MARCH 2007

The leading newsletter devoted to helping retail and office tenants negotiate, draft, and manage their leases.

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FEATURE Include Five Critical Operating Expense Protections in Your Lease . . . . . . . . . . . . . . . . . . . . . . . 1 Otherwise, you could end up paying too much for operating expenses.

FEATURE

Include Five Critical Operating Expense Protections in Your Lease By Charles F. Martin III, Esq. Charles F. Martin III, Esq., is a commercial real estate attorney with Robinson & Cole LLP in Stamford, Conn. He can be reached at (203) 462-7522 or [email protected].

*** Track Key Lease Dates, Deadlines. . . . . . . . . . . . . . . . . . . . . . . . 1 By missing a deadline, you could violate your lease, forfeit certain rights, or enable the owner to exercise one of its rights.

Recent Court Rulings . . . . . . . . . . . . . . 7 þ No Dismissal of Tenant’s Lawsuit Against Insurer þ Owner Not Required to Help Tenant Get Building Permit þ Termination Option Applied During Extension Term

Ask the Insider . . . . . . . . . . . . . . . . . . . 8 þ Defining ‘Vanilla Box’

Endorsed by

If you are like many office tenants, you focus hard on the specific items included and excluded from the definition of “operating expenses” in your lease. And for good reason, because the costs and expenses that are included or excluded can greatly affect the amount of money you will pay as “additional rent” over your lease term. Often overlooked, however, are five critical protections that have an impact on operating expenses and that, if not included, can affect your bottom line as well. (continued on p. 2)

Track Key Lease Dates, Deadlines A typical lease has numerous key dates and deadlines, such as the rent commencement date and the deadline for giving notice of your intent to renew your lease. If you don’t keep track of these dates and deadlines, you could violate the lease, lose a valuable right, or enable the owner to exercise one of its rights. For example, if you don’t notify the owner of your intent to renew by the appropriate deadline, the owner may argue—and a court may agree—that the owner does not have to honor your late renewal notice. You can prevent these things from happening by tracking key dates and deadlines, advises Elizabeth Ferrara, lease and asset manager for 1-800-flowers.com. We will tell you why you should track key lease dates and deadlines, which ones to track, how to determine the correct dates and deadlines that are not spelled out in your lease, and how to track key dates and deadlines. Missing Deadlines Could Cost You Most states take the view that lease deadlines should be strictly enforced and that failure to meet a deadline should be excused only in very limited circum(continued on p. 5)

COMMERCIAL TENANT’S LEASE INSIDER®

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BOARD OF ADVISORS

MARCH 2007

Five Protections (continued from p. 1) These protections are:

Alan M. DiSciullo, Esq. Citigroup Realty Services New York, NY Elizabeth Ferrara 1-800-Flowers.com Westbury, NY Harvey M. Haber, QC, LSM Goldman, Sloan, Nash & Haber Toronto, ON Canada D. Scott Hargadon, Esq. Bryan Cave LLP Chicago, IL Gary I. Kahn, Esq. Governor-at-Large National Retail Tenants Assn. New York, NY Daniel Kopp, Esq. Daspin & Aument LLP Chicago, IL Bruce R. Long, Esq. Trans World Entertainment Albany, NY

Richard C. Mallory, Esq. Allen Matkins Leck Gamble Mallory & Natsis LLP San Francisco, CA Stephen J. Messinger, Esq. Minden Gross Grafstein & Greenstein LLP Toronto, ON Canada Jeffrey A. Moerdler, Esq. Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, PC New York, NY Robert P. Reichman, Esq. Siller Wilk LLP New York, NY Mark A. Senn, Esq. Senn Visciano Kirschenbaum Merrick, PC Denver, CO Thomas F. Stewart, Esq. Downey Brand LLP Sacramento, CA Camilla Titterington, Esq. PetSmart, Inc. Phoenix, AZ

Gross-up protections; Limits on profits; ■ Caps on controllable expenses; ■ Recalculation of your proportionate share; and ■ Operating expense audit rights. These five critical protections are not particular to the market you are in, the size of the lease transaction, your creditworthiness, or any other factor. However, every tenant—whether you are a Fortune 500 company leasing 100,000 square feet in New York City or a small, start-up company taking much less space in the same market—can get these protections. ■ ■

Because these protections benefit you, most often they will not be included in a typical owner’s lease form. Thus, you will need to discuss them yourself with the owner. I will explain these five critical protections and how you should address them in your lease. I will also give you Model Lease Language for each of these protections that you can adapt and use in your lease.

Senior Editor: Wendy B. Starr, Esq. Executive Editor: Emily-Sue Sloane Copy Chief: Lorna Drake Production Manager: Kathryn Homenick Marketing Director: Kevin Mahon Director of Operations: Michael Koplin Publisher: Mark Fried Editorial Director: Julie DiMauro, Esq.

Commercial Tenant’s Lease Insider (ISSN 15512215) is published monthly by Vendome Group, LLC, 149 Fifth Ave., New York, NY 10010-6823. Subscriptions/Customer Service: To subscribe or for assistance with your subscription, call 1-800-5193692 or go to our Web site, www.vendomegrp.com. Subscription rate: $337 for 12 monthly issues (plus $15 shipping/handling). To Request Reprints: Email: [email protected]. To Contact the Editor: Email: wstarr@vendome grp.com. Call: Wendy B. Starr, Esq., at 212-812-8434; Fax: 212-228-1308. Disclaimer: This publication provides general coverage of its subject area. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional advice or services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The publisher shall not be responsible for any damages resulting from any error, inaccuracy, or omission contained in this publication. © 2007 by Vendome Group, LLC. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system, without written permission from the publisher. Commercial Tenant’s Lease Insider is a registered trademark of Vendome Group, LLC.

FIVE CRITICAL PROTECTIONS

❑ Make Owner ‘Gross-Up’ Certain Costs During Base Year As a building’s occupancy rate rises or falls, certain operating expenses rise and fall, too, depending on the number of occupants in the building. These “occupancy-dependent” operating expenses may include such costs as electricity, garbage removal, and HVAC. The occupancy fluctuations can lead to big increases and declines in total operating expenses, which are the sum of the occupancy-dependent operating expenses and also nonoccupancy-dependent operating expenses— that is, those that don’t rise and fall with occupancy. If you have a base year lease (or “modified gross lease”), it is not fair for you to pay a lot more or less, however, just because the building’s occupancy rate changes. You are still getting the same services, no matter how many other spaces are occupied. Grossing-up is a method that can prevent these big variations. When an owner grosses-up, it determines how much each occupancydependent operating expense would be if the building were nearly full—for example, 95 percent full. This evens out the occupancy-dependent operating expenses in base year leases so they don’t fluctuate with changes in the building’s occupancy rate. If you have a base year lease and are paying your proportionate share of operating expenses over a base year, make sure that, during the base year, the owner grosses-up: ■ All

occupancy-dependent expenses; and

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■ The costs of all services and utilities that other tenants are paying separately—such as tenants paying their electric bills directly to their utility company. If those expenses and costs are grossed-up only after the base year, but not during the base year, you could end up paying a share of huge increases in operating expenses over the base year.

Example: A lease requires you to pay your proportionate share of increases in operating expenses over a base year. If the building were fully occupied, the owner’s annual tenantrelated cleaning expenses would be $100,000. But the building’s occupancy rate in the base year falls to 50 percent, so the cost of the owner’s cleaning services for the base year is only $50,000. The lease requires the owner to gross-up to 95 percent all occupancydependent expenses every year after the base year when the building’s occupancy rate falls below 95 percent. If the building is 100 percent occupied during the second year of the lease term, the owner’s cleaning costs will jump to $100,000. You are stuck paying your share of that $50,000 ($100,000 - $50,000) increase in cleaning services. However, if the owner were required to gross-up such occupancydependent cleaning expenses during the base year, cleaning services during the base year would have been $95,000, instead of $50,000. Thus, you would pay your share of only the $5,000 ($100,000 - $95,000) increase in cleaning services in the second lease year. Clarify in the lease that the owner must gross-up operating expenses in the base year, as well as any year thereafter in which the building is less than 95 percent occupied:

Model Lease Language If, during any lease year, including, without limitation, the Base Year: (i) The Building is less than ninetyfive percent (95%) occupied; or (ii) Landlord shall furnish any service to less than ninety five percent (95%) of the Building, whether because another tenant is separately paying for services or utilities furnished to its premises or otherwise, then Operating Expenses shall be increased by Landlord to reflect ninety-five percent (95%) of the Operating Expenses that would have been reasonably incurred by Landlord had the Building been at least ninety-five percent (95%) occupied and Landlord had furnished such services to at least ninety-five percent (95%) of the Building.

❑ Don’t Let Owner Profit from Operating Expenses The owner should not make any profit from operating expenses. Therefore, include a clause prohibiting the owner from collecting an amount greater than your fair share of the operating expenses. Model Lease Language Landlord agrees that Landlord shall not collect from Tenant an amount greater than Tenant’s Proportionate Share of the Operating Expenses actually paid by Landlord in connection with the operation of the Building and Landlord shall make no profit from Landlord’s collections of Operating Expenses.

Also, limit the collection of operating expenses to owner’s actual and reasonable operating expenses. Finally, try to eliminate any catch-all phrases in the definition of operating expenses that let owners back in additional operating expenses not specifically set out in the lease. Examples of such phrases include: “any other cost or expense of operating or maintaining the Property,” and “expenses paid or incurred by owner for the operation of the Property, including without limitation. ...”

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❑ Limit Controllable Expenses Try to place an annual cap on increases in operating expenses that the owner can control—such as building personnel salaries, building service contracts, and management fees. Otherwise, these expenses could get out of hand and you could end up having to pay your share of a huge bill. For instance, add the following language to your lease, but make sure you define “Controllable Expenses” elsewhere in the lease: Model Lease Language Tenant shall have no liability for increases in Controllable Expenses of more than [insert percentage] in the aggregate per annum, on a cumulative basis, over $[insert base year dollar amount].

❑ Recalculate Proportionate Share if Building’s Size Increases An obvious and fair thing to do is to put a clause in your lease requiring the owner to recalculate and reduce your proportionate share when the rentable area of the building where your space is located increases. The reduction in proportionate share could end up significantly lowering your operating expense bills. The reduction in your proportionate share should take effect when the owner receives a certificate of occupancy for any new rentable space in the building, or when any tenant occupies such new space for its business purposes, whichever occurs first. If certificates of occupancy are not issued by the municipality or another appropriate government authority in which the space is located, the trigger should be the document or event that legally allows a person or company to occupy the space.

(continued on p. 4)

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Five Protections (continued from p. 3) Model Lease Language If the rentable area of the Building shall at any time exceed [insert rentable square footage of building on the lease’s commencement date], Tenant’s Proportionate Share shall be recalculated and reduced by dividing the rentable square feet of the Premises by the new rentable square feet of the Building. Promptly following any such increase in the rentable area of the Building, Landlord and Tenant hereby agree to execute and deliver to each other an amendment to this Lease memorializing the reduction in Tenant’s Proportionate Share.

If the owner is not required to recalculate your proportionate share when the rentable area of the building increases, you may be stuck paying operating expenses using the old proportionate share, unless you want to spend the time and money to litigate the matter in court. In most states, commercial leases are nothing more than contracts, and the parties can negotiate any terms they want, provided those terms don’t violate the law or public policy.

❑ Get Right to Audit Owner’s Books Make sure you include a clause in your lease that gives you the right to audit, review, and challenge the owner’s calculation of operating expenses. That will help keep the owner honest, and it gives you the right to obtain a refund for any overcharges. Here is a short checklist to run through each time you negotiate for audit rights.

❑ Detailed statement. Require the owner to deliver to you within 30 days to 60 days after the end of each lease year a detailed statement of its actual operating expenses for the prior year. You don’t want the owner to drag its feet in giving you this information, especially because the statement may indicate that the owner overcharged your operating expenses. Model Lease Language Within [insert #, e.g., thirty (30)] days after the end of each Lease Year, Landlord shall deliver to Tenant a detailed statement setting forth the Operating Expenses actually incurred by Landlord for the prior Lease Year.

❑ Get refund of overpayment. If the statement from the owner shows that the actual operating expenses for the prior year were less than what you paid, the owner should promptly refund your overcharge. ❑ Get enough review time. Make sure the owner gives you enough time to review its statement of operating expenses, so that you can decide whether to challenge it. Typically, if you don’t challenge an owner’s statement within a set period of time, you will be deemed to have accepted it and will lose your right to challenge it. Therefore, try to give yourself at least 90 days to review the owner’s statement and decide whether you want to dispute it. ❑ Get access to books. Require the owner’s books and records to be available to you at reasonable times and at reasonable locations. For instance, if your lease is for space in Florida and the owner’s offices are

MARCH 2007

based in California, it would be a long haul to the West Coast. In fact, that scenario would probably discourage you from exercising your audit right. ❑ Get owner to pay your costs. If the owner has overstated operating expenses by at least some threshold amount—usually between 3 percent and 5 percent—require the owner to pay for your audit costs. Further, if you have enough leverage in the lease negotiations, fight for the right to receive interest on all overcharges. ❑ Submit disputes to arbitration. If you and the owner can’t agree on whether there has been an overcharge or undercharge of operating expenses, get the right to submit the matter to a mutually acceptable arbitrator or mediator. Model Lease Language If Landlord and Tenant are unable to agree whether an overpayment or underbilling of Operating Expenses has occurred, or on the amount of such overcharge or underbilling, then either Landlord or Tenant may submit the matter to arbitration in accordance with Clause [insert # of arbitration clause] of this Lease.

Ideally, the arbitrator or mediator should have at least 10 years of experience in handling such disputes in the relevant market. For more information on what to include in an audit clause, see “Get Effective Lease Right to Audit Owner’s Books and Records,” Insider, March 2005. You can also download this article from the Real Estate section of Vendome Group’s Web site, www.vendomegrp.com. ■

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MARCH 2007

Track Key Dates, Deadlines (continued from p. 1)

stances—for example, if the failure was caused by fraud. The idea here is that the courts should not be used to extricate a tenant or an owner from a circumstance that it created. This is particularly true if the lease says, “Time is of the essence,” because that means you must perform all of your lease obligations without any delay. Look what happened to this Illinois tenant: The lease gave the tenant a cancellation option. The tenant had to do two things to exercise the option: 1) pay a cancellation fee; and 2) send written notice of the cancellation by Sept. 1. The cancellation option stated that “time [was] of the essence.” The tenant sent the cancellation fee on Aug. 31, but the owner didn’t receive the written cancellation notice by the deadline. Therefore, the owner informed the tenant that the option had expired, the lease was still in effect, and the owner would return the cancellation fee. The tenant sued the owner and asked the court to determine that the tenant had validly exercised its cancellation option. The tenant argued that it had effectively exercised the cancellation option because the owner knew when it received the cancellation fee on Aug. 31 that the tenant intended to exercise the option. An Illinois appeals court ruled that the tenant had not effectively exercised the cancellation option. The court noted that Illinois law requires commercial tenants that want to exercise an option to cancel or extend a lease to strictly comply with the terms of that option. That meant that the tenant was required to give the owner both the cancellation fee and written notice by the Sept. 1 deadline. However, the tenant admitted to the court that it didn’t provide written

notice by that deadline, but rather, it had sent the owner a copy of its written notice on Sept. 13. “In other words, Tenant conceded that it did not strictly comply with the Cancellation Option,” retorted the court [Thomson Learning, Inc. v. Olympia Properties, LLC]. Ferrara just experienced a sticky situation in which a tenant missed a key lease deadline. The situation concerned an environmentally contaminated space that was being remediated. The lease said that if the owner was ready to deliver the space to the tenant, but the tenant believed that the space had not been completely remediated, the tenant had to send the owner written notice objecting to the space’s delivery before the delivery date. The tenant missed the deadline for the objection notice. Fortunately for the tenant, the owner decided to push back the delivery date so the remediation issue could be resolved amicably. However, another owner may not have been so accommodating to this tenant, Ferrara warns. Dates and Deadlines to Track Don’t just track the dates and deadlines that relate to your rights and obligations. Also track those that relate to the owner’s rights and obligations so you will know when certain obligations begin, notices are due, and so on, says Ferrara. This way, you will know when you can take appropriate actions, she explains. For example, if you track the owner’s deadline for giving you notice of the restoration of your space, you will know when to expect that notice, she says. And if the owner misses that deadline, you will know when you can take the appropriate action, such as exercising your right to terminate the lease, she adds.

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The key dates and deadlines that you should track can be broken down into the following categories: Lease commencement and termination dates. Track the dates that mark the commencement of the lease and any obligations under the lease, says Ferrara. And track the dates that mark the end of the lease or the end of any of these obligations, she adds. Such dates include the following: ■

Lease signing date;

■ Delivery date—that is, the date by which the owner must deliver the space to you; ■ Lease commencement date— that is, the date on which the lease term starts; ■ Rent commencement date—that is, the date on which you must start paying rent; and ■ Termination date—that is, the date on which the lease term and obligations end. Money-related/financing dates. In addition to the rent commencement date mentioned above, you should track the following rent- and moneyrelated dates, suggests Ferrara:

Rent increase dates—that is, the dates on which your rent will increase—for example, the third and fifth years of the lease term; ■

rent payment dates— that is, the dates on which you must pay additional rent, such as percentage rent or your pro rata share of the center’s CAM costs or the building’s operating expenses; ■ Audit request date—that is, the date by which you must request an audit of CAM costs/operating expenses after receiving an annual CAM cost/operating expense reconciliation statement; ■ Security deposit “burn off ” dates—that is, the dates on which the ■ Additional

(continued on p. 6)

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MARCH 2007

Track Key Dates, Deadlines (continued from p. 5)

owner has agreed to refund part of your security deposit; ■ Estoppel letter due date—that is, the date by which you must sign and deliver to the owner an estoppel certificate; and ■ Letter of credit expiration date—that is, the date on which your letter of credit expires and thus must be renewed, provided that it is not an evergreen letter of credit, which renews automatically. Special rights/option deadlines. A lease may give you and the owner various options, such as a kick-out option or a renewal option, says Ferrara. Most of these options require the party with the option to notify the other party of its intent to exercise it by a certain deadline, she explains. Therefore, track the deadlines for serving notice of the following options: ■ Renewal or extension option— that is, your right to renew the lease; ■ Expansion option—that is, your right to expand your space by leasing additional space in the building or center; ■ Purchase option—that is, your right to buy your space; ■ Right of first refusal—that is, your right to require the owner to lease or sell you space that it plans to lease or sell to a third party for the same rent or price and terms that it is willing to accept from the third party; ■ Termination option—that is, the right of either you or the owner to terminate the lease; ■ Kick-out option—that is, the owner’s right to kick you out or your right to terminate the lease should your gross sales fall below a certain level; and ■ Relocation option—that is, the owner’s right to relocate you to another space in the building or center.

*** PRACTICAL POINTER: Your leases may have other miscellaneous dates and deadlines that you should track, such as the deadline for the owner’s consent to or rejection of your sublet or assignment request, and the date by which you can resort to your remedies for cotenancy or exclusive use violations. Be sure to thoroughly check your lease for other key dates and deadlines, says Ferrara.

*** Determining Correct Dates and Deadlines Some of the dates you should track are fixed or stated in the lease, such as the date the lease was signed or the date by which the owner must deliver the space to you, says Ferrara. However, there are other dates that you will have to correctly determine, she notes. For example, if you have a renewal option and must notify the owner six months before the lease termination date of your intent to exercise that option, you must first determine the lease commencement date and then calculate what the termination date is according to the length of the lease term. Then, you must count back six months from the termination date to determine the deadline by which you must give the owner your renewal notice. You will not necessarily be able to determine all the key dates and deadlines when you first get the signed lease, warns Ferrara. Some dates and deadlines are triggered only when certain events occur, she explains. Therefore, you will not be able to determine the appropriate deadline until the event occurs—if it occurs at all, she says. For example, suppose you must notify the owner of your intent to sublet your space, and the lease requires

the owner to consent to that proposed sublet within 30 days of getting such notice from you. You can’t track the deadline for the owner’s consent until you have given it your sublet notice. However, you may never want to sublet, so you may never have to track the owner’s consent deadline.

*** PRACTICAL POINTER: When you sign a lease, you may not even know what the lease commencement date will be, because, for instance, the building’s construction or the space’s buildout is unfinished. As a result, leases are often signed with a clause saying that the lease is subject to a commencement date to be determined later. Asking for a “commencement date notice” from the owner may be a good idea. A commencement date notice provides precise calendar dates of important events and options, not only the lease commencement date, notes Ferrara. The notice helps to avoid disputes between you and the owner over what the key lease dates and deadlines are if they were not clearly stated in the lease. For example, a commencement date notice can set: ■ The lease’s commencement and expiration dates; ■ The amount of the first payment of base rent and when it is due; ■ The dates of each rent escalation and the amount of base rent due; and ■ Deadlines for your notices exercising any special rights or options.

*** How to Track Dates and Deadlines Tracking key dates and deadlines is an ongoing process—especially because you may not know some of these dates until triggering events occur, says Ferrara. You should track the known or fixed dates at the beginning of the lease

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term and then update and add new dates and deadlines as they arise, she adds. The software you use to abstract your leases can most likely track your key dates and deadlines, and notify you when one is approaching, thereby simplifying the process, she adds. If

you don’t use lease abstracting software, you can use any calendar or spreadsheet program on your computer system to track the key dates and deadlines in your leases, she notes. ■ ■

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Insider Source Elizabeth Ferrara: Lease & Asset Manager, 1-800-flowers.com, 1600 Stewart Ave., Westbury, NY 11590; (516) 869-2452; [email protected].

Thomson Learning, Inc. v. Olympia Properties, LLC: 850 N.E.2d 314, (Ill. Ct. App. 2006).

RECENT COURT RULINGS

➤ No Dismissal of Tenant’s Lawsuit Against Insurer A lease required a tenant to maintain insurance and to name the owner as an additional insured or loss payee on the tenant’s policy. The tenant bought the insurance, but did not name the owner as an additional insured or loss payee. Later, a fire damaged the tenant’s space and the tenant filed a claim under its insurance policy. However, the insurer denied the claim. The owner sued the tenant for damages to the space. The tenant then sued the insurer for denying the tenant’s claim. The insurer asked the court to dismiss the tenant’s lawsuit. The insurer argued that because the owner did not qualify as a “third-party beneficiary” of the tenant’s policy, the tenant’s lawsuit could not stand. A Florida appeals court refused to dismiss the tenant’s lawsuit against the insurer. The court noted that the tenant’s lawsuit against the insurer—known as a “third-party action”—was proper because the insurer may be liable to the tenant for all or part of the owner’s damages, even though the owner was not named as an additional insured or loss payee of the policy.

issue a building permit to the tenant, because the parking lot’s driveways were too narrow. The tenant and owner could not agree on how to fix the problem so the tenant could get a building permit. The tenant stopped paying rent and terminated the lease. The tenant argued that the owner had materially violated the lease by, among other things, not allowing the tenant to make improvements to the lot and making the lot inaccessible to the tenant. A Minnesota appeals court ruled that the owner had not materially violated the lease. Rather, after reviewing the lease, the court determined that the owner had complied with the lease’s express provisions. And the disclaimers in the lease insulated the owner from a claim that the owner’s failure to deliver space suitable for use as a credit union was a material violation, the court added. Because the owner did not materially violate the lease, the tenant was not allowed to stop paying rent. Also, any interference with the tenant’s full use of the space “was the result of requirements imposed by the city,” not by the owner’s actions, said the court. ■

In the tenant’s lawsuit against the insurer, the tenant was making a claim for indemnification. And indemnification claims “must be brought as part of any third-party action” under Florida law, said the court. ■

New York Buffet, Inc. v. Certain Underwriters at Lloyd’s London: No. 4D05-4103, 2007 Fla. App. LEXIS 1411 (Fla. Ct. App. 2/7/07).

➤ Owner Not Required to Help Tenant Get Building Permit A credit union tenant leased space in a building and an adjacent parking lot. The lease included several owner disclaimers—such as the owner’s disclaimer of the warranty that the space was suitable for the tenant’s use. Also, the tenant agreed in the lease to take the space “as is” and “with all faults.” The municipal government refused to

Nicholson v. University of Minnesota Federal Credit Union: No. A06-652, 2007 Minn. App. Unpub. LEXIS 142 (Minn. Ct. App. 2/6/07).

➤ Termination Option Applied During Extension Term A lease’s rider gave a tenant two termination options. The second option could be exercised “at the completion of the twenty-fourth (24th) lease month.” The initial lease term ended on March 31, 1999, but the parties amended the lease and extended the term until March 31, 2009. Each amendment said that the lease’s terms and conditions would remain in full force and effect. On Oct. 14, 2005, the tenant exercised its option to terminate the lease on March 31, 2006—the 24th month of the extension term. The owner tried to block the termina(continued on p. 8)

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Recent Court Rulings (continued from p. 7) tion, arguing that the termination option didn’t apply during the extension term. A federal court in Michigan ruled that the termination option also applied during the extension term. The court noted that the lease was “clear and unambiguous on its face.” The court rejected the owner’s attempt to use outside evidence to prove that the parties did not intend the termination option to apply during the extension term. The lease specifically said that the terms and conditions in the lease and its exhibits and riders set forth the entire agreement of the parties, noted the court. Plus, there A S K

T H E

Defining ‘Vanilla Box’

Q A

Is there a standard definition of a “vanilla box” in commercial leasing?

No, says Miami attorney Carol Schoffel Faber. As a result, the term “vanilla box” means different things to different people. It may be generally understood that a vanilla box means the “demised” or delineated space, where demising walls separating it from the common areas and other tenant spaces have been constructed, she says. However, it may or may not include utilities and the finished interior walls, ceiling, or floor, she adds. What a vanilla box actually comprises will depend on the specifics of the lease deal and the building involved. Because there is no universally accepted definition of vanilla box, you would need to come up with your own definition to reflect your lease deal, says Faber.

Although some commercial owners may think that excluding a definition of vanilla box from their leases affords them more flexibility in what they must provide or allows them to avoid negotiating with the tenant about exactly what will be included, that is a risky road to follow, warns Faber. Defining vanilla box in a lease gives both parties certainty of what the owner will provide, and the items for which the tenant is responsible, she says. Without clarifying the condition in which the space will be delivered, the owner and tenant could have differing expectations, which could lead to conflict and even potential lawsuits. And that is not the best way to begin the owner-tenant relationship, says Faber. The term “vanilla box” can be used with any type of space, from retail and industrial space to office space, Faber notes. Since the owner knows what will be included in the vanilla box, the owner should have its architect, engineer, general contractor, and other construction professionals put together a detailed list, including specifications, of

MARCH 2007

was no proof of fraud, illegality, or mistake. Thus, the tenant did not violate the lease by exercising its early termination option for March 31, 2006, said the court. ■

General Pattern Co. v. REIT Management & Research, LLC: No. 06-CV-12627, 2007 U.S. Dist. LEXIS 7173 (U.S. Dist. Ct. E.D. Mich. 2/1/07).

Lesson Learned: If you do not want a special right or an option to apply during an extension or renewal term, then specifically say so in the document extending or renewing the lease.

I N S I D E R

which improvements will be provided as the vanilla box, says Faber. Those improvements will most likely concern walls (separation and demising walls), ceiling, doors, electrical (including electrical outlets), fire sprinklers, floor, HVAC, lighting, plumbing, restrooms, and a store front, she says. The list can then be attached as a schedule to the lease. Also, although actual specifications will vary from project to project and from owner to owner, there are issues that the parties should address in any vanilla box situation. For example, they should decide, and the lease should discuss, whether the electrical will be stubbed into the tenant’s space or will end at the building’s utility room, so that the tenant must bring it to the space, Faber adds.

*** PRACTICAL POINTER: Tenants should be aware that there is a difference between the terms “vanilla box” and “as is,” notes Faber. The lease may require the tenant to agree to take the space “as is,” in the condition existing at the time the lease was signed or at another time specified in the lease. The term “as is” means that the tenant is responsible for finding out what is and is not included in the space, and what each of the parties is expected to provide, she says. Any misunderstandings about what is and is not included in the space is likely to be resolved against the tenant because the tenant expressly agreed to take the space in the “as is” condition, Faber explains. Therefore, a tenant should protect itself by speaking to its construction professionals before it signs a lease, to make sure that it understands what the space will and will not include, she advises. ■ Insider Source Carol Schoffel Faber, Esq.: Member, Akerman, Senterfitt, One S.E. Third Ave., Ste. 2800, Miami, FL 33131; (305) 374-5600; [email protected].

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