Tuesday, February 22, 2011

Certificates Of Insurance- Worthless?

Many leases require tenants to carry insurance for their personal property and, quite possibly, the property that they occupy. Part of this requirement is to provide the landlord with proof that the tenant's insurance is current and that the policy meets the landlord's requirements. To satisfy this requirement the tenant will often provide the landlord with a "certificate of insurance". This is usually a one page standard form that is issued by the tenant's insurance agent. The form provides basic information about the insurance policy and the effective dates of the policy.
However, it is important to note that many of these certificates of insurance contain disclaimer language such as:


While there is no reason to believe that the certificate is inaccurate or fraudulent, the landlord needs to be aware that these certificates do not guaranty the information they contain is correct or, in fact, an insurance policy exists at all. Keep in mind, most of the time these certificates are issued by the agent and not the insurance company itself.
To be sure, a landlord should contact the insurance company directly and request a certified copy of the actual policy.

Monday, February 21, 2011

Tenant Use Provision

The tenant's use provision of a lease is more critical than you might think. The way in which the tenant's use is described can be instrumental in the event that the tenant wishes to sublease the space or in the event his business plans change during the term of the lease which would require a change in his use of the premises. Both events require the landlord's approval. One of the conditions of the landlord's approval is his approval of the subtenant's use or change of use by the existing tenant. Generally, there are two ways to describe a tenant's use:

  • Very specifically (i.e. Metal fabrication operation.) 
  • Very generically (i.e. Industrial manufacturing and all other legal uses.)
The first way favors the landlord since it allows him to be more restrictive in his approval of a change of use to the building. The second favors the tenant since it gives him more flexibility with his use of the building.

Whether repping the landlord or tenant, be diligent when describing the tenant's use in the lease.

Sunday, February 20, 2011

Waiver of Subrogation

Many leases contain a "waiver of subrogation" clause. This clause relates to insurance. First, let's understand what subrogation is. Many insurance policies allow for the insurance company to seek reimbursement from a third party for claims made by the person they insure. In other words, if the insured individual makes a claim as a result of a loss caused by a third party, the insurance company would pay that claim to the insured. Subrogation allows the insurance company to then pursue that third party in order to get reimbursed for the cost of the claim paid to the insured individual. This action would be taken on behalf of the insured individual.
A waiver of subrogation would disallow the insurance company from taking such action and pursuing the third party.

Video: Guarantor Section of AIR Lease Forms

Saturday, February 19, 2011

Occupancy Costs for Tenants

In addition to rent, a tenant may incur other costs associated with their occupancy of a premises. Such costs may include property maintenance, property insurance and property tax payments. Even under gross leases, tenants may be liable for building related expenses beyond rental payment.
At a minimum, when negotiating a lease document, brokers should make sure that tenants are aware of all the costs associated with the lease. If you are unsure about such costs, ask the owner for an operating budget for the building or simply ask for a breakdown of all costs for which the tenant may be liable. Negotiating a cap or fixing the amount of such costs should be done during lease negotiations.
Think of it the same way you do when purchasing a car. There's the sticker price and then there is the "out the door" price with all the extras.

Sublease v. Assignment of Lease

Let's discuss a tenant that occupies a 5,000 square foot space and has three years of term remaining on his lease. Say this tenant wishes to dispose of a part, or all, of his space. Should he use a sublease or a lease assignment.
If the tenant subleases any amount of space less than 5,000 square feet or subleases for anything less than the entire three years of remaining term, then he should use a sublease. If, however, he subleases the entire space for the entire remaining term, he should use an assignment form.

Rules of Thumb:
  • Less than entire space= Sublease
  • Less than entire term= Sublease
  • Less than entire space and less than entire term= Sublease
  • Entire space for entire remaining term= Assignment
Keep in mind that subletting and/or assigning a lease does not relieve the original tenant of their obligations to the landlord under the original lease.

Using the Correct Names on Leases

When preparing a lease, or any legal document, always make sure to use the full and correct names of all the parties involved. Failing to do so can create problems down the road for the parties. For example, if Acme Inc. was going to be the tenant under a new lease, and Acme Inc. is a Delaware corporation, then the lease should read, Acme Inc., A Delaware Corporation. Acme or Acme Corp. is not satisfactory. If the tenant were an individual with the name John Jones, then the lease should read, John Jones, Individual. Also, the signature blocks should match the name filled in as the tenant and it is critical that all parties sign the lease on each of the blanks provided on the signature block.