LEASE AGREEMENT REFERENCE GUIDE 1230: DRAFTING DURATIONAL LIMITS $49.95
DRAFTING DURATIONAL LIMITS
This LARG looks at time limits in leases. The first section lists several devices available to the parties to restrict the exercise of contractual rights in the lease. The Lease Clause Critique contains six separate clauses with comment illustrating the use of durational limitations, including exercise windows, unconditional cut-offs, conditional cut-offs, notices accelerating exercise, and lapse protection.
Using Timing Restrictions to Fine Tune Lease Obligations
Wise men have said that timing is everything in life. While timing may not be everything in leasing, timing provisions that restrict the exercise of contractual rights can become as important as the rights they constrain.
For example, suppose a tenant's lease contains an expansion option on adjacent space, but the option has a durational restriction on when the tenant may exercise and take down the new space. As a result, the tenant needs the extra space today, but can't exercise the option for another two years. What good is the expansion option to the tenant? No good. The durational restriction on exercise in this example is more important than the substantive right it constrains.
And, of course, that sort of simple durational restriction on exercise is common fare in commercial leases. And it is almost always found in options to renew, expand, terminate and purchase.
More Sophisticated Applications
Apart from simple timing mechanisms restricting the exercise of certain lease rights, there are a number of more tantalizing devices which can be extremely effective in shaping the contractual landscape of the lease. They include, for example:
Lapse Protection Devices which prevent certain rights from lapsing despite a party's failure to exercise them in a timely manner. For example, renewal options normally must be exercised by the tenant strictly in accordance with timetables specified in the lease. If the tenant misses an exercise date, even by one day, most landlord forms provide that the option lapses (i.e., becomes invalid). However, if the option contains anti-lapse protections, the option would continue until the landlord sends the tenant a notice asking whether the tenant intends to exercise the renewal option.
Exercise Windows which require the landlord or the tenant to exercise options for renewal, expansion, termination purchase, or other rights, within the confines of "not sooner than" and "not later than" dates.
Unconditional Cut-Offs which cut off existing liabilities or duties that would otherwise continue, such as statutes of limitations regarding payments required by contract. Normally, the statute of limitations for payments due by contract is longer than most tenants realize (e.g., seven years). This period can be shortened by a lease clause that imposes a waiver for charges not invoiced by the landlord within a certain time period (e.g., two years).
Conditional Cut-Offs which release a party from continuing lease liability provided certain conditions are met. Such conditional cut-offs sometimes terminate the post-sale lease liability of the landlord who sells his property, or the tenant's residual liability under the lease after it assigns the lease to a third party.
Notices Accelerating Exercise by which one party can require the other to either exercise a particular right immediately or see that right lapse. Such devices are sometimes negotiated by landlords to limit the effect of pro-tenant options to expand and options to purchase. This type of durational restriction requires the tenant to exercise its right within some relatively short period following the landlord's notice. If the tenant does not so exercise, the particular right will terminate.