Retail Perspectives - Practical Tips

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Scott L. Grossfeld
310.284.2247

Real Estate

Retail

Do Not "Permit" Your Rent Commencement Date To Go On Forever

By: Scott Grossfeld
 

Many rent commencement provisions in retail leases provide that the rent and the term of the lease start upon the occurrence of the earlier of (i) the tenant’s opening for business at the premises, or (ii) a certain negotiated number of days following the delivery of the premises to the tenant (usually enough days for the tenant to perform its build-out).  This type of provision creates an element of certainty for the landlord as to when rent will start – no later than the negotiated number of days from the landlord’s delivery of the premises to the tenant.

However, some larger and/or more creditworthy tenants with more bargaining strength sometimes try to structure provisions that trigger rent and lease commencement upon the tenant receiving approval of its tenant improvement plans from the landlord and receiving all necessary permits to perform its build-out work from the subject city or other governmental authority.  These additional elements can create major issues for a landlord, and should be avoided, if possible.  The landlord cannot control how long it will take the tenant to obtain approval of the tenant’s plans or receive necessary permits. Indeed, obtaining either or both may require extensive periods of time not contemplated by the parties, causing the commencement date to be pushed out beyond periods that are acceptable to the landlord.  With a provision like this, there is no certainty for the landlord as to when the lease and rent will start. 

Therefore, when faced with these types of provisions, landlords should consider a few strategies to try to limit the open nature of the tenant’s rights and create some structure, balance and boundaries.  The following are some concepts to consider, although other strategies also exist.  For example, the landlord should require the tenant to pursue its plans and permits using at least commercially reasonable, good faith and diligent efforts.  The landlord should require the tenant to submit plans and re-submit corrections by certain dates and in accordance with the construction exhibit to the lease.  The landlord may also want to consider requiring the tenant to use a plan expediter with the city.  In the event permits are not obtained by a negotiated date, the landlord should have the option to attempt to obtain the permits on the tenant’s behalf (and at the tenant’s cost).  The landlord should attempt to negotiate a limit to the tenant’s permit period, such that the permit condition is deemed satisfied or waived upon the earlier of tenant receiving its permit, or the expiration of an agreed number of days following the execution of the lease.  Finally, if all else fails, and because the landlord cannot be in a position where it loses control of its real estate without rent flow for an open-ended period, the landlord should consider negotiating a right to terminate the lease in the event these conditions are not satisfied within a certain time following the lease execution date.

One of the most important provisions of a lease is the rent commencement provision.  A landlord should be careful to draft this provision correctly in order to protect its interests.  For advice on the foregoing or other issues, please feel free to contact us.

Cox, Castle & Nicholson LLP is a full service law firm offering comprehensive legal services to the business community and specialized services for the real estate and construction industries.  Reproduction is prohibited without written permission from the publisher.  The publisher is not engaged in rendering legal, investment, business or insurance counseling through this publication.  No statement is to be construed as legal, investment, business or insurance advice.

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