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Lease Strategies

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This LARG contains the following items:

Lending Issues in Commercial Leases, and the Lease Clause Critique: Lender Modification Clauses

Number of Single Spaced Pages: 12




This LARG outlines the major points that may concern a lender in its review of space leases. Although most developers try to anticipate such financing concerns, lenders have been known to be arbitrary in their requirements for underlying space leases that pertain to properties which they finance. This is particularly true during periods when financing is tight, and the lender has a number of loan applications competing for the same loan funds.

As a result, many landlords seek to include lender modification clauses in their lease forms which obligate the tenant to make modifications or amendments to their leases requested by a lender following signing if such items are "reasonable" or 'nonsubstantive". Two examples of this type of provision follow. They sometimes appear in the "miscellaneous" section of the lease, and should be carefully reviewed by a tenant that wishes to avoid later disputes about "reasonable" or "nonsubstantive" amendments requested by the lender. This is particularly true since landlords will frequently threaten uncooperative tenants with a damage action for loss of the financing if they do not consent to the amendments requested by the lender.

In negotiations concerning such clauses, some tenants will agree to make "reasonable" modifications to their leases which benefit only the lender (but not the landlord) and become operative only after the lender actually comes into possession of the property following foreclosure proceedings. This approach may expedite the discussions over the clause since a tenant may think that the risk of having the modifications take effect if the lender comes into possession is one worth taking to shortcut negotiation over the issue.

Clause #1 provides for arbitration in the event a tenant considers a proposed amendment to be "substantive". Clause #2 is considerably more brief and obligates the tenant to consent promptly to modifications which do not "increase the obligations" of the tenant or "materially adversely affect the leasehold interest" or the tenant's rights under the lease. Although those limitations appear in the clause for the protection of the tenant, they may prove to be extremely difficult to apply to a particular amendment proposed by the lender after the lease is signed.

Lender Modification Clause #1

51.1 (a) It is understood by Lessee that during the term of this lease, Lessor may place new or additional financing upon the complex and in that event this lease must be approved by the financing institution making such additional financing. Accordingly, if any such financial institution requires, as a condition to the making of its loan, any nonsubstantive modification of this lease, Lessee agrees to enter into an amendment so modifying this lease. In the event Lessee refuses on grounds that the modification is substantive, that issue only shall be arbitrated as provided in Section 51.1(b) below.

(b) If the parties are unable to agree on the terms of the amendment, then each party, at its own cost and expense, and by giving notice to the other party in writing, shall appoint an arbitrator with at least five (5) years experience as an appraiser or a real estate broker working with commercial/office real property leases in the county in which the premises are located (hereinafter "qualified arbitrator"), to arbitrate and set the terms of the amendment. If a party does not appoint a qualified arbitrator within ten (10) days after the other party has given notice of the name of its arbitrator, the single arbitrator appointed shall be the sole arbitrator and shall set the terms of the amendment. If the two (2) arbitrators are appointed by the parties as stated in this section, they shall meet promptly to select a third qualified arbitrator within ten (10) days after the appointment of the later of the two arbitrators. If they are unable to agree promptly on the third arbitrator, either of the parties to this lease, by giving five (5) days notice to the other party, may apply to the then president of the County Real Estate Board for the county in which the property is located, or to the presiding judge of the highest trial court in the county in which the property is located, for the selection of the third arbitrator. Each of the parties shall bear one-half of the cost of appointing the third arbitrator and of paying the third arbitrator's fee. The third arbitrator, however selected, shall be a person who has not previously acted in any capacity for either party. Within ten (10) days after the selection of the third arbitrator, each of the arbitrators shall notify each of the parties hereto, in writing, of its opinion as to the terms of the amendment. If it is determined by such arbitration that Lessee refuses to execute such amendment within ten (10) days after such determination, thereby breaching its lease obligation herein, then Lessor shall have the right, in addition to any other remedies it may have at law or in equity, by giving written notice to Lessee, to terminate this lease; and upon giving such notice this lease shall terminate and both Lessor and Lessee shall pay any sums owing to the other at the time of such termination.


End of Excerpt