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Superior Interests and how not to lose your lease and improvements or keep the lease and lose the options and tenant allowance without recourse: In times of economic crises such as being experienced now with tightened credit, increased business failures , foreclosures and bankruptcies, there is increased risk of loss of the lease interest and tenant installation improvements from foreclosure by superior interest and title holders of the leased property as well as disaffirmance of the lease in bankruptcy proceedings. While the lease may not be lost in foreclosure, the benefit of certain rights such as options for additional space and payment by the landlord of tenant work allowances, funds or curative delivery condition corrections costs may be lost without recourse by the tenant. Even performing properties without existing defaults can be a risk if existing mortgages are maturing and must be refinanced in the coming year. It is important to have your broker and lease negotiator address and protect your business rights against superior interest holders such as existing and future mortgagees, ground lessors and future purchasers of the building or condominium interests prior to commencing negotiation of the lease terms or lease documents. This is clearly in this writer's experience one of the most difficult business risk issues for business persons to wrap their heads around.
An example of the current superior interest layerings beginning to surface in New York City is below set forth on a time line as the superior interests are created or come into existence. Because the values of buildings are becoming so great, the current fad for exit strategies by landlords includes the strategy of unbundling the property interests and selling off the building in portions such as floors of condominium units in a conversion, subject to existing commercial leases and options. This tactic can put lease rights at great risk and must be addressed by experienced counsel at the beginning of the negotiation.
For full floor or larger tenants and most retail tenants, negotiations with the existing superior interest holders is a requisite to obtaining a secure lease and all benefits under the lease, not selective ones. So confirm that the existing and future superior interest holders will fully recognize the new, extended or renewal lease and do not allow subordination to new interests such as future condominium owners under anticipated condominium conversions and declarations without protection through acceptable recognition agreements benefiting the tenant obtained and agreed to prior to negotiation of the deal. It is too late to negotiate with the other "real potential owner" after fully negotiating the lease with the current owner. You must bring the "other owner" to the table at the beginning to obtain a commitment of complete, not selective, recognition or don't waste time and resources obtaining a long term improvable lease that may only be a temporary option or the lease without the tenant allowance or landlord's work!
Arbitration Feasibility analysis even when no rights or obligations to arbitrate exist in a lease: In economic stressful times, the courts are jammed. Even in less stressful economic times, the courts are crowded and real estate cases of sophistication, such as commercial leases always present, are rarely assigned to judges with extensive experience or knowledge in the particular area of the controversy. This is especially true for construction and additional rental escalations types of disputes where the terms of art and customs and practices when coupled with aggressive text cause large and complex claims. When costs to articulate a claim and just to get to the courthouse on average commercial lease disputes experienced by this counsel are exceeding $25,000.00, and time intervals to get meaningful moments before a judge in the norm are exceeding 4 to 6 months, it becomes important to explore alternatives to litigation processes. Motions and preliminaries before pre-trial conferences have driven costs to the $100,000.00 range without meaningful advantage and sometimes extend periods before a trial can be obtained to years.
So if you encounter a lease with a dispute and without alternative dispute resolution clauses, this counsel suggests that it would be a good idea to meet with counsel experienced in commercial arbitration to explore the opportunities with opposition counsel to create an arbitration agreement and submission instructions for a forum other than court. Areas that are rich in rewards to cut costs and enhance resolution for submission criteria are i) use of experienced professionals in the area of the commercial lease dispute as the sole arbitrator or a panel of arbitrators (only if multiple disciplines are involved); ii) determination of the case on rules of law with rights to appeal based on interpretation of law, not on determination or evaluation of facts; iii) strict time limits for presentation of documentary evidence and testimony of expert professional witnesses; and iv) use of the new commercial rules promulgated by the American Arbitration Association.
Real Estate Taxes for Base Year Additional Rentals for new construction or renovations of existing buildings in a declining tax/assessment/market value environment: A considerable amount of negotiation is occurring with respect to the additional rental escalations for real estate taxes to be paid in future years when real estate taxes for those future years are compared to the real estate taxes in effect for the base year selected for the transaction. At best, for new construction, real estate taxes are impossible of ascertainment on an equitable basis for a base year to be utilized as a comparison to future years if the objective is to have a base year tax amount or assessment that fairly reflects a fully constructed improvement with full occupancy and fully operating and at the then full assessed valuation as if the building had "burned in" for a number of years. This is near impossible when there is a stable economic or fair market economic environment, but completely impossible in an economic environment similar to the one being experienced now.
This current real estate assessment economic environment is most similar to the one the writer experienced in 1977. The future calculations and resulting additional rentals following the late 1970s in some of my lease forms contributed to this writer being named the "Father of the Modern Killer Lease" by the Wall Street Journal in 1984. So those who allow typical real estate tax escalation clauses to remain in their form leases in this environment will within 3 to 5 lease years have serious problems with excessive charges being billed to them. Current examples of these excessive charges abound and seem to be a mystery to both the business persons and the attorneys. The only way to deal with these business terms is to reduce the formulation to a equalized and "all in" or "full in" real estate factor or amount per floor area square foot measurement and then have that as the base real estate taxes for comparison against future years. Mechanisms can be built in to do a "look-back" adjustment in the event of error in the base year factor and to base comparisons on adjusted assessed valuations rather than actual tax bills to adjust for abatements, tax incentive phase-ins and tax credits. But in any event, if there is either new or renovated construction involved which is less than 5 years old and essentially fully occupied at the time of the negotiation, great care and attention must be given to this additional rental calculation so as to avoid very material errors in estimation and nasty unintended increases in additional rentals.
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