- QUESTION: What is a "gross-up" provision and why is it included in commercial leases?
- QUESTION: Even though my real estate loan is current, the lender has stopped funding due to "increased risk." What are my rights?
- QUESTION: There is currently a great opportunity to acquire real estate as a result of the recent number of loans that are on the brink of foreclosure. Real estate developers might have the ability to purchase these loans at a discount and then foreclose on the real estate securing such loans. When purchasing such loans with the intention of foreclosing on the real estate, what protections should a purchaser request be included in the agreement of sale?
- QUESTION: The real estate tax assessment on my shopping center was just increased, and I don't know why. What may I have missed?
- QUESTION: What issues should be considered when forming a joint venture?
- QUESTION: If I have a piece of land in Pennsylvania that I can not subdivide, can I create a condominium and sell separate parcels.
- QUESTION: A prospective tenant has asked to "cap" annual increases in common area charges. Should I agree?
- QUESTION: What is an estoppel certificate and why are they essential in purchasing or financing a commercial property?
- QUESTION: I'm both a Landlord and Tenant. As a Landlord, how do I protect myself if I'm unable to deliver possession of premises by a fixed date? As a Tenant, how do I ensure my ability to terminate the lease and/or be compensated if Landlord fails to timely deliver premises?
- QUESTION: How can I assess the risks associated with developing real estate which is subject to subsurface mining rights?
- QUESTION: Is my "triple net" lease really a net lease?
- QUESTION: Why use a letter of intent?
- QUESTION: What protections should a landlord consider when negotiating a commercial lease provision related to the finalization of the plans and specifications for the initial construction of a premises?
- QUESTION: Can an apartment landlord ignore complaints by one tenant about the actions of another tenant?
- QUESTION: Are professional services rendered in connection with a real estate transaction taxable in Pennsylvania?
- QUESTION: I am a commercial landlord. I have a tenant who has failed to pay rent. My lease permits me to obtain possession of the premises and accelerate the balance of the rent due under the lease for the remainder of the lease term. Am I permitted to do so?
- QUESTION: How do I make the representations and warranties in an agreement of sale for commercial real estate worth more than the paper on which they are written?
- QUESTION: Does Pennsylvania require that parties to a letter of intent negotiate in good faith?
- QUESTION: What protections should a landlord consider when negotiating a commercial lease provision related to the finalization of the plans and specifications for the initial construction of a premises?
Back to Question and Answer Index
QUESTION: What is a "gross-up" provision and why is it included in commercial leases?
ANSWER: In addition to base rent, commercial tenants are often required to pay their share of the costs and expenses of operating the property, such as common area maintenance expenses, insurance costs and real estate taxes. The tenant's share of those operating expenses (often called its "proportionate share") is determined by dividing the rentable square footage of the tenant's premises by the rentable square footage of the entire building. Sometimes, however, this formula is not equitable since certain of the expenses will vary as a result of the occupancy level of the building or if certain services are not provided to all of the tenants of the building. In such instances, the tenant's proportionate share of these variable expenses is "grossed-up" in order to account for a lower occupancy level or for being one of only a few tenants receiving these services. Examples of expenses that vary due to occupancy level or self provided services are janitorial costs and utilities that are not separately metered.
For example, assume a two story building with one tenant occupying the entire first floor and another occupying the entire second floor. Each tenant would be responsible for fifty percent (50%) of the operating expenses, which includes the landlord's cost of providing janitorial services to their respective premises. If the first floor tenant vacated, or decided to provide its own janitorial services, the second floor tenant would be the only tenant receiving such services. As a result, the landlord's cost of providing janitorial services would be reduced due to the decreased services being provided, but the second floor tenant's proportionate should be "grossed-up" to one hundred percent (100%) so that they are responsible for the entire cost.
Utility costs for a tenant's premises that are not separately metered should also be subject to a "gross-up" provision. If the tenant is the only tenant in the building, then its premises is the only premises in the building that is utilizing the HVAC system and is consuming electricity. Therefore, using the example in the paragraph above, the second floor tenant should be responsible for one hundred percent (100%) of the costs for the HVAC system and electricity, as opposed to fifty percent (50%) of such costs. From the tenant's perspective, however, there should be some adjustment to this percentage because, even if a space is vacant, the landlord will minimally heat or cool the vacant space and use a minimal amount of electricity in order to be able to show the space to prospective tenants and maintain the temperature for the remainder of the building.
In a "gross-up" provision, although the proportionate share is being increased as a result of the variable expenses, due to the decrease in the total amount of such expenses used for the entire building, the tenant should be paying approximately the same amount as if the building was completely occupied or the services were being provided to all of the tenants of the building.
QUESTION: Even though my real estate loan is current, the lender has stopped funding due to "increased risk." What are my rights?
ANSWER: Many lenders are under increasing pressure from regulators to classify performing loans as non-conforming, if the lender perceives that the underlying project is not meeting sales or leasing criteria, or the loan's interest reserve faces depletion, or if some other potential default is perceived by the lender. The pressure may culminate in the lender's refusal to fund further improvements. The possible result is a lender liability claim arising from breach of contract. In its most basic form, a loan is a contract between the parties, the terms of which begin with the commitment letter. To the extent that the lender deviates from the commitment or ignores certain terms only to try to enforce the same terms later, such conduct may constitute a breach of contract. Often the result will turn upon whether the lender is declaring a material or non-material loan term to be in default. Depending upon the language in the loan documents, a lender's "wrongful acceleration" of a note may constitute a breach of contract.
The "failure to fund" theory of liability will depend greatly upon the loan agreement and the extent to which the lender is acting in bad faith. General contract principles impose a duty of good faith and fair dealing on both parties. A lender may be said to act in bad faith if it acts in an arbitrary, capricious, or unreasonable manner. When the loan documents give the lender broad discretion, that discretion must nevertheless be exercised reasonably. Because the relationship between the lender and the borrower is more tightly intertwined in a construction loan situation, the circumstances are more susceptible to lender liability claims. In cases of delayed or rejected requisitions, the exercise of discretion contrary to explicit loan provisions may be deemed unconscionable or in bad faith, triggering lender liability. A lender taking control of a construction project such that the borrower is extremely limited or closed out of construction management may cause the mortgagee to be deemed "in possession" for liability purposes.
A lender's bad faith which hampers the borrower's compliance with key loan terms, may also give rise to lender liability. For example, a borrower may allege that the lender's refusal to promptly advance loan proceeds resulted in liquidity shortfalls making it impossible for the borrower to complete the construction of the project in a timely manner and perform its obligations under the loan documents.
It is worth repeating that every borrower and borrower's counsel must ensure that all documents, from the commitment to each draw request, are carefully prepared and sufficiently detailed to limit lender discretion.
QUESTION: There is currently a great opportunity to acquire real estate as a result of the recent number of loans that are on the brink of foreclosure. Real estate developers might have the ability to purchase these loans at a discount and then foreclose on the real estate securing such loans. When purchasing such loans with the intention of foreclosing on the real estate, what protections should a purchaser request be included in the agreement of sale?
ANSWER: Although lenders may initially be unwilling to make any representations or promises when selling loans secured by real estate, with some negotiation and insistence, a lender might agree to represent:
- That it is the sole legal and beneficial owner of the loan and has the authority to sell the loan;
- That it has delivered to the purchaser true and correct copies of all of the loan documents and all amendments and material correspondence associated with the loan;
- That it has informed the purchaser about any and all litigation related to the loan and has provided all documents and other filings related to the litigation;
- That, to the best of its knowledge, the borrower of the loan does not have any offset, claim, defense or counterclaim against any payment due under the loan or against any other obligation of the borrower under the loan;
- The amount due from the borrower under the loan and what payments have been made; and
- That it is not holding any escrow funds or reserves with regard to the loan or, if they are holding such amounts, the amounts then being held.
In the agreement of sale to purchase the loan, purchasers should add provisions to ensure that the lender does not amend the loan documents or commence any litigation without the purchaser's prior written consent. Also, the purchaser should, prior to completing the purchase of the loan, investigate whether there have been any bankruptcy filings made by the borrower or the lender, and investigate whether there are any environmental or title problems with the real estate.
It has been said that for every problem, there is an opportunity. The number of distressed loans is no exception to that rule. However, the foregoing representations and other protections are important to confirm that the purchaser is getting the deal that it expects.
QUESTION: The real estate tax assessment on my shopping center was just increased, and I don't know why. What may I have missed?
ANSWER: Welcome to the stimulus program for local government and school districts. Unfortunately, the economic downturn has forced local municipalities and school districts to seek new means of raising revenue by raising taxes. Since tax rate increases themselves often prove unpopular with voters, increasing assessments may have the same effect. Here are some things to keep in mind. Most people believe that once an assessment is fixed on a property, it cannot be changed. Generally speaking, unless all properties in the county are reassessed (known as a county-wide reassessment), an individual property lawfully can be reassessed only in limited circumstances. These circumstances include a subdivision of the property, a physical change in the real estate (such as new construction or removal or change of existing improvements), or an appeal of the assessment of the subject property. A sale of the subject property, in and of itself, cannot lawfully trigger a reassessment, regardless of purchase price. However, there are some exceptions to this general rule. If you wish to appeal your assessment, proceed cautiously. On appeal, the entire value is placed in issue and while the assessment board (or court on subsequent appeal) has the power to reduce the assessment, the board or court also has the power to increase the assessment. For this reason, you must realistically estimate current market value, often with the help of an appraiser, before filing an appeal.
Also, keep in mind that a school district or municipality may also appeal your assessment (and of course, will be seeking an increase, not a decrease). School districts often scan property transfer data for new sales of property. Since a recent sales price is often the best indicator of fair market value (but not always), a sales price in excess of the assessment-based fair market value may prompt a school district to appeal an assessment. You must take such an appeal seriously and be prepared for battle at the hearing. This preparation will likely require the assistance of an appraiser and counsel. Many property owners simply presume that an assessment will increase just because of a recent sale; this is not always the case and may times such an appeal can be defeated. Irrespective of which party appeals, proper adherence to the assessment board's standard practices and procedures, as well as knowledge of the necessary legal principles, is essential to winning the day. However, even if the assessment board rules against you, all is not lost. A court appeals process is available and many such cases are often settled prior to trial.
QUESTION: What issues should be considered when forming a joint venture?
ANSWER: When forming a joint venture, the parties should consider the following issues to ensure that their expectations are met and appropriate provisions are drafted into the joint venture agreement.
- MANAGEMENT: The first issue is the manner in which the joint venture will be managed. If only certain partners will be responsible for the day-to-day management of the joint venture, the remaining partners could have a vote on the major decisions. Depending on how the voting structure is arranged, the partners should consider whether there is a possibility of a deadlock and an appropriate resolution of the deadlock. Also, if any partner will receive compensation for their duties with respect to the joint venture, then these payments should be outlined in the joint venture agreement.
- CAPITAL CONTRIBUTIONS: The partners should also determine how the joint venture will be capitalized, including initial contributions and the possibility of future contributions. In many joint ventures, the partners are not required to fund any additional capital after their initial contribution; however, if such additional contributions are made, the partners making such advances should receive additional benefits. Examples of benefits to the contributing partners are increases in the ownership interests of the contributing partners, or having any additional contributions treated as a loan (with interest) to the joint venture.
- DISTRIBUTION OF CASH: The procedure for distributing cash from the joint venture should be considered. If all of the partners are contributing an amount commensurate with their ownership interests, then the distributions are normally made based on these ownership interests. If not, the partners could grant a priority return to the partners that contribute the capital to the venture, with the remaining partners receiving distributions after the priority distributions are made.
- ASSIGNMENT OF INTERESTS: The partners should restrict the ability of the partners to assign their ownership interests in the joint venture to third parties or other partners. At a minimum, it is common to include a right of first offer to the other partners. There should be a balance between the desire to freely transfer a partner's interest with the risk of having an undesirable individual becoming a partner in the venture.
- INSURANCE: Depending on a partner's role in the joint venture, disability insurance and key-man insurance are sometimes purchased by the joint venture to protect against the disability or death of a partner, and provide funds so that the joint venture can proceed and find a replacement. Also, in the event of a death of a partner with voting rights, life insurance is sometimes purchased by a joint venture with the estate of the deceased partner being required to sell the interests for an agreed upon amount which is funded by the life insurance.
The parties to the joint venture should consult with an attorney to give guidance on possible resolutions to these issues and draft the appropriate agreement.
QUESTION: If I have a piece of land in Pennsylvania that I can not subdivide, can I create a condominium and sell separate parcels.
ANSWER: The answer to that very simple question is, yes.
However, most people do not split land into parcels just to sell it and not do anything further in terms of land development or other uses. So, the next natural question is, if my proposed development does not meet the local codes for subdivision, can I develop my property as I intended, create a condominium and then sell the lots? The answer is the all-too-typical lawyer answer...it depends.
Most people think of a condominium as a high-rise building in which units or suites are sold to individual buyer, but the Pennsylvania Uniform Condominium Act also provides a framework for creating a "land condominium". A land condominium is a condominium in which a single parcel of property is divided into two (2) more separate tracts, and each such tract of land is created as a condominium unit.
Development of real property is governed by local zoning, subdivision and land development laws. However, the condominium act provides that local laws can not prohibit the condominium form of ownership or impose stricter requirements on a condominium than it would impose on any property. This does not mean that local zoning and land development laws do not apply to condominiums, but local laws can not prohibit the condominium form of ownership.
Now that you are thoroughly confused, the basic answer is what I tell clients inquiring about a land condominium. A land owner must design its project on the entire parcel as if the condominium does not exist, which involves an analysis of the local zoning and land development laws. If the project meets all zoning and land use requirements, but subdivision is not possible under the local subdivision ordinance, then the land condominium will allow those lots to be sold under a condominium form of ownership. The condominium lots are not treated as separate lots for zoning purposes; the municipality will always view the condominiumized parcel as one lot. For example, if the sign ordinance allows one (1) free-standing sign for each "lot", you are still permitted only one (1) free-standing sign, not one (1) for each condominium unit. The creation of two (2) condominium lots does not now mean that you have two (2) building lots for zoning purposes.
A condominium can be an effective way of creating multiple ownership of a single parcel. However, it is not a cure-all for a property that can not be subdivided. The first step is consulting an engineer or land planner to determine whether the condominium will work for your project.
By: Jeffrey L. Silberman, Esquire
QUESTION: A prospective tenant has asked to "cap" annual increases in common area charges. Should I agree?
ANSWER: For various reasons, tenants are increasingly asking to limit annual increases in common area charges ("CAM"). Given the economic climate, all businesses are more cognizant of limiting their costs. More specific to leasing, the universe of tenants has contracted, so tenants in many instances have more leverage than in past years.
Tenants typically ask to limit annual increases in CAM (known as a "CAM cap") not to pay less additional rent, but to give some predictability to their occupancy charges. Landlords obviously resist any limitations on CAM because every dollar not recouped from a tenant is a dollar that the landlord must fund from its own pocket. Less net rent impacts not only monthly cash flow, but it affects a potential sale price and it reduces the amount that can be borrowed against rents.
Notwithstanding this conflict, there are ways to make CAM caps palatable to both parties, if a landlord decides it must give a cap to make a deal. First, parties typically agree that a landlord is only required to cap charges over which it has some control, the theory being that it would be unfair for the landlord to bear the risk of expenses that no landlord could control, even a landlord that is proficient at managing CAM. In this instance, controllable expenses are capped and uncontrollable expenses are billed at their full rate. The list of "uncontrollable" expenses is fairly short, and usually includes real estate taxes, insurance expenses, snow and ice removal and common area utilities.
CAM caps are cumulative or non-cumulative. A cumulative cap gives the landlord the benefit of savings for prior years by adding any saving from prior years to the cap in future years. A savings is achieved by the landlord bringing in the CAM at an amount less than that year's cap. A non-cumulative cap simply perpetuates the cap in each successive year. Obviously, a cumulative cap is preferable to a landlord.
Another effective way for a landlord to limit its exposure is to reset the cap if a tenant exercises a renewal option. In that instance, if the tenant elects to renew, there is no cap in the first year of the renewal, and the cap starts in the second year of the renewal. This forces the tenant to take the revised cap into consideration when renewing, and gives the landlord the ability to catch-up if CAM has exceeded the cap in prior years.
There are various other methods to reduce the risk to a landlord of a CAM cap. These methods, along with the suggestions above, can be used to make a CAM cap work when it is a necessary component of a deal.
By: Jeffrey L. Silberman, Esquire
QUESTION: What is an estoppel certificate and why are they essential in purchasing or financing a commercial property?
ANSWER: An estoppel certificate is a document, signed by a tenant, in which the tenant certifies certain information about their lease, including the lease term, the current rent, and any claims that the tenant has against the owner. Purchasers and lenders of commercial real estate rely on these certificates to ensure that they are not assuming any problem leases. Although most leases require a tenant to sign such certificates when asked, as an owner of a commercial property, it is important that each lease contain stringent remedies to force the tenants to timely sign and return the certificates.
QUESTION: I'm both a Landlord and Tenant. As a Landlord, how do I protect myself if I'm unable to deliver possession of premises by a fixed date? As a Tenant, how do I ensure my ability to terminate the lease and/or be compensated if Landlord fails to timely deliver premises?
ANSWER: Landlord: Lease should state that you will not be liable for failure to timely deliver. If, however, Tenant requires a fixed delivery date, lease must include language excluding Landlord liability for events outside Landlord's control (strike, fire, weather, tenant-caused delays, etc.) and any damages. Tenant: Lease must include language allowing Tenant lease termination after a specific period of delay, in addition to a clearly specified amount of "rent credit" for each day past a fixed date.
QUESTION: How can I assess the risks associated with developing real estate which is subject to subsurface mining rights?
ANSWER: Large regions of western and northeastern Pennsylvania have been mined for coal and remain subject to subsurface mining rights. A title search will disclose recorded subsurface interests. It is sometimes possible to locate the holders of those interests and purchase them. However, title insurance companies will generally insure only the surface of property in the coal regions and will disclaim responsibility for surface support. The most important precaution is a thorough geo-technical study evaluating the risk of subsidence and the cost of recommended subsurface improvements. The Pennsylvania Department of Environmental Protection also publishes information about the levels of risk in various areas and offers a subsidence insurance program.
By: William K. Stewart, Esquire
QUESTION: Is my "triple net" lease really a net lease?
ANSWER: The term "triple net" lease is widely used, but seldom fully understood. A triple-net lease generally means that the tenant pays for all expenses related to the premises, including maintenance, taxes and insurance. However, most tenants assume that the landlord is responsible for maintenance of the roof and structure of the premises, and for any "capital" repairs. Also, many tenants believe that they are only responsible for payment of operating expenses to the extent the costs increase over a certain level of expense, typically referred to as "base year" expenses or a "base stop". To avoid lengthy negotiations, be sure to clearly define the obligations of the parties in the letter of intent or term sheet.
By: Jeffrey L. Silberman, Esquire
QUESTION: Why use a letter of intent?
ANSWER: A letter of intent should describe the principal terms of a complex transaction. The parties may therefore state their basic understandings before undertaking the time and expense of creating more elaborate documentation that will eventually be necessary. The potential disadvantage to a letter of intent is that it may bind the parties to certain terms without addressing other essential terms. This can obviously cause serious misunderstandings. To avoid this problem a letter of intent should state that it is not legally binding. This is particularly true in real estate transactions where oral agreements are generally not enforceable. A written letter of intent may constitute the writing needed to establish legal rights and responsibilities unless it explicitly states otherwise.
By: William K. Stewart, Esquire
QUESTION: What protections should a landlord consider when negotiating a commercial lease provision related to the finalization of the plans and specifications for the initial construction of a premises?
ANSWER: In many instances, the plans and specifications for the initial construction of a premises are not finalized when a commercial lease is ready to be executed. If the landlord is obligated to perform certain construction obligations prior to delivering the premises to the tenant, the finalization of such plans and specifications could delay the date that rent commences and increase the landlord's investment in the lease. As a result, there are certain protections that landlords should consider when negotiating lease provisions related to the finalization of such plans and specifications.
Since the rent commencement date is often calculated based on a number of days after the delivery of the premises to the tenant, a delay in finalizing the plans and specifications could delay the date the tenant is obligated to commence paying rent. As a result, a landlord should include a provision in the lease that provides that the rent commencement date is moved one day earlier for each day of any delay caused by the tenant. As another option, a landlord could include a provision that provides that, in the event the plans and specifications are not completed by a certain date, the landlord can complete the plans and specifications or the tenant is deemed to have approved such plans and specifications.
As an additional concern, many commercial tenants require the ability to receive free rent and to terminate the lease in the event the delivery of the premises has not occurred by a certain date. If such rights are required, then it is important for the landlord to provide that the required dates are extended by the number of days of the delay caused by the tenant.
The cost of the construction obligations of the landlord should be considered as well. If the landlord is obligated to perform the work set forth in the plans and specifications, then there is a potential that the cost to perform the construction set forth in the plans and specifications as finalized could be more than anticipated. It is important, therefore, for the landlord to try to negotiate a maximum cost that the landlord is obligated to spend in order to complete the work set forth in those plans and specifications, with the tenant obligated to pay any excess costs.
Although it is ideal for the final construction plans and specifications to be agreed upon prior to the execution of a lease, in most instances, this is not feasible. With the foregoing provisions added to the lease, the landlord should be able to protect itself so that it receives rent in a timely manner and does not incur unanticipated construction costs for the initial construction of the premises.
QUESTION: Can an apartment landlord ignore complaints by one tenant about the actions of another tenant?
ANSWER: Such complaints cannot be ignored if the harassment and/or abuse of a resident is based on discrimination and the resident is part of a protected class under the Fair Housing Amendments Act. The landlord does not have to engage in the discriminatory behavior himself or herself. Courts have held that failure to take action in the face of alleged harassment and threats of a discriminatory nature can create a "hostile living environment" in violation of the Act. The landlord can be held liable for allowing such situation to continue. A landlord can also be held liable under the FHAA for the acts or omissions of its managing agent.
QUESTION: Are professional services rendered in connection with a real estate transaction taxable in Pennsylvania?
ANSWER: No. Currently, professional services rendered in connection with a real estate transaction are not subject to Pennsylvania's sales tax.
Governor Rendell's proposed 2010-2011 budget included reducing the sales tax from six percent (6%) to four percent (4%). Then Governor Rendell proposed to increase the tax base by eliminating seventy-four (74) previously exempt items.
Among those "to be taxed" items were real estate/broker services, attorney services, mortgage origination, home inspections, surveys, title searches, construction, architectural services and site preparation. Opponents of the changes, in particular, the Pennsylvania Association of Realtors and State Representative Sue Helm (of the 104th Legislative District) argued that the proposed taxes would have driven up the cost for consumers in the home buying and selling process. According to State Representative Helm "With the amount of money required at closing including property taxes, the sales tax could very well put homeownership out of reach for tens of thousands of people."
After much compromise on other issues, the Pennsylvania 2010-2011 budget passed without new taxes. Remarkably, the budget passed on time for the first time in eight years.
QUESTION: I am a commercial landlord. I have a tenant who has failed to pay rent. My lease permits me to obtain possession of the premises and accelerate the balance of the rent due under the lease for the remainder of the lease term. Am I permitted to do so?
ANSWER: No. Under Pennsylvania law, a landlord may not recover possession of a leased premises and seek to collect an acceleration of rents for the remainder of the unexpired term of a lease. Instead, a commercial landlord is required to elect between a judgment for possession of the leased premises, along with the past-due rent then due and owing, or a judgment for the accelerated rent due until the expiration of the lease term. That requirement is intended to prevent a "double recovery" or "windfall" to the landlord. If you do recover possession, you are still entitled to recover the rent due on a monthly basis, assuming you have not mitigated your damages by obtaining another tenant for the premises. However, you cannot do so for future amounts due.
QUESTION: How do I make the representations and warranties in an agreement of sale for commercial real estate worth more than the paper on which they are written?
Answer: The representations and warranties in an agreement of sale for commercial real estate ensure that the purchaser knows and understands what it is buying. In these provisions, a purchaser attempts to have the seller make representations and warranties regarding the seller's authority to enter into the agreement, the accuracy of the documents and reports that the seller delivered to the purchaser, what contracts and leases affect the property and if there are any defaults in such documents, the zoning of the property, any tax assessments affecting the property, and the physical and environmental condition of the property. In many instances, however, the entity that comprises the seller only owns the property that is being sold. Therefore, after the sale has been completed, there are no assets that the purchaser could legally obtain from the seller as compensation if the purchaser was successful in a lawsuit regarding a breach of any of the representations or warranties.
There are two common methods that are used to protect a purchaser in the event it becomes aware of a breach of a seller's representation or warranty after the property has been acquired and the seller no longer owns any assets. The first method is that the seller places a portion of the purchase price with an escrow agent for a certain period of time. If the purchaser discovers a breach of any of the representations or warranties while such funds are being held by the escrow agent, then the escrow agent would deliver a portion of such funds to the purchaser so that it is compensated for any losses resulting from the breach. The other method is to require a party related to the selling entity to guaranty to purchaser and compensate the purchaser for any losses resulting from such a breach.
QUESTION: Does Pennsylvania require that parties to a letter of intent negotiate in good faith?
Answer: Letters of intent for the purchase and lease of real estate are frequently used. Many times, these letters are drafted by non-lawyers, and can therefore be varied. Whether parties to a letter of intent are required to negotiate in good faith is dependent upon the language of the document. Pennsylvania does not recognize a cause of action for breach of a duty to negotiate in good faith absent express language in the letter. This means that either party may walk away from the transaction for any or no reason. If the parties to a letter of intent want to make it an obligation of each to negotiate in good faith to a conclusion, there should be express language to this effect in the letter of intent.
Do we want to be obligated to negotiate in good faith? Most letters of intent that are drafted by attorneys expressly provide both that the letter of intent is not enforceable, and that there is no duty to negotiate in good faith. This can be beneficial, but it can also be detrimental if one party has spent time and money on due diligence and legal fees if the other unexpectedly walks away from the transaction. Prior to entering into a letter of intent, it should be determined whether a party prefers that the letter of intent have the force and effect of a contract, even if all of the details have not yet been determined. The parties may then obligate themselves to negotiate the details in good faith to a conclusion. Otherwise, absent this language, either party may freely walk away from the transaction without recourse.
By: Matthew A. Cosenza, Esquire
QUESTION: What protections should a landlord consider when negotiating a commercial lease provision related to the finalization of the plans and specifications for the initial construction of a premises?
Answer: In many instances, the plans and specifications for the initial construction of a premises are not finalized when a commercial lease is ready to be executed. If the landlord is obligated to perform certain construction obligations prior to delivering the premises to the tenant, the finalization of such plans and specifications could delay the date that rent commences and increase the landlord€™s investment in the lease. As a result, there are certain protections that landlords should consider when negotiating lease provisions related to the finalization of such plans and specifications.
Since the rent commencement date is often calculated based on a number of days after the delivery of the premises to the tenant, a delay in finalizing the plans and specifications could delay the date the tenant is obligated to commence paying rent. As a result, a landlord should include a provision in the lease that provides that the rent commencement date is moved one day earlier for each day of any delay caused by the tenant. As another option, a landlord could include a provision that provides that, in the event the plans and specifications are not completed by a certain date, the landlord can complete the plans and specifications or the tenant is deemed to have approved such plans and specifications.
As an additional concern, many commercial tenants require the ability to receive free rent and to terminate the lease in the event the delivery of the premises has not occurred by a certain date. If such rights are required, then it is important for the landlord to provide that the required dates are extended by the number of days of the delay caused by the tenant.
The cost of the construction obligations of the landlord should be considered as well. If the landlord is obligated to perform the work set forth in the plans and specifications, then there is a potential that the cost to perform the construction set forth in the plans and specifications as finalized could be more than anticipated. It is important, therefore, for the landlord to try to negotiate a maximum cost that the landlord is obligated to spend in order to complete the work set forth in those plans and specifications, with the tenant obligated to pay any excess costs.
Although it is ideal for the final construction plans and specifications to be agreed upon prior to the execution of a lease, in most instances, this is not feasible. With the foregoing provisions added to the lease, the landlord should be able to protect itself so that it receives rent in a timely manner and does not incur unanticipated construction costs for the initial construction of the premises.
