of loss for the furnishings, and that the tenant will not get the benefit of any warranties on the fur-nishings, he adds [Clause, par. b]. Only you should get the full benefit of any warranties on the furnishings.

q You have no repair, Maintenance DutiesMake it clear in the lease that you have no responsibility to maintain or repair the furnishings, says Ripp. Rather, the tenant must maintain and repair the fur-nishings—and pay all maintenance and repairs costs—to keep the furnishings clean, functioning, and in good order at all times, he adds [Clause, par. c].

q Tenant Must Carry insurance Covering FurnishingsRequire the tenant to carry insurance that will provide coverage for the furnishings, advises Ripp. That way, you will have protection if any item of the furnishings is stolen, lost, or damaged, without having to pay for the insurance.

Also, make sure the tenant is responsible for replacing any stolen or damaged furnishings, Ripp adds. The replacement items should be as close to the original furnishings as possible. Therefore, specify that the new items of furnishings must be identical in dimension, weight, color, style, and quality to what was stolen or damaged, advises Ripp.

Require the tenant to give you a complete, accurate, and detailed, written description of all replaced items, together with a color photo-graph, so you know what the replace-ment is and what it looks like, he says [Clause, par. d].

q You will remain Furnishings’ ownerHave the tenant fill out and sign, at your demand, any paperwork needed to show that you are the true owner of the furnishings, says Ripp. For instance, you may require the tenant to sign and give you security agree-ments, and/or financing statements indicating that you are the furnish-ings’ owner. This way, the tenant can’t later claim that it owns the fur-nishings.

Also, state that the tenant can-not remove the furnishings from the tenant’s space, nor can the tenant do anything that will result in a lien being placed on the furnishings, says Ripp [Clause, par. e]. For example, if the tenant takes out a loan, it can’t use the furnishings as part of its collateral, he explains. Otherwise, if the ten-ant defaults under its loan, the lender could confiscate your furnishings.

q Furnishings Must remain in space at Lease EndMake clear that the furnishings must still be located in the space when the lease ends. Otherwise, the tenant



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Furnished Office Space (continued from p. �)

FUrnishED prEMisEsa . Acknowledgment by Tenant . Tenant acknowledges that the Premises are being leased to Tenant in a furnished con-dition. Tenant, at its sole expense, shall maintain and repair in a first-class manner and, if necessary but only pursuant to Paragraph d hereof, replace the furnishings listed in Exhibit [insert #], attached hereto and made a part hereof (collectively, “Furnishings”). Tenant hereby confirms that:

(i) Tenant has thoroughly inspected the Furnishings;

(ii) Tenant is satisfied with the physical condition of the Furnishings based on Tenant’s own judgment and expressly disclaims reliance upon any statements, representations, or warranties made by Landlord;

(iii) The Furnishings are clean, functioning, and in good order;

(iv) The Furnishings are Landlord’s personal property; and

(v) Landlord is not a manufacturer or vendor of all or any of the Furnishings.

b . No Warranty by Landlord . Landlord neither makes nor shall be deemed to have made:

(i) Any warranty or representation, either express or implied, as to the design or condition of, or as to the quality of the material or workmanship in, or as to the suitability for any purpose of, all or any of the Furnishings, or as to the ability of all or any of the Furnishings to perform any function; or

(ii) Any warranty of merchantability of all or any of the Furnishings for any particular purpose or as to any other matter relating to all or any of the Furnishings, it being agreed that all risk of loss, as between Landlord and Tenant, is to be borne by Tenant, and the benefits of any and all implied warranties and representations of Landlord are hereby waived by Tenant.

c . Maintenance, Repair of Furnishings . Landlord shall at all times during the Term have no responsibility, and Tenant assumes all responsibility, for the physical condition of the Furnishings. Tenant, at its sole expense, shall maintain and repair in a first-class manner the Furnishings so as to keep them clean, functioning, and in good order at all times.

d . Insurance . Tenant, at its sole expense, shall at all times keep the Furnishings insured. If any or all of the Furnishings are stolen or damaged by fire or other casualty, then Tenant, at its sole expense, shall immediately replace the stolen or damaged item(s) of the Furnishings with a new item(s) identical in dimension, weight, color, style, and quality to the stolen or damaged item(s). Any of the Furnishings that are replaced in accordance with this Paragraph d shall constitute part of the “Furnishings” for purpose of this Clause. Immediately after Tenant replaces one or more items of the Furnishings in accordance with this Paragraph d, Tenant shall give Landlord a complete, accurate, and detailed written description of the replacement, together with a color photograph thereof. Tenant acknowledges that, notwithstanding its obligation to insure the Furnishings, the Furnishings are the personal property of Landlord, not Tenant.

e . Ownership of Furnishings . To evidence Landlord’s continuing ownership of and title to the Furnishings, Tenant shall, upon Landlord’s demand, execute and deliver to Landlord any and all confirmatory documents, security agreements, and/or financing statements, in form and content satisfactory and acceptable to Landlord. At no time shall Tenant remove from the Premises all or any of the Furnishings. Tenant shall do nothing that will result in a lien, claim, or encumbrance being placed against all or any of the Furnishings.

f . End of Lease . At the expiration or earlier termination of this Lease, whichever comes sooner, all of the Furnishings shall be in the Premises and all the Furnishings shall be in the physical condition required under this Clause.

g . Transfer of Ownership .

(i) Notwithstanding anything contained to the contrary in this Clause, Landlord, upon written notice to Tenant, may relinquish Landlord’s ownership interest in, and transfer title to Tenant of, all or any of the Furnishings, in which event:

(A) Such item(s) of relinquished Furnishings that Landlord has identified to Tenant in writing shall be removed by Tenant from the Premises at Tenant’s sole expense prior to the expiration or earlier termination of the Lease, whichever occurs sooner; and

(B) Tenant, at its sole expense, shall repair any damage to the Premises and Building due to such removal; and

(ii) To effectuate such transfer of title to Tenant from Landlord, Tenant hereby appoints Landlord as Tenant’s duly autho-rized agent and attorney-in-fact, and delegates to Landlord the unqualified power of attorney to execute any instruments, such as, by way of example, a bill of sale, in the name of Tenant and undertake such measures on behalf of Tenant as Land-lord may determine. The foregoing appointment shall be a special power of attorney coupled with an interest and shall be irrevocable. If Landlord transfers title to all or any of the Furnishings to Tenant, such relinquished item(s) of the Furnishings shall be conveyed in their then “as is” physical condition and state of repair, without warranty from, representation by, or recourse against Landlord.

m o d e l l e a s e c l a u s e

Add Furnishings Clause to LeaseThe following lease clause was provided by New Jersey attorney Marc L. Ripp. Put it in your lease if you are renting furnished space to a tenant.

Show this clause to an attorney in your area before putting it into your lease.




10 C O M M E R C I A L L E A S E L A W I n S I d E R ® August �007

might try to remove them without your consent. Also, the furnishings must be clean, functional, and in good order, says Ripp [Clause, par. f].

q You Can Transfer ownership of Furnishings to TenantGet the right to transfer ownership of the furnishings to the tenant, says Ripp. After all, if the tenant has used the furnishings for a long time, they may have become worse for wear. Thus, you may not want them back

when the lease ends, he explains. Rather, once the furnishings’ owner-ship transfers to the tenant, it will have the responsibility to remove the furnishings from the space at lease end at its sole cost. Also, the tenant must fix, at its sole cost, any damage to the space and building as a result of the removal.

To ensure that the transfer of ownership is performed smoothly, have the tenant name you as its attor-ney-in-fact under a power-of-attor-ney, advises Ripp. That way, you will have the authority to sign title docu-ments—such as a bill of sale—on

the tenant’s behalf, to effectuate the transfer, he explains. Otherwise, the tenant may be uncooperative or drag its feet in signing such paperwork.

Finally, make sure the tenant must take the furnishings in their “as is” condition and state of repair. Other-wise, the tenant might try to come after you legally or financially if there is something wrong with the furnish-ings, says Ripp [Clause, par. g].

CLLI SourceMarc Leonard Ripp, Esq .: Senior Associate General Counsel, Mack-Cali Realty Corpora-tion, Edison, NJ

owner Must Exercise right to Consent to Lease Assignment in good FaithFacts: A lease agreement said that the tenant couldn’t assign or transfer the lease without “the prior written con-sent of [the owner].” It gave the owner the right to termi-nate the lease if the tenant assigned the lease without the owner’s consent. The tenant assigned the lease without getting this consent. The owner sued to regain posses-sion of the leased property, and the trial court granted the request. The tenant and assignee appealed.

Decision: A Florida appeals court reversed the trial court’s ruling and sent the case back to the trial court for further proceedings.

Reasoning: The trial court had ruled for the owner because it determined that the lease gave the owner “the unfettered right to deny its consent to the assignment,” but the appeals court disagreed. Although the lease didn’t say that there were conditions on the owner’s ability to give consent, the appeals court said that the lease con-tained an “implied covenant of good faith.”

According to the court, this covenant comes into play when a lease’s terms don’t resolve a dispute, or when a party can make a discretionary decision without being bound by specific standards. The covenant is designed to protect each party’s reasonable expectations. The court explained that it would be unreasonable for the owner to arbitrarily withhold its consent to a lease assignment, unless the lease clearly gave the owner this right.

n Speedway SuperAmerica, LLC v. Tropic Enters., April �007.

LESSON LEARNED: When drafting your assignment clause, remember to include conditions for when you may refuse to give consent to an assignment. Many leases say that the owner can not unreasonably refuse to give consent to an assignment, but even this limitation may not be specific enough. Listing specific instances when you can refuse to give consent should help to limit disputes. And if you want to be able to refuse consent for any reason, make sure your lease clearly says that you have this right.

Tenant Can’t Use Bankruptcy Law solely to Avoid EvictionFacts: A tenant had been leasing property along Balti-more’s waterfront for over 40 years. Negotiations for a lease renewal with the current owner broke down, and the tenant continued operating out of its space as a holdover tenant on a monthly basis. After further negotiations were unsuccessful, the owner sent the tenant a notice that termi-nated the monthly tenancy effective May 1. On April 29, the tenant filed a Chapter 11 bankruptcy petition in federal bankruptcy court.

The tenant invoked provisions of federal law that would prevent it from being evicted while the bankruptcy hearing was pending. The federal bankruptcy court and a federal district court in Maryland dismissed the tenant’s petition, and the tenant appealed.

Decision: The 4th Circuit Court of Appeals agreed with the lower courts and refused to stop the tenant’s eviction.

R e c e n t c o u R t R u l i n g s

(continued on p. ��)

Furnished Office Space (continued from p. �)

Go to the Real Estate section of our Web site, www.vendomegrp.com, for more information

about our publications.

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1� C O M M E R C I A L L E A S E L A W I n S I d E R ® August �007

Reasoning: The court found that the tenant had filed for Chapter 11 protection in bad faith. Chapter 11 petitions are granted only when a party acts in good faith, the court said. This is because bankruptcy courts can prevent ten-ants from being evicted while a hearing is pending. The court noted that tenants act in good faith only when there is a realistic possibility of effective reorganization and the tenant honestly intends to reorganize.

In this case, the court determined that the tenant’s sole purpose for filing the petition was to avoid eviction. Since the tenant acted in bad faith, it was not entitled to protection from eviction once the lease expired. The court concluded that the only real issue in this case was a contractual dispute between an owner and a tenant, which should not have been framed in bankruptcy terms.

n In re Premiere Automotive Services, Inc., June �007.

LESSON LEARNED: Most lease disputes will be gov-erned by a state’s contract law. As this case demon-strates, parties can get into trouble when they try to frame certain issues improperly. If you have a dispute with a tenant, talk with your attorney about how to settle that dispute before it becomes trouble. That way, you won’t have to come up with creative legal strategies to try to avoid potential problems. And if a tenant tries to use a bankruptcy proceeding to avoid eviction, or to keep from paying you money it owes, make sure the ten-ant actually wants to reorganize.

owner Can’t require Assignee to Abide by Lease TermsFacts: The owner claimed that the assignee was required to pay its annual rent in quarterly installments of gold coins of a certain weight, as required under the lease. The assignee said it would continue to pay the rent in U.S. currency. The owner sued the assignee for breaching the lease.

Decision: An Ohio federal district court ruled for the assignee without going to trial.

Reasoning: The court ruled that the lease released the assignee from “personal liability” upon assignment. For the assignee to be bound by the lease terms, the owner would have had to agree in writing to the lease assign-ment. The court said that there was no evidence that the owner had agreed in writing to the assignment. The owner’s explicit consent to the assignment would have brought the owner and assignee together under the terms of a contract (the lease), thereby allowing the owner to enforce these terms. Since this never happened, the lease terms apply only to the parties who entered into it origi-nally: the owner and the original tenant.

n 216 Jamaica Ave. LLC v. S & R Playhouse Realty Co., July �007.

LESSON LEARNED: An owner that does not expressly consent to the assignment cannot later require the assignee to abide by the terms of the lease agreement.

7Don’t Order Tenant to Get Terrorism Coverage When Lease Is Silent

If your lease does not specifically require a tenant to get terrorism coverage, don’t demand that the tenant get that coverage anyway, says litigation attorney Warren A. Estis. If you do, you could face a costly lawsuit by the tenant, and a court is likely to rule that you had no right to demand that coverage from the tenant.

A New York owner just learned this lesson when Estis’s tenant-client signed a lease that required the tenant to “main-tain insurance on the building against loss or damage by fire and against loss or damage by other risks included under the standard Extended Coverage Endorsement . . . .”

The tenant’s original all-risk policy included terrorism coverage. However, because the policy came up for renew-al after the terrorist attacks of Sept. 11, 2001, the tenant’s insurer specifically excluded terrorism coverage from the renewal policy. The owner sent the tenant a default notice because the tenant had gotten insurance that did not include

terrorism coverage. The tenant asked a court to determine whether the tenant must get terrorism coverage.

A New York appeals court ruled that the tenant was not responsible for getting terrorism coverage. The court noted that when the lease took effect in 1989, the Extended Coverage Endorsement enumerated those perils that were included and excluded from coverage—but terrorism was not among them. The court said that an insurance policy should not be extended beyond its plain meaning to include perils not specifically covered by its provisions.

Also, terrorism coverage was not mentioned anywhere in the lease. The court noted that it would be unfair to require the tenant “to assume an obligation that was not reasonably within [its] contemplation” when it signed the lease [Tag 380, LLC v. ComMet 380, Inc., 2007].

As a precaution, check with an attorney in your area to see whether your local laws differ on this issue, notes Estis.

Insider SourceWarren A . Estis, Esq .: Partner, Rosenberg & Estis, P.C., New York, NY

d o s & d o n ’ t s

Recent Court Rulings (continued from p. �0)

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