RE31RC09: Commercial Leasing and Leasing Basics

Approved 2009

Learning Objectives:

This course is specifically designed to expose the residential practitioner to the basics of commercial leases, as well as to provide the seasoned commercial practitioner with a refresher of some fundamentals. The goal is to have the practitioner gain an objective view of the concerns and needs of both landlords and tenants so that each side's position is better understood. An effective lease should accommodate both parties' needs whenever possible and practical.

License Requirements:

A. License Required (M.G.L. c. 112 § 87 PP) see licensee definitions

B. No special license required for Commercial Real Estate Transactions Proof of Lease

C. Definition - space for consideration

D. Creates a leasehold estate

Purpose of Lease and Leasing Issues:

Creates a leasehold and a contract.

A. Letter of Intent: Precursor to a lease is a letter of intent. Use disclaimer- Cover the following:

1. Premise

2. Term

3. Commencement Date

4. Rent - For entire lease period

5. Rent adjustments or abatements

6. Leasehold improvements (by landlord) or trade fixtures (by tenant)

7. Options to renew

8. Right to expand or right of first refusal to lease or purchase, or right of first offer

9. CAM (Common Area Maintenance)

10. Real estate escalation

11. HVAC

12. Electricity

13. Parking

14. Storage

15. Security Deposit

16. Brokers

17. Tenant obligations

18. Non-binding clause - bound pursuant to a lease. See Lease Drafting in Massachusetts - two volumes by Edward M. Bloom, et. al.

B. Is an agreement to lease sufficiently certain? A written agreement to lease is binding only to the extent that it expressly delegates the terms of the lease to be executed in the future. Some factors to consider if agreement is sufficient:

1. Adequacy of statement. Sands v. Arruda 359 Mass 591 (1971) 549-95

2. Description of property to be leased. Saxton Theatre Corp. v Sage, 347 Mass. at 666.

3. Who is to pay for utilities? Bridge Enters., Inc. v Futurity Tread Co., Mass App. Ct 243, 247-48

C. Statutes of Frauds - G.L. c. 259 § 1. Lease for more than one year must be in writing to be enforceable. G.L. c. 259 § 1, CL5.

D. Tenancies at Will. Oral Agreement for a fixed term may create a tenancy at will. G.L. c. 183 § 3 Greenstein v. Flatley, 19 Mass App. Ct. 351, 355. Also, an oral extension of a lease only creates a tenancy at will. Terms of Tenancy at Will may be shown by parole evidence.

Can be terminated by:

1. Giving statutory notice

2. Surrender

3. Partition

4. Death

5. Eminent Domain

Lease by Landlord (Commercial context only) Sale of the premises MAY

Residential tenancies at will - not terminated by lease if premises or sale of premises. G.L. c. 186 § 13.

E. Expired commercial lease cannot be extended orally at a higher rent - violates the statue of frauds and is unenforceable. Chester A. Baker, Inc v Shea Drycleaners, Inc. 322 Mass 311,312.

F. Most leases should cover the following elements.

1. Date of lease

2. Name of landlord and tenant

3. Description of premises being leased

4. Term of Lease and any renewal options

5. Rent and how calculated

6. Covenants of both landlord and tenant

7. Casualty, insurance and eminent domain provisions

8. Default provisions

9. Discuss other clauses that may be relevant

10. Signature of landlord and tenant

G. Consideration

1. Normally rent payments stream

2. Can be as is sufficient for any other contract

H. Intent of Parties is Key-Landlord signs and delivers lease - may be binding even if not signed by tenant. For example by tenant:

1. Paying rent

2. Entering into possession

3. Failing to return the lease

4. Failing to express not to be bound

I. Effective Delivery

1. Enforceability of a written lease required effective delivery

2. Delivery is presumed on the date of the lease

3. Delivery maybe express or implied

J. Laws of Agency Apply - Just as in other contracts

K. Lease does not require acknowledgement nor witnessing

L. Notice of Lease

1. Notices of Lease are typically used so that lease details are not disclosed.

2. Notice is required if lease term is more than seven years - notice must be recorded at the registry or land court. (Should explain that if not recorded lease is still binding upon landlord)

3. Notice Executed by all parties and detail: G.L c.183 § 4

a. Date of lease execution

b. Lease term

c. Commencement date

d. Description of leased premises as on lease

e. Extension and renewal rights, if any

M. When Lease takes Effect

1. Typically takes effect on date it is executed and delivered-fully discuss-terms

2. Leases executed on Sundays shall be reaffirmed

3. May be modified like other contracts in writing

4. Parole evidence rule applies however - Parole evidence is admissible to contest the existence of the lease itself. Ecclesiastes 3:1, Inc v. Cambridge Sav. Bank, 10 MASS.App.Lt. 377, 380, 407 NE 2nd 1318, 1320

5. Must still satisfy the Statutes of Frauds

N. Parties and Power to Lease

1. Prior to entering into a lease - both parties should determine the existence and authority of the other in order to avoid a potential problem, prospective tenants should be alert to the following:

a. Legal title in a party other than the landlord

b. Evidence of foreclosure proceedings

c. All with only leasehold title (unless lease assignment or sublet contemplated)

d. Evidence of possession of another tenant

e. Evidence of adverse possession, seizure, or exercise of eminent domain.

f. A Lis Pendens or other legal challenge to ownership

2. Leases Dealing with:

a. Trustees

b. Personal Representation

c. Guardians

d. Wards

e. Minors

f. Married

g. Persons

h. Tenants in Common

i. Joint Tenants

j. Joint and Several Liability

k. Life Tenant

l. Death

m. Insanity

n. Private and Public Entities

1. Corporations/LLC's

2. General Partnerships

3. LLP's

O. Rights Given to Tenants by Lease

1. Nature of tenants interest - type lease

2. Tenancy at will

3. License

P. Landlord's Representations and Warranties

1. Quiet enjoyment

2. Give tenant right to possession

3. No implied warranty for habitation

a. Tenant takes only an "estate"

b. Tenant should inspect

c. Landlord or tenant improvements

d. Complies with laws and no defects - if leasehold improvements

4. Landlord discloses known defects

a. Dangerous conditions

b. Code Violations

5. Landlord to maintain common areas

6. Exculpatory clause - ok if no fraud

a. Landlord includes clause " no warranties etc" other than those in lease

7. Appurtenant Right

a. Lights & Air

b. Easements

Q. Landlord's Reserved Rights

1. Rights of re-entry

a. Demand payment

b. Repairs and prevent waste

c. Keep conditions safe

d. Expressly reserved

R. Tenants use of promises

1. Imposed by lease i.e. Restriction or stipulations

2. Imposed by law

a. Licenses

b. Permits

c. Zoning

S. Term of Lease

1. "Landlord hereby leases" is sufficient language

2. Term Certainty - i.e. term lease - year to year

3. Oral or written

4. Illegality by executor - i.e. trustee

5. Termination provisions - i.e. by death

6. Extension or renewal

7. Option to purchase

8. Assignment or sublease

9. Seven year leases - should be recorded G.L. C183 § 4 and G.L. C185 § 5

10. Options to extend or renew

T. Types of Lease Agreements and Related Issues

1. Gross Lease

2. Net Lease

3. % Leases

4. Non-Payment of Rent

a. Notice Provisions

b. May result in eviction proceedings

c. Acceleration for non-payment

5. Hold over tenants

a. Estate at sufferance

6. Leases - seasonal sales % - adjusted period

7. Define gross sales - usually less: deductions, exclusions and credit

8. Continuous operation by tenant

9. Use restrictions

10. Audits

11. Confidentiality by Landlord - normally to other than mortgagees and buyers

12. C.A.M - wording may include tax on income tax paid by Landlord; RE tax escalators

Base year - betterments G.L. C80, §1; (Sewers, sidewalks, etc)

13. Sewer and Water charges

U. Excuses From Paying Rent

1. Independent verses dependent covenants Wesson v. Leone Enterprises, Inc 437 Mass 708 (2002)

2. Constructive eviction - Walker Ice co. v. AM Steel & Wire Co., 185 Mass 463

3. Void and Voidable leases - i.e. agent no authority to act

4. Eviction - interference by landlord, 3rd party or title holder

5. Actual eviction

6. Title defect

7. Landlord duty in MA to deliver premises - tenant assumes risk that it will be able to use premises for purposes intended.

8. Building repairs, alterations and signage tenant should provide for contingencies

9. Surrender of premises - if agreed upon - doesn't cure breaches

10. Apportionment of rent - mid-tenancy termination or transfer to new tenancy

11. Abatement - physical damage, fire or casualty

12. Eminent domain

13. Self-help and set off

V. Condition of Premises

1. Landlord not presumed to have to make repairs just by reason of entering into lease.

2. Tenant required to use and maintain leased premises in a "tenant like manner" -Normally portion under exclusive control

3. Hemmingway case NOT extended to landlord's of commercial/industrial properties (i.e. habitability)

4. Landlord generally not liable for tort actions in areas under tenant’s exclusive control-Landlord could be liable for tort action of leased premises or common areas under landlord control

5. Landlord duty of "reasonable care" on premises not under tenants control D. Marzo v. S&P Realty Corp., 364 Mass 510,306 N.E. 2nd 432 (1973)

6. Premises can be construed to be more than just the space being leased, i.e. common

area facilities such as bathrooms, elevators, hallways, parking areas etc.

7. Tenant duty is to "keep good order and repair" - lease language is critical. Exceptions

to tenant's duty:

a. Ordinary wear & tear

b. Fire & unavoidable casualty

c. Eminent domain

d. Landlord acts or omissions

e. Delays beyond tenant's control

8. Yield up or surrender of possession provision - typically similar to tenant maintenance provisions in lease.

9. Landlord - may warrant that premises comply with laws at commencement; Tenant - not use premises in unlawful or harmful manner.

10. Environmental concerns - representations by landlord and tenant and tenant duties.

11. Discussion of fire, casualty and eminent domain concerns

W. Improvements and Alterations to the Property

1. Tenant - no obligation unless agreed upon

2. Landlord may contribute toward tenant work

Disbursement terms

a. Income tax issues

b. Workman like

c. Landlord sign offs on work

3. Indemnification by tenant to landlord for tenant work

4. Lease provisions to allow landlord to make alterations

X. Insurance, Subrogation and Indemnity

1. Insurance

a. Fire and casualty

b. Liability

c. Rent Insurance and business interruption

d. Insurable Interest

2. Subrogation - landlord or tenant is entitled to recover from two different sources - the tortfeasor (primary) and an insurer (secondary). Insurer "steps into the shoes" of the tortfeasor - i.e. takes over insured rights

3. Indemnity - contract (lease) provision between landlord and tenant whereby rights associated with 3rd party claims are allocated

4. Exculpatory clauses - an agreement by which one party contractually avoids liability to another - typical tenant covenants to hold the landlord harmless - may be reciprocal

5. Landlord cannot transfer to liability to the tenants, arising from any omission, fault, negligence or other misconduct of the lessor or about the leased premises. G.L. C186 § 115.

Y. Transfer of Landlord's or Tenant's Lease Interest

1. Transfer of Tenant's Interests - Most leases restrict tenants ability to transfer leases; also prohibits assignment or subletting.

a. Organizational changes

b. By operation of law

c. Landlord prior written consent - if not obtained - could be a default - possible provision. Landlord consent not unreasonably withheld

d. Estoppel certificate to purchaser -Attesting to details of lease by tenant

e. Non-disturbance agreement

2. Transfer of Landlords Interest - Generally landlord interest in a lease.

a. Maybe transferred in whole or in part - with the landlord fee interest in the property

b. May be assigned separately

c. May pass by operation of law

Z. Options to Purchase

1. Allows tenant to purchase either the leased premises or the property of which the lease premises are a part - is an irrevocable option offered by landlord to sell - must be accepted by tenant to become an enforceable option.

2. Right of first refusal - only gives the holder of the right to match an offer within a specific period of time as previously agreed - that maybe accepted by the property owner.

3. Valid option -Statute of frauds applies to be enforceable

4. Validity of an option during a renewal or extension period of a lease - HLM Realty Corp. v. Morreale, 394 MASS. 714,716,477 N.E. 2nd 394,395-396 (1985) i.e. look to all circumstances of the lease and the conduct of the parties - then just the words renew or extend the lease.

AA. Ground Lease - Combination of three distinguishing elements - make a genuine ground lease.

1. Land

2. Long Term

3. Net Rent


Cases cited in Course Outline Lease Drafting in Massachusetts, Edward M. Bloom et. al.; Wesson v. Leone Enters, 437 Mass. 708 (2002), Copies of LOI and Commercial Lease Commercial Lease Forms, James W. Hackett & Timothy M. Smith

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