LEASE AGREEMENT REFERENCE GUIDE 260: ALTERATIONS IN COMMERCIAL LEASES $24.95
ALTERATIONS IN COMMERCIAL LEASES
Tenant Alterations--A Clash of Many Interests
This LARG looks at alterations by the tenant to its premises, and the clash of interests between the landlord, the tenant, the landlord's lender and the tenant's lender that results. Both retail and office/industrial landlords find themselves leasing more space to noncredit tenants these days, and such tenants frequently borrow from third party lenders to finance improvements and leasehold equipment. This means that alterations clauses get more scrutiny than they used to, since both landlords and tenants often have lenders looking over their shoulders during lease negotiations.
The Tenant's Alterations Checklist is a specific laundry list that tenants (and landlords) might wish to consider during negotiations that focus upon alterations issues.
Enter the Equipment Lessor analyses a Waiver and Consent Form commonly used by equipment lessors that provide equipment to the tenant which is affixed to the leased premises. In the most usual case, the Waiver and Consent form is used for restaurant equipment, security systems, telephone, telecommunications and computer equipment, but it could apply to any equipment affixed to the leased premises subject to third party financing. The Landlord's Response to the Equipment Lessor outlines basic concerns that the landlord and its lender would likely have regarding the Waiver and Consent, and contains an addendum for such a waiver that neutralizes some of its provisions most objectionable to landlords.
The Lease Clause Critique covers a pro-landlord alterations clause for office buildings. The clause discussed there is generally representative of alterations clauses found in landlord-oriented office forms.
The Tenant's Alterations Checklist
Generally speaking, the longer the term of the lease, the more extensive the tenant's rights are to make alterations to the premises. This makes sense, since the long term tenant is much more likely to need to alter the premises than the three year retail or office tenant. Apart from that rule of thumb, rights to alter the premises are all subject to negotiation between the landlord and the tenant. The tenant, whether it is an office, industrial or retail tenant, may want to consider the following points when negotiating the alterations provisions of its lease:
Enter the Equipment Lessor
Equipment lessors will usually not install business equipment in leased premises unless they receive a waiver of certain rights from the landlord ensuring that they won't lose the equipment if the tenant defaults. The Waiver and Consent that follows is a form used by many equipment lessors that furnish telephone, telecommunications or computer equipment to tenants in office buildings. The purpose of the form is to give the equipment lessor furnishing the equipment fairly broad rights regarding the installation, servicing and removal of that equipment.
The form also ensures that the equipment lessor will not face competing claims against the equipment from the landlord under the lease if the tenant defaults and the landlord is in the process of evicting the tenant. It is reasonable for equipment lessors furnishing equipment to tenants to have some sort of arrangement with the landlord regarding these issues. However, the landlord must be mindful of the loan covenants in its lender's financing documents that pertain to the security for the loan, and the landlord's own interests with regard to leasehold improvements and the landlord's remedies in the event of tenant default.
Clause #1 of the Waiver and Consent provides that the equipment which is itemized on Exhibit A to the form may be installed or affixed to the real estate, but that it will still constitute personal property, and that title to the equipment will remain in the equipment lessor's name or in the name of its assigns, as the case may be. This provision appears in the form because language in pro-landlord lease forms customarily makes all improvements to the leased premises vest in the landlord's ownership at the time they are made, except for trade fixtures and equipment (see Section 15.1 of The Lease Clause Critique). The equipment lessor includes such language so that it will have no argument with the landlord as to ownership of the itemized equipment.