Don't Let Tenant that Defaults or Goes Dark Enjoy Special Perks

When negotiating a lease with a prospective tenant, you may agree to give one or more special perks to entice that tenant to sign your lease. For example, you may agree to give it free-rent concessions, building naming and signage privileges, a right of first offer, a cotenancy right, an exclusive, or a renewal option. These are perks that you would want only your most desirable tenants to have.

But if your lease is like many we've looked at, you may not be able to stop the tenant from taking advantage of or continuing to enjoy the perks even if it defaults under the lease or, in the case of a retail tenant, if it goes dark in all or part of its space and the lease doesn't have a continuous operations clause. For example, if you agree to give the tenant a renewal option, and the tenant is in default or has gone dark in all or part of its space when it exercises the option, you could be forced to let it renew its lease (thus extending the period it's in default or dark).

Put Conditions on Perks

There's an easy way to avoid this problem, says New Jersey attorney Marc L. Ripp: Include language in the lease that says the tenant can't continue enjoying or take advantage of any perks if it defaults under the lease or goes dark in all or part of its space. The language you'll use will depend on the type of perk you agree to give the tenant. There are two types of perks: those that must be “exercised” that is, perks that take effect only if the tenant notifies you within a fixed time of its intent to take advantage of them'and perks that take effect automatically.

Perks that must be exercised. Examples of perks that must be exercised are a termination right, an expansion right, a purchase option, an option to extend the term, an option to go dark, or a right of first refusal or offer. These perks generally don't go into effect unless the tenant sends you notice.

If you agreed to give the tenant such a perk, state in the lease that the perk is conditioned on the tenant's not being in default of its lease or having gone dark in all or part of its space at two specific points in time: when you get the tenant's notice that it's exercising the perk and when the perk actually goes into effect or, in the case of a purchase option, closes, says Ripp. This protects you from having to let the tenant take advantage of the perk if it defaults or goes dark in all or part of its space right after it sends you its notice.

Here's language you can add to each clause that grants the tenant a perk that must be exercised. You should also add the language about being open and operating if the tenant is a retail tenant that's not required to continuously operate:

Model Lease Language

The [insert right or option, e.g., option to terminate the lease or renew the lease] granted under this Clause is conditioned on Tenant's being open and operating in the entire Premises and not being in default under this Lease at the time of Tenant's exercise of such [right/option] or on the date the [insert result of right or option, e.g., lease terminates or the renewal term begins].

Automatic perks. Examples of perks that go into effect automatically are special name and signage privileges, a cotenancy right, an automatic renewal right, an exclusive, and free-rent concessions. If you agreed to give the tenant such a perk, state in the lease that the perk will automatically terminate if the tenant defaults under the lease or goes dark in all or part of its space. This protects you from letting a defaulting tenant or tenant that has gone dark continue to enjoy the perk. It also gives you more power to negotiate other issues with the tenant after the perk has been forfeited.

Here's language you can add to each clause that grants the tenant an automatic perk, says Ripp. You should also add the language about being open and operating if the tenant is a retail tenant that's not required to continuously operate:

Model Lease Language

This Clause shall automatically become null and void if Tenant defaults under this Leaseor at any time Tenant is not open and operating in the entire Premises.

Expect a savvy tenant to demand that it not lose any of its perks unless its lease default is either “material—that is, serious—or involves money (for example, nonpayment of rent) and not until the tenant has had an opportunity to cure the default. Depending on the tenant's clout, you may have to give in to this demand.

Insider Source

Marc L. Ripp, Esq.: Sr. Assoc. General Counsel, Mack-Cali Realty Corp.; Mack-Cali Centre II; 650 From Rd., Ste. 220; Paramus, NJ 07652-3517; (201) 967-0324; mripp@mack-cali.com.