By David C. Hannah
Because of the existing credit crunch, community bankers now have the opportunity to look at good loan deals with high-profile companies willing to consider a banking relationship with a small community bank. With the lure of highly leveraged, low-cost, non-recourse debt no longer in play, community banks’ more-traditional approach to lending (lower loan-to-value ratios, proven debt service coverage capability, recourse debt) is not the competitive disadvantage it was a few years ago. Many national banks simply have no appetite for additional commercial mortgage loans — despite long-time pre-existing client relationships — and often are unwilling to issue commercially viable term sheets on new deals. Community bank lending officers recognize these deals are tremendous opportunities to bring larger business clients to the bank, establish meaningful deposit relationships, and, most importantly, create solid loan assets for the bank’s commercial real estate portfolio.
However, there is a catch. Unfortunately, many community banks cannot meet the total funding requirements for the deals. They are constrained by either their legal lending limits or their own policy decisions and simply cannot do the deals on their own.
The solution? Banks can band together with other similarly situated community banks to share the credit risk through a loan participation or syndication arrangement. In its simplest terms, Bank A is presented with a rock-solid $20 million commercial mortgage loan opportunity, but has a $5 million loan limit, so it partners with Banks B, C, and D via a loan participation or syndication arrangement to make the deal.
Borrowers (and even some lenders) often use the terms participation and syndication as synonyms, meaning any type of loan facility that is shared by multiple lenders; but there is a legal distinction. In a participation arrangement the borrower only deals with the lead lender as they are the only parties to the loan agreement and related loan documents. The borrower can look only to the lead lender for funding, and only the lead lender can deal with the borrower with regard to default or other compliance issues. The participant lenders own portions of the loan purchased from the lead lender, with all of the rights and obligations between them specified in a separate participation agreement. The borrower may not even know of the existence of the participation agreement or the identity of any participant lenders.
In a syndicated loan, two or more lenders agree to jointly make a loan to the borrower. Each syndicate lender is a party to the loan agreement and receives a separate promissory note in the amount of its funding commitment. Likewise, the borrower only can look to each syndicate lender for funding of its portion of the loan facility. The loan agreement in a syndicated arrangement actually serves both the traditional function of establishing the terms and conditions imposed on the borrower for the credit facility and the additional function of spelling out the rules of engagement among the various syndicate lenders. Day-to-day decision making with respect to the administration of the loan is handled by an administrative agent.
There is a perception among borrowers that a syndication confers more rights upon the lenders and, therefore, is riskier than a participation loan. But with properly drafted agreements there is very little practical difference in the customer’s borrowing experience under either format. Ideally, the cooperative effort will be seamless to the borrower.
In addition to lending limit concerns, participant and syndicate banks may be motivated by a lack of loan origination capability with certain types of customers or transactions and the desire to leverage their lending partner’s competence in these areas. Depending on the bank’s willingness to rely on the lead lender’s transaction screening and credit analysis of the borrower, the participant or syndicate bank may acquire new loan assets in areas where they do not have expertise at significantly lower internal costs.
Borrowers and lead lenders alike fear that the participant or syndicate banks will not rely on the lead lender’s underwriting, due diligence, or legal documentation efforts, but will want to conduct their own independent review and negotiation processes, thereby adding layers of complexity, cost, and closing risk to each proposed transaction.
Because of the potential for the “too many cooks in the kitchen” problems associated with lender club deals, many borrowers maintain a high degree of skepticism about the chances for actually closing the loan when told by their relationship bank of the need to bring in additional lenders. In one recent $10 million loan transaction to refinance a maturing CMBS loan on a multitenanted office building, the borrower gave instructions to the loan broker to deal only with lenders able to close on its own account because of fears that multiple lenders would equal trouble. However, after many futile months of false promises and false starts by the national banks and other large lenders, it was a combination of two small Northern Virginia community banks, neither of which had the ability to close the deal without the other, working under a participation arrangement, which put together the winning loan package. The loan was full recourse, with a parent guaranty, approximately 55 percent LTV, and relatively high DSC covenants, but it had a very competitive interest rate and fee structure and provided the borrower a performing loan with cost certainty for the term.
We have closed several community bank participation/syndication commercial mortgage loans in the past six months, representing both real estate owners and lenders in the process, and have seen firsthand the impact these community banking “strange bedfellows” can make by working together.
The good news for community banks is that many real estate owners and developers have long memories. If the community banks are willing to put aside their competitive differences and step into the current real estate lending breach to make these much-needed commercial mortgage loans, then they will earn the gratitude and loyalty of a group of strong, high-profile customers they would never have reached in different market circumstances.
Tuesday, July 27, 2010
Monday, July 19, 2010
Lease Leverage: How can creditworthy tenants maximize their bargaining advantage?
Lease Leverage
How can creditworthy tenants maximize their bargaining advantage?
By Steven D. Sallen and Kasturi Bagchi
Many property owners continue to be weakened by the languishing commercial real estate market. Falling rental values, declining occupancy rates, and maturing loans with no readily available replacement financing all are affecting landlords’ bottom lines and eroding their equity.
For tenants, however, this creates an opportunity, especially for those that are fiscally stable and have short lease terms remaining or other circumstances that make viable a threat to vacate. These tenants are in a position to use their leverage to renegotiate their existing leases. Here are some negotiating points that tenants should consider — and to which landlords must be prepared to respond.
Quid pro Quo
Tenants who demand lower rental rates should be prepared to offer something of value in return. Most landlords cannot afford to reduce their rental income with no quid pro quo. They have mortgages to pay, and their lenders are unlikely to offer concessions in this climate.
Tenants have several options to propose to landlords in return for rent concessions, including offering to extend their lease terms. It will be far easier for a landlord to justify a rental reduction in the short term if the contracted rental stream continues beyond its original term. Another option is timed rent escalations, perhaps even returning to pre-concession levels.
Operating expenses is another area for negotiation. Many landlords may want or need the added certainty that operating expenses will not increase; therefore, changing a gross lease to a triple net lease — which assigns to tenants responsibility for operating costs — may give a landlord confidence that it won’t be damaged on the back end by operating expense inflation.
Tenants also can offer a personal or affiliate guaranty, sometimes known as a good-guy guaranty, which ensures rent payment if the tenant defaults and fails to immediately yield possession of the leased premises.
Landlord Finances
Tenant improvements usually are a part of new leases or lease amendments, but in today’s economy, tenants may wonder if the landlord can afford to pay for promised improvements. In such instances, tenants may need to examine a landlord’s financial statements. In the old economy, such financial analysis always was downstream and almost never upstream to the landlord. But a landlord may be a mere shell for a limited liability company whose only asset is the building. Add to that the likelihood that the building’s equity is probably eroded, and tenants may have little recourse if the landlord cannot perform a TI build-out.
Depending on the bargaining strength of the parties, a tenant may demand certain protections. For example, the landlord could commit TI dollars in advance by depositing funds in escrow, or obtain a letter of credit naming the tenant as the beneficiary. However, a letter of credit or escrow may be considered part of a debtor’s estate and could be seized if the landlord files for bankruptcy.
Another option is to establish a right of offset against rent if the landlord fails to complete the improvements. Parties also could agree to a reduced rent upfront and make the tenant responsible for the improvements. In such cases, landlords must make sure tenants do not take advantage of the rental reduction and do nothing to better the space.
A landlord’s failing financial strength also may lead to deterioration in building and common area maintenance. Tenants concerned about a landlord’s ability to maintain and make timely repairs may want a self-help right to maintain and offset costs against rent to cover the incurred expenses. Tenants also may need to consider what levels of building maintenance and other services will be continued if the building winds up in foreclosure and/or receivership.
Default Issues
Tenants should confirm if the landlord has a mortgage and if there is a current or potential likelihood of mortgage default. If yes, tenants should review lease terms to determine if a nondisturbance agreement in favor of the tenant is in place or can be obtained from the lender. A nondisturbance agreement assures that the lease stays in place (so long as no default exists) even if the lender forecloses its mortgage. Lenders typically are receptive to such agreements because they help ensure that the tenant will pay rent directly to the mortgagee after a loan default. Tenants also should ask the lender to provide a duplicate notice of mortgage default, and, in certain cases, such as a single-tenant building, a right to make direct payments to the mortgagee, with a corresponding credit against the rent.
Typical loan documents prohibit landlords from amending leases (especially for a rental concession) or entering into new leases without a lender’s consent. Thus, in assessing leverage, tenants should determine ahead of time how many parties will be sitting at the bargaining table and be aware that dealing with lenders on these issues can take time, patience, and sometimes money.
Tenants negotiating new leases or amendments to existing leases for single-tenant buildings might ask for an option to purchase the leased premises. However, lenders often consider such options as an impediment to their foreclosure rights. Therefore, lenders may withhold their consent to purchase options within a lease without additional provisions. Often the option specifically must provide that it cannot be exercised against a successor landlord such as a lender after foreclosure or, at a minimum, that the purchase price must pay off the mortgage in full.
As with any negotiation, leverage points can be anticipated by being prepared. Tenants — as well as landlords — should plan a strategy for success in advance, indentifying all the players involved and the potential obstacles. In today’s climate both parties must be creative, and above all, make the deal a win-win for all concerned.
How can creditworthy tenants maximize their bargaining advantage?
By Steven D. Sallen and Kasturi Bagchi
Many property owners continue to be weakened by the languishing commercial real estate market. Falling rental values, declining occupancy rates, and maturing loans with no readily available replacement financing all are affecting landlords’ bottom lines and eroding their equity.
For tenants, however, this creates an opportunity, especially for those that are fiscally stable and have short lease terms remaining or other circumstances that make viable a threat to vacate. These tenants are in a position to use their leverage to renegotiate their existing leases. Here are some negotiating points that tenants should consider — and to which landlords must be prepared to respond.
Quid pro Quo
Tenants who demand lower rental rates should be prepared to offer something of value in return. Most landlords cannot afford to reduce their rental income with no quid pro quo. They have mortgages to pay, and their lenders are unlikely to offer concessions in this climate.
Tenants have several options to propose to landlords in return for rent concessions, including offering to extend their lease terms. It will be far easier for a landlord to justify a rental reduction in the short term if the contracted rental stream continues beyond its original term. Another option is timed rent escalations, perhaps even returning to pre-concession levels.
Operating expenses is another area for negotiation. Many landlords may want or need the added certainty that operating expenses will not increase; therefore, changing a gross lease to a triple net lease — which assigns to tenants responsibility for operating costs — may give a landlord confidence that it won’t be damaged on the back end by operating expense inflation.
Tenants also can offer a personal or affiliate guaranty, sometimes known as a good-guy guaranty, which ensures rent payment if the tenant defaults and fails to immediately yield possession of the leased premises.
Landlord Finances
Tenant improvements usually are a part of new leases or lease amendments, but in today’s economy, tenants may wonder if the landlord can afford to pay for promised improvements. In such instances, tenants may need to examine a landlord’s financial statements. In the old economy, such financial analysis always was downstream and almost never upstream to the landlord. But a landlord may be a mere shell for a limited liability company whose only asset is the building. Add to that the likelihood that the building’s equity is probably eroded, and tenants may have little recourse if the landlord cannot perform a TI build-out.
Depending on the bargaining strength of the parties, a tenant may demand certain protections. For example, the landlord could commit TI dollars in advance by depositing funds in escrow, or obtain a letter of credit naming the tenant as the beneficiary. However, a letter of credit or escrow may be considered part of a debtor’s estate and could be seized if the landlord files for bankruptcy.
Another option is to establish a right of offset against rent if the landlord fails to complete the improvements. Parties also could agree to a reduced rent upfront and make the tenant responsible for the improvements. In such cases, landlords must make sure tenants do not take advantage of the rental reduction and do nothing to better the space.
A landlord’s failing financial strength also may lead to deterioration in building and common area maintenance. Tenants concerned about a landlord’s ability to maintain and make timely repairs may want a self-help right to maintain and offset costs against rent to cover the incurred expenses. Tenants also may need to consider what levels of building maintenance and other services will be continued if the building winds up in foreclosure and/or receivership.
Default Issues
Tenants should confirm if the landlord has a mortgage and if there is a current or potential likelihood of mortgage default. If yes, tenants should review lease terms to determine if a nondisturbance agreement in favor of the tenant is in place or can be obtained from the lender. A nondisturbance agreement assures that the lease stays in place (so long as no default exists) even if the lender forecloses its mortgage. Lenders typically are receptive to such agreements because they help ensure that the tenant will pay rent directly to the mortgagee after a loan default. Tenants also should ask the lender to provide a duplicate notice of mortgage default, and, in certain cases, such as a single-tenant building, a right to make direct payments to the mortgagee, with a corresponding credit against the rent.
Typical loan documents prohibit landlords from amending leases (especially for a rental concession) or entering into new leases without a lender’s consent. Thus, in assessing leverage, tenants should determine ahead of time how many parties will be sitting at the bargaining table and be aware that dealing with lenders on these issues can take time, patience, and sometimes money.
Tenants negotiating new leases or amendments to existing leases for single-tenant buildings might ask for an option to purchase the leased premises. However, lenders often consider such options as an impediment to their foreclosure rights. Therefore, lenders may withhold their consent to purchase options within a lease without additional provisions. Often the option specifically must provide that it cannot be exercised against a successor landlord such as a lender after foreclosure or, at a minimum, that the purchase price must pay off the mortgage in full.
As with any negotiation, leverage points can be anticipated by being prepared. Tenants — as well as landlords — should plan a strategy for success in advance, indentifying all the players involved and the potential obstacles. In today’s climate both parties must be creative, and above all, make the deal a win-win for all concerned.
Friday, July 16, 2010
"As Is" Clauses Do Not Equal Iron-Clad Protection
June 9, 2010
Article by Julie N. Nagorski
Given the current state of commercial real estate, it is understandable that an owner of an under performing building may be anxious to do whatever it takes to unload the asset, but sellers must take care to ensure that even in an "as is" sale, no exposure is created as a result of negligent or intentional misrepresentations or a failure to disclose a material condition of the building. Although most purchase agreements provide that the buyer take the property "as is," this standard clause does not provide absolute protection from all claims regarding the condition of the property. A common "as is" clause seems ironclad:
The land, building, fixtures, machinery, and equipment sold under this agreement are being sold in an "as is" condition, excluding all warranties, including but not limited to warranties of merchantability and fitness for any particular purpose.
Given the clear understandability and the breadth of an "as is" clause, many property owners believe that these provisions bar claims for the seller's representations concerning the condition of the property. However, these contractual clauses do not necessarily shield a seller from all liability for all misrepresentations. In addition to a potential breach of contract claim, a seller may face liability for a fraudulent misrepresentation or an intentional failure to disclose a property condition. These types of statements and activities may render the "as is" clause unenforceable. A seller should have a basic understanding of different types of misrepresentations and omissions that may create liability exposure if proper care is not exercised in the transaction.
Negligent misrepresentations
A property owner generally cannot be held liable to a buyer for a negligent misrepresentation regarding the condition of the property, even if the contract does not include an "as is" clause. However, to better understand the claims under which a seller may be liable, an explanation of a negligent misrepresentation claim is helpful.
A misrepresentation is negligent when it is an accidental incorrect statement of the facts. A buyer must prove not only that the seller made a representation that was false, but also that the buyer reasonably relied on the misrepresentation and the buyer's reliance on the representation caused it to experience damage. The reason why negligent misrepresentation rarely arises in an arm's length real estate transaction is that there can only be liability where there is a trust relationship between the parties such that one party owes a duty of care to the other party. In an arm's length real estate transaction, such a trust relationship is not generally deemed to exist. Under Minnesota law, the general rule is that adversarial parties negotiating at arm's length do not have a duty of reasonable care. Therefore, a seller in a commercial transaction is not typically liable for a negligent, or accidental, misrepresentation.
Fraudulent misrepresentations
However, in contrast to negligent misrepresentations, property owners generally are liable for fraudulent misrepresentations to purchasers. A fraudulent misrepresentation is an intentional incorrect statement of important facts. A fraudulent misrepresentation is more difficult to prove than a negligent misrepresentation. A buyer must prove that the seller made a false representation and that the seller either knew it was false or asserted that it was true without knowing whether it was true.
Further, the misrepresentation must have been important to the transaction. For example, if an owner of a fifteen story office building represents that all of the basement storage spaces are in good condition, but one of the storage spaces has minor damage that is easily repaired, it is less likely to be held liable for a fraudulent misrepresentation. Also, the buyer must prove that the seller intended the buyer to rely on the misrepresentation and that the buyer did in fact rely on the misrepresentation. Thus, for example, if the owner misrepresented the storage space, but the buyer learned the true condition of the storage space before the closing and nonetheless chose to close, then the seller would usually not be liable for a fraudulent misrepresentation. Finally, the buyer must prove that its reliance on the representation caused it to suffer damages.
Under Minnesota law, a claim for a fraudulent misrepresentation is possible even when the purchase agreement included an "as is" clause where a property owner knows of the condition of the property and either misrepresents or conceals it, and the buyer relies on the misrepresentation or concealment in deciding to purchase the property. For example, if a seller makes temporary and makeshift repairs to a roof, and then tells the buyer that the roof had a couple of minor leaks in the past, but that it was still in good condition, it may be held liable for a fraudulent misrepresentation even though the contract states that the property is being sold "as is." In one case involving a purchase agreement with an "as is" clause, the court held that a purchaser could recover from a seller for a fraudulent misrepresentation even though the purchaser was a sophisticated party, it had visited the site prior to the closing, and it did not inspect the seller's records despite having that opportunity.
The rule that a party cannot commit a fraud and then hide behind a contract is based on public policy considerations. The courts are sending the message that a seller cannot lie and expect to get away with it. If a seller deliberately makes false representations to a buyer, then the "as is" clause is basically negated if the buyer relies on the fraudulent representations in agreeing to purchase the property.
Failure to disclose
A seller can be held liable for a fraudulent misrepresentation when it fails to disclose a fact in certain circumstances. If a property owner chooses to disclose conditions of the property to a purchaser, it cannot hold back or hide facts it is aware of that make its disclosures misleading. For example, if a seller states that the roof never leaks when it is raining, and fails to also state that the roof does leak in the winter and spring because of ice dams, then the seller may be held liable for a fraudulent misrepresentation. Thus, a seller must be careful to avoid half-truths.
Another situation in which a seller can be found liable for a fraudulent misrepresentation is when it fails to "correct the record." If a seller makes a representation believing it to be true, and then later learns before the closing that its statement was false, it must disclose the truth to the buyer to avoid being held liable for a fraudulent misrepresentation.
Lastly, a seller may even commit a fraudulent misrepresentation by remaining silent. In one Minnesota case, the court found a property owner liable when its tenant made misrepresentations to a potential purchaser about the lease in the presence of the landlord and the landlord remained silent instead of correcting the misrepresentation.
Even if the purchase agreement includes an "as is" clause, a court will generally hold a property owner liable for an intentional omission, particularly a deliberate omission concerning a condition that is not obvious. Thus, for example, if a seller knows that the stairs in the building need a major structural repair that the purchaser cannot readily detect, and the seller fails to inform the purchaser, then a courtmay hold the seller liable for fraud, even with the "as is" clause. Again, this rule is premised on the public policy that a party cannot contract around a fraud.
Avoiding liability
Before making any representations regarding the condition of your property to a potential buyer, it is wise to consult an attorney. Avoid half-truths and correct the record when necessary— whether you make a representation you later learn is false, or whether you hear someone falsely represent the condition of the property to the purchaser. Your attorney may also direct you not to make any oral disclosures regarding the property so that proving the actual contents of the disclosures, if necessary, will be simpler. No matter what the purchase agreement states, you will want to be careful not to deliberately misrepresent the property's condition or attempt to hide any problems.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Article by Julie N. Nagorski
Given the current state of commercial real estate, it is understandable that an owner of an under performing building may be anxious to do whatever it takes to unload the asset, but sellers must take care to ensure that even in an "as is" sale, no exposure is created as a result of negligent or intentional misrepresentations or a failure to disclose a material condition of the building. Although most purchase agreements provide that the buyer take the property "as is," this standard clause does not provide absolute protection from all claims regarding the condition of the property. A common "as is" clause seems ironclad:
The land, building, fixtures, machinery, and equipment sold under this agreement are being sold in an "as is" condition, excluding all warranties, including but not limited to warranties of merchantability and fitness for any particular purpose.
Given the clear understandability and the breadth of an "as is" clause, many property owners believe that these provisions bar claims for the seller's representations concerning the condition of the property. However, these contractual clauses do not necessarily shield a seller from all liability for all misrepresentations. In addition to a potential breach of contract claim, a seller may face liability for a fraudulent misrepresentation or an intentional failure to disclose a property condition. These types of statements and activities may render the "as is" clause unenforceable. A seller should have a basic understanding of different types of misrepresentations and omissions that may create liability exposure if proper care is not exercised in the transaction.
Negligent misrepresentations
A property owner generally cannot be held liable to a buyer for a negligent misrepresentation regarding the condition of the property, even if the contract does not include an "as is" clause. However, to better understand the claims under which a seller may be liable, an explanation of a negligent misrepresentation claim is helpful.
A misrepresentation is negligent when it is an accidental incorrect statement of the facts. A buyer must prove not only that the seller made a representation that was false, but also that the buyer reasonably relied on the misrepresentation and the buyer's reliance on the representation caused it to experience damage. The reason why negligent misrepresentation rarely arises in an arm's length real estate transaction is that there can only be liability where there is a trust relationship between the parties such that one party owes a duty of care to the other party. In an arm's length real estate transaction, such a trust relationship is not generally deemed to exist. Under Minnesota law, the general rule is that adversarial parties negotiating at arm's length do not have a duty of reasonable care. Therefore, a seller in a commercial transaction is not typically liable for a negligent, or accidental, misrepresentation.
Fraudulent misrepresentations
However, in contrast to negligent misrepresentations, property owners generally are liable for fraudulent misrepresentations to purchasers. A fraudulent misrepresentation is an intentional incorrect statement of important facts. A fraudulent misrepresentation is more difficult to prove than a negligent misrepresentation. A buyer must prove that the seller made a false representation and that the seller either knew it was false or asserted that it was true without knowing whether it was true.
Further, the misrepresentation must have been important to the transaction. For example, if an owner of a fifteen story office building represents that all of the basement storage spaces are in good condition, but one of the storage spaces has minor damage that is easily repaired, it is less likely to be held liable for a fraudulent misrepresentation. Also, the buyer must prove that the seller intended the buyer to rely on the misrepresentation and that the buyer did in fact rely on the misrepresentation. Thus, for example, if the owner misrepresented the storage space, but the buyer learned the true condition of the storage space before the closing and nonetheless chose to close, then the seller would usually not be liable for a fraudulent misrepresentation. Finally, the buyer must prove that its reliance on the representation caused it to suffer damages.
Under Minnesota law, a claim for a fraudulent misrepresentation is possible even when the purchase agreement included an "as is" clause where a property owner knows of the condition of the property and either misrepresents or conceals it, and the buyer relies on the misrepresentation or concealment in deciding to purchase the property. For example, if a seller makes temporary and makeshift repairs to a roof, and then tells the buyer that the roof had a couple of minor leaks in the past, but that it was still in good condition, it may be held liable for a fraudulent misrepresentation even though the contract states that the property is being sold "as is." In one case involving a purchase agreement with an "as is" clause, the court held that a purchaser could recover from a seller for a fraudulent misrepresentation even though the purchaser was a sophisticated party, it had visited the site prior to the closing, and it did not inspect the seller's records despite having that opportunity.
The rule that a party cannot commit a fraud and then hide behind a contract is based on public policy considerations. The courts are sending the message that a seller cannot lie and expect to get away with it. If a seller deliberately makes false representations to a buyer, then the "as is" clause is basically negated if the buyer relies on the fraudulent representations in agreeing to purchase the property.
Failure to disclose
A seller can be held liable for a fraudulent misrepresentation when it fails to disclose a fact in certain circumstances. If a property owner chooses to disclose conditions of the property to a purchaser, it cannot hold back or hide facts it is aware of that make its disclosures misleading. For example, if a seller states that the roof never leaks when it is raining, and fails to also state that the roof does leak in the winter and spring because of ice dams, then the seller may be held liable for a fraudulent misrepresentation. Thus, a seller must be careful to avoid half-truths.
Another situation in which a seller can be found liable for a fraudulent misrepresentation is when it fails to "correct the record." If a seller makes a representation believing it to be true, and then later learns before the closing that its statement was false, it must disclose the truth to the buyer to avoid being held liable for a fraudulent misrepresentation.
Lastly, a seller may even commit a fraudulent misrepresentation by remaining silent. In one Minnesota case, the court found a property owner liable when its tenant made misrepresentations to a potential purchaser about the lease in the presence of the landlord and the landlord remained silent instead of correcting the misrepresentation.
Even if the purchase agreement includes an "as is" clause, a court will generally hold a property owner liable for an intentional omission, particularly a deliberate omission concerning a condition that is not obvious. Thus, for example, if a seller knows that the stairs in the building need a major structural repair that the purchaser cannot readily detect, and the seller fails to inform the purchaser, then a courtmay hold the seller liable for fraud, even with the "as is" clause. Again, this rule is premised on the public policy that a party cannot contract around a fraud.
Avoiding liability
Before making any representations regarding the condition of your property to a potential buyer, it is wise to consult an attorney. Avoid half-truths and correct the record when necessary— whether you make a representation you later learn is false, or whether you hear someone falsely represent the condition of the property to the purchaser. Your attorney may also direct you not to make any oral disclosures regarding the property so that proving the actual contents of the disclosures, if necessary, will be simpler. No matter what the purchase agreement states, you will want to be careful not to deliberately misrepresent the property's condition or attempt to hide any problems.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Thursday, July 8, 2010
Beyond the LOI - Proactive Steps to Get Leases Done Quickly
By Steven Heller
Landlords in this anemic leasing market want to act quickly to get leases signed and rent payments started. Economic instability brings fresh urgency to the need for increased occupancy. But delays and roadblocks can slow the process and frustrate a landlord’s preferred schedule.
Negotiating the lease isn’t enough –- the landlord must move all transaction elements forward at once. This article is a checklist of common-sense considerations to get the tenant signed up, into its space, and writing rent checks.
Financing
A project’s financing directly impacts the leasing process –- and, in today’s climate, lenders remain skittish. Practical landlords plan ahead for tenants’ initial build-out costs, whether direct costs or tenant allowances. If financing or alternate funding isn’t available, then proactively structure leases’ business terms to address these expenses.
Tenants expect landlords’ lenders to provide a subordination and nondisturbance agreement. It is increasingly difficult and time-consuming to extract reasonable SNDAs from lenders, so start the discussion early in the lease negotiation to avoid a hold up at lease execution time If the SNDA becomes a post-execution contingency item, the resulting delay could prevent rent commencement (or, worse, give the tenant a termination right).
Agree in advance on a form or at least initiate early discussions with the parties. A national retailer (or other multisite tenant) already may have completed SNDAs with your lender. Ask the brokers if they know of SNDAs used by the parties in comparable transactions.
This provides another reason to contact the lender early in the process: If the lender won’t customize a strategy for the lease, it is at least aware of the negotiations and might be more responsive.
Permits and Construction
Obtaining building and use permits typically takes time, but budget cuts have reduced staffs at city planning and building departments, so review time may take longer than expected.
In addition, the loss of experienced city staff may lead to bumpier handling of formerly routine approvals and often to extensions, which won’t help to speed up project revenues, because city approval frequently triggers a tenant’s rent obligation. These concerns should motivate the parties to get the permit process in motion as soon as possible.
Because this submittal process requires costly advance design and planning work, the parties often wait until the end of the lease negotiation or make these approvals a post-execution contingency item. In that case, initiate contact with the city agencies and engage in pre-submittal due diligence, to speed the process when it does start.
Alert Tenants
Lease items important to tenants often linger as loose ends, using up critical time at the end of the transaction. For instance, a tenant may need to address its poor financials or its legal entity. Evaluate a prospective tenant’s financial condition and legal entity at the start to avoid encountering these problems at the back end of the transaction.
Similarly, tenants may wait until late in the game to discuss tenant financing. A tenant’s lender may want SNDA changes, a landlord lien waiver, and lease document changes. Ask the tenant for its lender’s proposed requirements and integrate these issues as soon as practical into ongoing lease negotiations.
Even standard concerns like insurance and construction frequently stir up new issues just when deal closure is expected. Submit your insurance requirements to the tenant’s risk consultants for review long before lease execution. Bring construction teams together to flush out misunderstandings or logistical concerns. Get the tenant’s signage plans in advance to facilitate city approval and construction review.
Finally, account for final lease approval by the tenant’s management team. How long does it take? What can you do to expedite the process? Current economic conditions add unpredictability to a process that often starts just when you thought things were done.
Third Parties
Because landlords and tenants cannot control adjacent owners or other parties to recorded agreements, obtaining parking or other rights for a tenant under such recorded agreements can cause delays. Similar issues arise from offsite work, environmental remediation, or similar large-scale requirements, which raise substantial legal and practical issues. Obviously landlords should confront these matters long before they reach a crisis point.
Lease security introduces such third parties as guarantors and issuers of letters of credit such as banks. Although negotiation of the guaranty or LC routinely occurs at the last minute, try to negotiate these documents at the same time as the lease to avoid delays.
Lease Negotiation
The lease negotiation process necessarily controls the basic nature and timing of the deal. Every negotiation goes more smoothly when the parties negotiate rates and terms realistically.
The lease document frames the tenor of the legal negotiations. Onerous pro-landlord lease forms take longer to negotiate. Accordingly, to quickly close deals, avoid draconian lease forms or at least offer pre-negotiated forms that soften the hard edges.
Accept risk in the negotiations. While landlords shouldn’t dispense with careful lease review or make capricious concessions, holding fast to every precaution prolongs negotiations.
Consider the big picture value when selecting attorneys. Property owners are increasingly conserving precious cash by keeping legal work in-house, but an in-house attorney may lack real estate expertise or simply be overloaded with work, ultimately delaying the deal. Also, this market calls for flexibility in approaching the legal provisions of the lease. An attorney with experience as a real estate business person, or at least a business-oriented approach, adds value in this economic environment.
When you need to put a tenant in place, look beyond the LOI and lease document. This leasing market presents multiple challenges that parties need get out in front of to avoid delays in getting ink on the signature page and rent in the lockbox. Landlords can’t control everything, but they can take a proactive approach to create momentum toward a completed deal.
Landlords in this anemic leasing market want to act quickly to get leases signed and rent payments started. Economic instability brings fresh urgency to the need for increased occupancy. But delays and roadblocks can slow the process and frustrate a landlord’s preferred schedule.
Negotiating the lease isn’t enough –- the landlord must move all transaction elements forward at once. This article is a checklist of common-sense considerations to get the tenant signed up, into its space, and writing rent checks.
Financing
A project’s financing directly impacts the leasing process –- and, in today’s climate, lenders remain skittish. Practical landlords plan ahead for tenants’ initial build-out costs, whether direct costs or tenant allowances. If financing or alternate funding isn’t available, then proactively structure leases’ business terms to address these expenses.
Tenants expect landlords’ lenders to provide a subordination and nondisturbance agreement. It is increasingly difficult and time-consuming to extract reasonable SNDAs from lenders, so start the discussion early in the lease negotiation to avoid a hold up at lease execution time If the SNDA becomes a post-execution contingency item, the resulting delay could prevent rent commencement (or, worse, give the tenant a termination right).
Agree in advance on a form or at least initiate early discussions with the parties. A national retailer (or other multisite tenant) already may have completed SNDAs with your lender. Ask the brokers if they know of SNDAs used by the parties in comparable transactions.
This provides another reason to contact the lender early in the process: If the lender won’t customize a strategy for the lease, it is at least aware of the negotiations and might be more responsive.
Permits and Construction
Obtaining building and use permits typically takes time, but budget cuts have reduced staffs at city planning and building departments, so review time may take longer than expected.
In addition, the loss of experienced city staff may lead to bumpier handling of formerly routine approvals and often to extensions, which won’t help to speed up project revenues, because city approval frequently triggers a tenant’s rent obligation. These concerns should motivate the parties to get the permit process in motion as soon as possible.
Because this submittal process requires costly advance design and planning work, the parties often wait until the end of the lease negotiation or make these approvals a post-execution contingency item. In that case, initiate contact with the city agencies and engage in pre-submittal due diligence, to speed the process when it does start.
Alert Tenants
Lease items important to tenants often linger as loose ends, using up critical time at the end of the transaction. For instance, a tenant may need to address its poor financials or its legal entity. Evaluate a prospective tenant’s financial condition and legal entity at the start to avoid encountering these problems at the back end of the transaction.
Similarly, tenants may wait until late in the game to discuss tenant financing. A tenant’s lender may want SNDA changes, a landlord lien waiver, and lease document changes. Ask the tenant for its lender’s proposed requirements and integrate these issues as soon as practical into ongoing lease negotiations.
Even standard concerns like insurance and construction frequently stir up new issues just when deal closure is expected. Submit your insurance requirements to the tenant’s risk consultants for review long before lease execution. Bring construction teams together to flush out misunderstandings or logistical concerns. Get the tenant’s signage plans in advance to facilitate city approval and construction review.
Finally, account for final lease approval by the tenant’s management team. How long does it take? What can you do to expedite the process? Current economic conditions add unpredictability to a process that often starts just when you thought things were done.
Third Parties
Because landlords and tenants cannot control adjacent owners or other parties to recorded agreements, obtaining parking or other rights for a tenant under such recorded agreements can cause delays. Similar issues arise from offsite work, environmental remediation, or similar large-scale requirements, which raise substantial legal and practical issues. Obviously landlords should confront these matters long before they reach a crisis point.
Lease security introduces such third parties as guarantors and issuers of letters of credit such as banks. Although negotiation of the guaranty or LC routinely occurs at the last minute, try to negotiate these documents at the same time as the lease to avoid delays.
Lease Negotiation
The lease negotiation process necessarily controls the basic nature and timing of the deal. Every negotiation goes more smoothly when the parties negotiate rates and terms realistically.
The lease document frames the tenor of the legal negotiations. Onerous pro-landlord lease forms take longer to negotiate. Accordingly, to quickly close deals, avoid draconian lease forms or at least offer pre-negotiated forms that soften the hard edges.
Accept risk in the negotiations. While landlords shouldn’t dispense with careful lease review or make capricious concessions, holding fast to every precaution prolongs negotiations.
Consider the big picture value when selecting attorneys. Property owners are increasingly conserving precious cash by keeping legal work in-house, but an in-house attorney may lack real estate expertise or simply be overloaded with work, ultimately delaying the deal. Also, this market calls for flexibility in approaching the legal provisions of the lease. An attorney with experience as a real estate business person, or at least a business-oriented approach, adds value in this economic environment.
When you need to put a tenant in place, look beyond the LOI and lease document. This leasing market presents multiple challenges that parties need get out in front of to avoid delays in getting ink on the signature page and rent in the lockbox. Landlords can’t control everything, but they can take a proactive approach to create momentum toward a completed deal.
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