RE69C11: Commercial Brokerage: The Lease Offer and the Basics of a Lease: Part I

Approved Sept. 27, 2011

New Course as of Sept. 27, 2011

I. Licenses (5 mins)

A. Massachusetts License required for all real estate brokerage/transactions

1. MGL c. 112 section 87 PP

2. No special license required specifically for commercial real estate brokerage (one license covers all brokerage)

II. The Leasing Process (15 mins)

A. Be certain that all parties understand (Tenant, Landlord, and Broker) before signing a lease

B. Using a Letter of Intent (LOI) for a Tool / What is a Letter of Intent (LOI)?

1.      An “outline” of the business terms or principal points

2.      It is different from an Offer

3.      Historically Non-binding

4.      Reviews the business terms of a lease agreement

5.   Review of McCarthy vs. Tobin”: Feb. 11, 1998/March 2, 1999 as it relates to the drafting of an  LOI and possibly binding but could be non-binding with a disclaimer

6.   Review of “Tristam’s Landing v. Wait” (367 Mass. 622) as it relates to a Purchase & Sale being binding

7.   Broker Disclaimer Language

8.   Sample of an LOI

9.   Use of “Memorandum of Understanding” (MOU)

III. Lease Document: The Basics (10 mins)

A.    Is an Agreement to Lease sufficiently absolute?

B.     A written agreement to lease is binding only to the extent that it is expressly delegates the terms of the lease to be executed in the future.

C.     Some factors to consider if agreement is sufficient.

1.      Adequacy of statement

2.      Description of property to be leased

3.      Who is to pay for utilities?

IV. Lease Tenancies

A.    Statute of Frauds (5 mins)

1. Statute of Fraud: G.L. c. 259 Section 1, CL5 states that a lease for more than one year must be in

writing to constitute an enforceable obligation

2. The impact on commercial leases

3. Not all countries have the same legal support

4. What is a “Standard Commercial Lease”?

B.     Proof of Lease (5 mins)

1. Purpose of a lease: Creates a leasehold and a contract

2. Definition: Space for Consideration

C.    Tenant-at-Will (TAW) (10 mins)

1. Oral agreement for a fixed term may create a TAW, G.L. c. 183, Section 3, “Greenstein v. Flatley”, 19 Mass. App. Ct. 351, 355; Also an oral extension of a lease only creates a tenancy-at-will and terms of tenancy-at-will may be shown by parole evidence

2. Can be terminated by:

a. Giving statutory notice

b. Surrender

c. Partition

d. Death

e. Eminent Domain

f.  Written lease by Landlord of a commercial lease

g. Expired Commercial Lease

h. Cannot be extended orally at a higher rent because it…

i.  Violates the Statute of Frauds

D.    When does a lease take effect? (5 mins)

1. Typically the lease takes effect on the date it is fully executed and delivered

2. Leases executed on Sundays shall be reaffirmed

3. May be modified like other written contracts

4. Parole evidence rule applies; however, Parole evidence is admissible to contest the existence of the lease itself

5. Must still satisfy the Statutes of Frauds

E.     Leases Dealing with the Following: (5 mins)

1. Trustees

2. Personal Representation

3. Guardians

4. Wards

5. Minors

6. Married

7. Persons

8. Tenants In Common

9. Joint Tenants

10. Joint and Several Liability

11. Life Tenant

12. Death

13. Insanity

14. Private and Public Entities

F. Rights Given to Tenants by Lease (5 mins)

1. Nature of tenant’s interest: type of lease

2. Tenancy-at-will

3. License

G.    Types of Lease Agreements and Related Issues (10 mins)

1. “Full Service Lease” v. “Gross Lease”

2. “Triple Net” Lease or a better term “Absolute Net” or “All Net” lease

3. Percent or Percentage Rent

4. Different forms of annual rent escalators (Pre-Tax)

5. Examples of escalators: Consumer Price Index (CPI), fixed dollar increases, annual percent increases and how this differs from increases due to real estate tax and operating expense reimbursements

H.    Term of Lease (10 mins)

1. Term Certainty

2. Defined time in space, yearly, monthly

3. Oral or written

4. Termination provisions: i.e. By death

5. Extension or renewal

6. Option to purchase

7. Assignment or sublease

8. 7-year leases must be recorded at Registry of Deeds

9. Options to extend or renew

I.       Tenants Use of Premises (5 mins)

1. A description of what the tenant plans to operate or conduct in the leased space

2. The description is not always clear or detailed

3. Sometimes a general description

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

5. Imposed by law

a.       Licenses

b.      Permits

c.       Zoning

J.      Condition of Premises (5 mins)

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

2. Tenant required to use and maintain leased premises in a “tenant like manner”

3. Hemingway (363 Mass 184) NOT extended to landlords of commercial/industrial properties (i.e. habitability)

4. Landlord generally not liable for tort actions in areas under tenant’s exclusive control

5. Landlord could be liable for tort action of leased premise or common areas under landlord control

6. Landlord duty of “reasonable care” on premises not under tenant’s control (common area)

7. Premises can be construed to be more than just the space being leased

K.    Transfer of Landlord’s or Tenant’s Lease Interest (10 mins)

1.   Transfer of Tenant’s Interests

a.    Most leases restrict tenant’s ability to transfer interests

b.      Also may prohibit assignment or subletting

c.       Organizational changes

d.      By operation of law

e.       Landlord prior written consent could be a provision and if not obtained, could be a default

f.       Landlord consent not unreasonably withheld

2.   Transfer of Landlord’s Interest

a.   Generally landlord interest in a lease

b.   May be transferred in whole or in part with the landlord fee interest in the property

c.   May be assigned separately

d.   May pass by operation of law

L.     Options to Purchase (10 mins)

1.      Allows tenant to purchase either the leased premise or the property of which the lease premises are a part of

a.       May be an irrevocable option offered by landlord or to sell

b.      Must be accepted by tenant to become an enforceable option

2. Right of first refusal

a.       Only gives the holder of the right to match an offer

b.      That may be accepted by the property owner

3. Valid Option

a.       Statue of Frauds applies to be enforceable

4. Validity of an option during a renewal or extension period of a lease

M.   Ground Lease (5 mins)

1.   Combination of three (3) distinguishing elements makes a genuine ground lease

2.   Land

2.   Long term

3.   “Net” Rent

References: It is recommended to the instructor that sample lease clauses are used with the material. Cases cited in Course Outline Lease Drafting in Massachusetts, Edward M. Bloom et al.: Copies of LOI and Commercial Lease Commercial Lease Forms, James W. Hackett & Timothy M. Smith; Copies of Commercial Lease Forms, Commercial Brokers Association of Greater Boston Real Estate Board.