As businesses grow, from a home or garage to a first leased space, their leaders often rush to sign the landlord’s lease with little to no review or thought as to the provisions included. Often, a tenant is presented with a “pre-printed” form lease and assumes that it must be even-handed – and therefore acceptable to sign without further consideration. While the following list is not intended to be a comprehensive one of issues that should be considered when signing such a lease, it highlights many of the hidden issues in pre-printed lease forms that tenants need to think about.

Assignment and subletting

Many leases treat transfers of equity (change in control or ownership interests of the tenant), or transfers of a material portion of tenant assets, as an “assignment” for lease purposes requiring that the tenant obtain the landlord’s consent to any proposed transfer (usually along with a fee to the landlord). Tenants, especially as they grow and add new partners, often assign an interest in the lease without realizing that the landlord’s consent was required. Beyond the issues that can arise with seeking the landlord’s consent, an “assignment” (including “assignments” by change of control) can often trigger a right by the landlord to recapture the leased space, which often prompts renegotiation of the lease. In addition to the economic impacts, seeking the landlord’s “prior” written consent to any change in the tenant’s equity structure is often an unwanted procedural step. Given the growth strategies of many early stage companies, the provisions regarding equity transfers and assignments need to be given special consideration and attention during negotiations.

Options

Options to terminate, expand and renew leases are key considerations requiring careful analysis of the tenant’s long-term requirements during negotiation of the letter of intent and lease. Tenants often desire the option to renew their lease as a means of maintaining control over their space for a longer period of time than the original lease term (especially in a retail lease). Furthermore, expansion rights can be critical for growth in numbers. Termination rights are equally important for a number of reasons. In this scenario, unexpired portions of leases can impede the completion of a merger or acquisition. Pre-printed leases typically do not include these options. If a tenant wants any of these options, they must be negotiated prior to lease execution.

Default

Of particular concern to a startup company are lease provisions requiring continuous occupancy, and those prohibiting insolvency of the tenant. During the life cycle of a startup, there may be times when temporary (or permanent) vacation of leased space is prudent. Vacating may constitute a technical default, which will often create a legal impediment to what may otherwise be a sound business decision. Furthermore, as part of the financial growth of a startup, a tenant may be technically “insolvent” under many of the definitions set forth in the lease agreement. In any event, give due consideration to this language in a lease. Do not simply assume that because it is part of a standard form, it is acceptable.

Expiration and surrender obligations

Two issues of concern with expiration and surrender obligations in leases are the condition of the premises and the holdover provisions. Many leases require the tenant to return the premises in the “same condition” it was received. In some cases, this may mean the tenant could be obligated to remove tenant improvements installed at, or prior to, lease commencement – often at a substantial cost. Furthermore, the tenant needs to understand the ramifications of remaining in the space after expiration of the lease term, often called a “holdover.” If a tenant is moving into a new space, the timing of the build-out of that space and expiration of the term in the old space is difficult to coordinate. During a holdover under many leases, a tenant’s rent often doubles, and a tenant may become responsible for consequential damages to the landlord on account of the holdover (i.e., the loss of a new lease with a new tenant taking the old space).

Lien waivers

When negotiating a lease, it is important to know the type of security (collateral) the tenant’s lender may require for equipment, working capital or other financing needs. For example, SBA lenders, whose loans are secured by personal property, typically want a landlord to waive statutory (possessory) lien rights and afford them (the tenant’s lender) a reasonable opportunity to either cure any lease default or enter the premises and take possession of the collateral. These issues are best addressed in advance of lease execution. Once a lease is signed, the tenant loses most of its leverage to have a landlord grant a tenant’s lender any rights.

Given the importance of a lease in satisfying a growing company’s needs, it is advisable to become well informed about leasing issues before it is too late. It is never too early to ensure that the lease adequately suits the tenant’s current and future requirements. As with any transaction, it is recommended that officials consult with their broker or legal representative about important issues.

Attorney Robert Koury is co-chairman of Jordan Ramis PC’s Dirt Lawâ practice group. His practice concentrates on real estate law. Contact him at 503-598-5591 or robert.koury@jordanramis.com.

The post OP-ED: Leasing issues for young companies appeared first on Daily Journal of Commerce.

The economy’s emerging recovery is causing many businesses to increase the pace of their transactions. In the race to show good faith and serious intent to proceed with deals (including, but not limited to, the sale or lease of real estate or business assets), parties are moving quickly through the process of memorializing the terms of their proposed business arrangements – the negotiation of a “letter of intent,” “memorandum of understanding,” or similar agreement.

A letter of intent generally takes less time to negotiate than does a final purchase agreement and related transaction documents. It also enables the parties to memorialize their agreement on the critical business terms prior to spending material amounts of money and time on due diligence. However, with business picking up and parties rushing to move before their competitors act, the market rises, interest rates climb, or some combination of all three, counsel often is not sought at this early stage. Instead, there is a race to finalize the letter of intent, sometimes with dire consequences.

Generally, the parties to a letter of intent prefer that these preliminary “agreements” be nonbinding. But they often include limited provisions, like those related to confidentiality and exclusive negotiation/non-solicitation, intended to be binding. Parties should take special care to clearly define what is intended to be binding and what is not by creating separate sections within the letter of intent for each type of provision.

In light of recent cases in this area, extra care must be used to ensure that the other provisions of the letter of intent are not deemed to be binding, in whole or in part, on the parties. For example, careful attention must be paid to make sure that what was intended as a period of exclusive negotiation (or some other provision) does not become an additional, binding obligation broader than what the parties intended.

The key factor that courts use to determine whether a letter of intent (or a specific provision thereof) is binding has been the intent of the parties. However, the course of conduct after the execution of the letter can provide further evidence of the parties’ intent. Juries have determined that public actions of one party have the power to revise the interpretation of the terms of otherwise very clearly drafted language in a “nonbinding” letter of intent.

Once a clearly “nonbinding” letter of intent has been executed, parties need to be concerned about potential legal liability and obligations that exist prior to execution of the formal binding purchase agreement. Regardless of “intent,” the parties to a contract are bound by an unwritten or implied covenant of good faith and fair dealing. This is also true during the period of time between the execution of a letter of intent and a formal contract, when the parties are bound by a lesser standard – the duty to negotiate in good faith.

While seeking to memorialize key business points in a letter of intent, it is essential for the parties to ensure that the only binding provisions in a letter of intent are those that were intended to be binding. During the period of time leading up to execution of a formal contract, the parties should continue to act in a manner consistent with the legal obligations and implied covenants that come with operating under such an agreement. Without due care, parties could find themselves bound by provisions they thought were nonbinding.

Robert Koury is an attorney with Jordan Ramis PC, and the leader of its Dirt Law practice group. He concentrates his practice on real estate law. Contact him at 503-598-5591 or robert.koury@jordanramis.com.

The post OP-ED: In letters of intent, be perfectly clear appeared first on Daily Journal of Commerce.