Over the life of a commercial real estate lease world events will happen. In the last fifteen years, various events- technological advances, financial spikes and dips, and acts of terrorism have directly impacted lease negotiations and terms. Jackson Cross Partners reviews, abstracts and analyzes thousands of leases a year- here are a few clauses that are relatively new and why it’s costly to ignore them.
An outcome of the September 11th, 2001 attacks was the Patriot Act and an Executive Order from President Bush, both signed in 2001, intending to stop terrorist activities in the US by restricting terrorists’ access to financial assets. The Executive Order prohibits US companies from doing business with any person that: 1) has committed a terrorist act; 2) poses a risk for committing/abetting a terrorist attack; or 3) is listed as a “Specially Designated National and Blocked” person on the list maintained by the Office of Foreign Assets Control (OFAC). Prior to signing a commercial lease, each party is required to disclose the names of the principals of the other party and confirm that their name is not on the list. Presuming the other party on your lease is not a prohibited person can become a costly mistake- fines in 2014 for violations amounted to $1,209,298,807! OFAC has an accessible list of “Prohibited People”, but keep in mind that some foreign names do not translate perfectly into English characters. There are third-party providers that can do the initial screening and provide resources to confirm the identities of all the parties to a lease (especially in international leases where there may be 10 individuals named as “Landlord”). Additionally, there are lease provisions that can be added to the contract language that can address the anti-money laundering requirements of the Patriot Act and should be considered when drafting a lease.
Right to Relocate Clause
The economy is good, businesses are expanding and your landlord has a tenant who wants your office space (with the “best view”) and the one next door. Buried in your lease is a clause that allows the landlord to “relocate” your business elsewhere. With advances in technology, gone are the days when “moving” means more than just changing the suite number on the office stationary. In most commercial properties it’s likely the server room has been specially fitted for the company’s use and moving out that equipment is costly and disruptive to business. There’s also the network wiring that’s been configured to your office space; pulling those cables and moving rack space and servers is expensive and needs to be addressed before you sign your lease. Limiting the number of times (if any) that the Landlord can relocate your business and addressing the expense that Landlord will cover in the event that you are moved can be critical to the bottom line- especially in mitigating the “soft costs” of workplace disruption, employee distraction and lost business days.
Limitations to the Tax Clause
Having the tenant pay for the real estate taxes is standard in most leases and frequently factored into the Operating Expense calculations, however what happens when the tax amount changes as a result of the landlord’s actions? For example, the landlord refinances or flips the property, which leads to a reassessment by the local tax collector which increases your occupancy costs and effectively “raises the rent” for your space. In the course of a lease, it’s likely to happen, but in recent years, tenants were seeing more than the average amount of increases prompted by the landlord’s actions. As a result, many tenants now demand a limitation provision that states the landlord will pay the difference in the base year tax amount if the landlord’s actions such as, sale of the property or refinancing the mortgage, triggers the reassessment.
Similarly, what is your recourse if the assessment from a tax collector is questionable? Disputing a tax assessment isn’t just a landlord’s exclusive right anymore. Including a “Tenant’s Right to Appeal Taxes” provision bypasses a landlord’s choice to decide whether to proceed with an appeal. It’s a strategic move that has been successfully used by companies who enter into numerous long term leases and have the ability to track their tax assessments and are willing to file an appeal with the local authority. Having the right to launch an appeal without involving a reluctant landlord opens up the possibility of tax relief and potential lowering of the overall costs of the lease.
As part of our Advisory practice, Jackson Cross Partners has seen many companies include these types of lease provisions in direct response to changes in the market as well as changing business needs. Entering into any lease involves a bit of foresight to ensure the clauses agreed upon now are still valuable and effectual during the course of the term and these three provisions are an example of some recent changes to standard lease contracts. Tenant brokers and real estate attorneys’ understanding of the nuisances of a lease contract can ensure that clauses will accurately protect all of the parties involved. You can’t control world events and the impact they may have on your business but understanding the changes brought about by such events and mitigating the consequences of these occurrences is the first step in controlling costs, reducing risks and limiting business impact.