Basics of Drafting Commercial Leases

 

 

Overview of Materials:

 

            These written materials were designed to be practice tools that can be implemented in any leasing practice.  For most of the topics discussed in this paper, there are two parts.  The first part is example language that might actually be found in a Landlord form of Lease.  That language has been revised to incorporate changes that a tenant might desire, with those changes being reflected in the example language as blacklined text.  Most of such example language is for retail shopping center leases; however, in most cases, it can be easily adapted for use in other types of leases.  The second part is a brief introduction to the topic and/or a description of what the quoted Lease language seeks to accomplish and commentary on key points addressed or that should be considered in connection with the topic.

 

I.    Overview Of Commercial Leasing

 

      A.  What is a Lease?

 

            1.   Real property interest

 

            A lease is a real property interest under which one party to the lease, the landlord, grants to the other party to the lease, the tenant, the right to occupy a defined geographic area, the premises, exclusively.  The tenant’s interest is referred to as a leasehold interest, while the landlord’s remaining interest is referred to as a reversionary interest or a reversion.

 

            2.   Alternatives to leases—easements, licenses, management agreements

 

            Easements.  An easement is a real property interest that entitles the holder of the easement (called the dominant estate holder) to use the property of another (who is called the servient estate holder) for a specific purpose and, usually, for a limited time.  An easement is distinguished from a lease in that the servient estate holder usually retains the right to use the property over or under which the easement runs and, thus, an easement is not usually exclusive.  Most commercial leases contain, either explicitly or, more commonly, by implication, easements over the common areas of the applicable project to permit access, parking, installation of utilities and other uses of the common areas by the tenants of the project.

 

            Licenses.  A license grants the licensee the right to occupy a defined geographic area.  However, a license is not a real property interest and, as such, historically did not entitle the licensee to be put back in possession of the licensed space if the licensor interfered with such licensee’s use of such space.  Historically, a licensee’s sole recourse was an action for damages.  However, the modern trend in other jurisdictions (which has not been ruled upon in Nevada) is to grant specific performance of licenses, thus effectively converting these types of agreements into de facto real property interests.  The effectiveness of the distinction is further undermined by existing Nevada case law that makes it very difficult to draft an agreement such that it would qualify as a license, as opposed to a lease.  See Sportsco Enterprises v. Morris, 112 Nev. 625 (1996); Department of Commerce vs. Carriage House, 94 Nev. 707 (1978) (not a license because irrevocable and transferable).  Accordingly, if a waiver of real property interests and limitation of remedies to a claim for damages is desired, the best practice is to provide for that expressly in the agreement.

 

            Management Agreements.  Management agreements are increasingly used to induce highly-desirable retail and restaurant tenants who wish to take on no real estate risk to nonetheless occupy space in a project.  Under a management agreement, a project owner hires a manager to manage a certain space or amenity within a project for a defined term.  The manager typically invests little in the build out of the space it is to manage and is typically reimbursed for all of its expenses.  The manager under such an agreement is typically paid a management fee equal to a percentage of the revenues from the space or amenity it manages.  In addition, the manager typically receives an additional incentive fee if the applicable space or amenity performs better than expected.  Thus, while the manager will typically share in the up-side under such a deal, because its investment is small, the manager typically faces little of the down-side risk if the project turns out not to be successful.

 

            Each of the foregoing lease alternatives might work better than a traditional lease depending on the deal that has been struck and the intended relationship between the owner and the occupant.

 

      B.   Lease economics

 

            1.   Minimum/base rent

 

            Tenant agrees to pay, at the times and in the manner herein provided, the Base Rent, Percentage Rent and Additional Rent specified herein (collectively, “Rent” or “rent”), without offset, deduction, counterclaim, prior notice or demand, or abatement, except as expressly set forth in this Lease, for the use and occupancy of the Premises during the Term.  All Rent shall be paid by Tenant to Landlord at the address of Landlord set forth in Section       or to such other payee and/or at such other place as may be designated from time to time by notice from Landlord to Tenant.

 

            Commencing on the Rent Commencement Date, Tenant shall pay, in advance on the first day of each calendar month during the Term, Base Rent specified in the Section        above, in equal monthly installments.  However, if the Rent Commencement Date is not the first day of a calendar month, the first payment of Base Rent shall be paid on the Rent Commencement Date and will be a prorated amount based upon the applicable Base Rent amount and the actual number of days in the first partial calendar month of the Term.  The Base Rent amounts set forth in Section    will be proportionately increased or decreased on a daily basis for any Lease Year that includes more or less, respectively, than twelve (12) full calendar months.

 

            In a lease transaction, the tenant’s primary goal is to secure the use of the specific piece of real property it has bargained for.  The landlord’s primary goal is to receive income or rent from the space being leased.  The principal components of that rent are the minimum or base rent component (which is referred to in these materials interchangeably as base or minimum rent) and, depending on the particulars of the deal, the percentage rent component.  Additional rent components are present in so-called “triple net” leases.  Those other rent components are, at least in theory, merely to protect the sum of the minimum or base rent and the percentage rent as landlord’s “real return” or “net rent” and are not themselves intended to be profit centers for the landlord.

 

            It is important to both the landlord and the tenant that the minimum rents be defined either as fixed numbers or so that they can be easily calculated.  If the minimum rents are to be based on the floor area of the premises, it is important to include a definition of how that floor area will be measured; to specify the amount, if any, by which the measured floor area may vary from the estimated floor area (if the area of the premises cannot be measured at the time the lease is signed); to provide for re-measurement within some period if either party disagrees with the other party’s measurement; and to specify whether the measured floor area is to be increased by a load factor.  (DRAFTER’S NOTE:  The application of a load factor to increase the measured floor area is sometimes referred to as “grossing up”.  However, I use that term in another way below and throughout this paper.  So, to avoid confusion, I will not use that term in this paper to describe the method by which the floor area is increased for purposes of calculating rent.  It will refer, in this paper, only to the means by which occupancy-related expenses are increased for comparison purposes, as described below.)   Those matters are all discussed more fully below in Section 4(b).

 

            2.   Operating expenses and other pass-through costs

 

                  a.  Net lease

 

            Commencing on the Rent Commencement Date, Tenant shall pay to Landlord Tenant’s Share of Common Area Costs in the time periods and manner set forth in this Section    .  Landlord shall notify Tenant from time to time of Landlord’s estimate of Tenant’s Share of estimated Common Area Costs. From and after the date of any such notice, Tenant shall pay to Landlord Tenant’s Share of estimated Common Area Costs monthly, in advance, on or before the first day of each month.  For the purposes of this Section      , “Tenant’s Share” means a fraction, the numerator of which is the floor area of the Premises (excluding Tenant’s service yard, trash enclosure and Patio Area) and the denominator of which is the aggregate as-builtleasable floor area of all space in the Shopping Center which is occupied by tenants as of the first day of the applicable Lease Year, as measured and determined by Landlord.  Notwithstanding the foregoing, where Common Area Costs are incurred for goods and services benefiting only a subset of Shopping Center tenants (e.g., where only certain tenants participate in trash removal, janitorial or other services), Landlord shall have the right and option from time to time to adjust Tenant’s Share of Common Area Costs in accordance with a reasonable scheme of allocation taking into account the extent of use of such goods and services by Tenant in comparison with all others using such goods and services, and any such determination made by Landlord shall be final and binding on Tenantthe Shopping Center.  If, for so long as, and to the extent that any occupants in the Shopping Center shall be obligated to, and shall, operate, maintain and repair anya fairly allocable portion(s) of the Common Area (“Excepted Common Area”) pursuant to agreement(s) between or among Landlord and such occupants, then Landlord shall not have responsibility for such Excepted Common Area (to the extent of any such occupant obligationsactually maintains the Excepted Common Area to the standard required under this Lease) and “Common Area Costs” shall refer only to the Common Area Costs exclusive of costs associated with such Excepted Common Area (to the extent of such occupant obligations).  Landlord also shall have the right and option from time to time to adjust Tenant’s Share of Common Area Costs to include the floor area of any Excepted Common Area Costs and any such determination made by Landlord shall be final and binding on Tenant.

FollowingWithin ninety (90) days following the end of each calendar year, Landlord shall submit to Tenant a statement (the “Annual Statement”) containing (a) Tenant’s Share of Common Area Costs for the subject calendar year, (b) the total amount paid by Tenant for Tenant’s Share of estimated Common Area Costs for such year and (c) the amount of any resulting balance due to Landlord or overpayment made by Tenant on the basis of a comparison between Tenant’s Share of estimated Common Area Costs and Tenant’s Share of actual Common Area Costs for the period covered by such statement.  If such Annual Statement reflects that Tenant underpaid Common Area Costs for the prior calendar year, Tenant shall pay to Landlord the amount of such shortfall within tenthirty (1030) days after the date the Annual Statement is delivered to Tenant.  If the Annual Statement reflects that Tenant overpaid Common Area Costs for the prior calendar year, Landlord shall apply the amount of such overpayment against the next due installment(s) of Tenant’s Share of estimated Common Area Costsrent or any other amounts due under this Lease until such overpayment has been exhausted or, if this Lease shall have terminated or expired, within thirty (30) days following the date such Annual Statement was delivered by Landlord.           

Landlord shall maintain books and records of Common Area Costs for a period of three (3) years following the end of each calendar year.  Upon ten (10) days’ prior written notice, Tenant or Tenant’s accountant shall have the right to audit Landlord's books and records relating to any prior year’s Common Area Costs at Landlord's local office, if one exists, or if none exists, at Landlord’s main offices.  If the audit discloses that the total amount invoiced to Tenant after year-end reconciliation for such year exceeds the actual Common Area Costs, Landlord, at Tenant’s option, shall either credit the amount of overpayment towards Tenant’s next due payment of rent or any other amounts due under this Lease, or refund the same to Tenant within ten (10) days after written demand therefor.  In addition, if such audit discloses that Tenant has been overcharged by [five percent (5%)] [SAME PERCENTAGE AS THE TRIGGER FOR PAYMENT OF LANDLORD’S COSTS TO AUDIT ANNUAL STATEMENTS OF GROSS RECEIPTS FOR PERCENTAGE RENT, IF APPLICABLE] or more of Tenant’s share of Common Area Costs, then Landlord shall reimburse Tenant for the cost of the audit within ten (10) days after written demand therefor.   If such audit discloses that the total amount invoiced to Tenant after year-end reconciliation for such year is less than Tenant’s share of Common Area Costs, Tenant shall promptly pay the difference to Landlord.  Landlord’s and Tenant’s obligations under this paragraph shall survive the expiration or sooner termination of this Lease.  If property taxes and insurance premiums are otherwise payable by Tenant hereunder, but not included in Common Area Costs, then Tenant’s audit rights pursuant to this paragraph shall extend to such charges as well.

Except as otherwise provided herein to the contrary, “Common Area Costs” means the total costs and expenses paid or incurred by Landlord, its property manager, and their respective agents for (a) operating, managing, administering, maintaining, equipping, repairing and replacing all or any part of the Common Area (and any installations in, on, under or over the Common Area), (b) Landlord’s insurance pursuant to Section   , (c) Landlord’s repair obligations pursuant to Section   , (d) Real Estate Taxes, (e) taxes on the personalty within and/or comprising the Common Area and (f) all other costs and expenses relating to the Common Area including, but not be limited to, the following: The total costs and expenses paid or incurred in cleaning, planting, replanting and maintaining the landscaping of the Common Area; the costs incurred in connection with the procurement of insurance and reasonable reserves for deductibles and any self-insured retentionLandlord is required to carry hereunder; all maintenance and repairs; repainting; rental and maintenance of signs and equipment; purchase and display of seasonal decorations; any public utility or governmental charges, surcharges or costs levied, assessed or imposed upon Landlord or incurred by Landlord pursuant to, or in compliance with, any governmental regulations; lighting; sanitary control; removal of snow and ice, trash and other refuse; maintenance, repair and replacement of light fixtures (including replacement of tubes, ballasts and lamps); maintenance, repair and replacement of the HVAC serving the Shopping Center, maintenance, repair and replacement of mechanical equipment; fire/life safety systems and security alarm systems; maintenance, repair, replacement, and cleaning of structures, including floors, ceilings, roofs (including the depreciation of the above-mentioned improvements), roof skylights and windows; repair, maintenance, replacement and depreciation of the parking areas, including repaving and restriping of the paved areas; non-refundable contributions toward one (1) or more reserve funds; repair and/or replacement of water lines, electrical lines, gas lines, sanitary sewer lines and storm water lines; all electrical, water, sewer and other utility charges for utilities serving the Common Area (including any on‑site and/or off‑site sanitary treatment plants serving the Shopping Center and all pipes leading to and from the same); the cost of personnel to implement such services; all costs and expenses (including wages, salaries, employee benefits, unemployment insurance and social security payments) relating to the employment of all on‑site personnel, including Landlord’s property manager, promotional and development personnel and other on‑site personnel utilized in connection with the operation, maintenance and repairs of the Shopping Center; operating costs and maintenance costs for the property management offices in the Shopping Center; the costs incurred in complying with governmental regulations (exclusive of any occupant’s premises), whether done voluntarily or by mandate of governmental or quasi-governmental authorities; the costs incurred in complying with changes after the date of this Lease in the Americans With Disabilities Act of 1990, as amended from time to time, with respect to the Common Area; fees or charges payable to any homeowners’ and/or retail and business associations formed pursuant to recorded agreements to which this Lease is subject; personal property taxes, sales and use taxes on material, equipment, supplies and services; fees for required licenses and permits; fire, security and police protection; public address system(s); [DELETE IF TENANT WILL HAVE ITS OWN RESTROOMS  IN ITS PREMISES:] public toilets; reasonable straight-line depreciation of, and all rental charges for, machinery and equipment to the extent used in the operation, maintenance and repair of the Common Area; and the costs incurred for supplies, tools, materials and labor to the extent used in connection with the operation, maintenance and repair of the Common Area. In addition, there shall be included in Common Area Costs an administrative charge equalnot to fifteenexceed ten percent (1510%) of the total of all Common Area Costs (excluding expenses for taxes, insurance and utilities) for Landlord’s administrative overhead.

 

Notwithstanding anything to the contrary contained in this Lease, Common Area Costs shall not include the following:  (i) any repairs, restoration or other work occasioned by fire, wind, the elements or casualty; (ii) income and franchise taxes of Landlord; (iii) expenses incurred in leasing to or procuring of tenants, including without limitation leasing commissions, bonuses or other compensation payable to Landlord, Landlord’s employees or a third party, and any renovations of space for other tenants; (iv) interest or principal payments on any mortgage or other indebtedness of Landlord, or payment under any ground lease; (v) compensation paid to any employee of Landlord or its affiliates or agents above the grade of property manager; (vi) any depreciation allowance or expense; (vii) any overhead, interest or profit to the Landlord or one of its affiliates; (viii) costs and expenses of repairs and replacements that under generally accepted accounting principles should be classified as capital expenditures, except for the current amortized portion of the costs and expenses (based upon amortization of the cost on a straight-line basis over the useful life of such items) of repairs or replacements of items in place on the date Tenant opens for business that are repaired or replaced due to wear and tear and not due to the initial construction or remodeling of the Shopping Center; (ix) any costs or expenses which are the responsibility of any particular tenant; (x) any costs or legal fees incurred in connection with any particular tenant; (xi) any costs incurred as a result of any violation by Landlord of any law or the terms of any lease or mortgage; (xii) any costs or expenses incurred for the removal or remediation of pollutants, contaminants or hazardous materials as such terms are defined by governmental authorities; (xiii) any expense resulting from the negligence or willful misconduct of Landlord, its agents, employees or contractors; (xiv) the cost of any repair to remedy damage directly caused by or directly resulting from the negligence of any other tenants; (xv) reserves for anticipated future expenses; (xvi) all interest and penalties incurred as a result of Landlord’s negligently failing to pay any bill as the same shall become due; (xvii) costs of purchasing sculptures, paintings or other art works; (xviii) costs arising from political or charitable contributions; (xix) any costs or expenses for marketing, advertising or promotion of the Shopping Center or any event or entertainment thereon (including, without limitation, any costs or expenses associated with any merchant’s association or similar association, except as otherwise expressly provided in this Lease); (xx) any costs or expenses associated with any kiosk, childcare center, postal or packaging services facility or governmental offices located on the Shopping Center; (xxi) any costs or expenses associated with any undeveloped portion of the Shopping Center; (xxii) any costs or expenses associated with the operation of any valet parking service; (xxiii) the amount by which the sum of all property management, administrative, and similar fees, costs and expenses (whether paid to Landlord or a third-party) exceeds ten percent (10%) of total Common Area Costs (excluding any costs for utilities, taxes and insurance); (xxiv) any costs or expenses associated with any space occupied exclusively by Landlord or any of its affiliates or agents; (xxv) any costs and expenses paid by any tenant whose floor area is not included in the denominator in calculating Tenant’s Share or that are the obligation of any such tenant; (xxvi) any costs and expenses incurred for operating or maintaining portions of the Common Areas outside the Premises where Tenant, at its cost and expense, maintains such similar areas within the Premises; (xxvii) any local, state or federal income tax imposed on Landlord; (xxviiii) any tax or assessment applicable to a class that includes others than real property or commercial real property owners, including any local, state or federal gross receipts tax of general applicability to all businesses and which is imposed on the receiver of such gross receipts without regard to the nature of the receipts (as opposed to a gross receipts tax imposed wholly or partially on rents received from real estate or Tenant’s Work thereon); (xxix) any estate or death tax imposed on Landlord or with respect to the Shopping Center as a result of the death of Landlord or its partners; (xxx) any special assessments levied for improvements made by or at the request of Landlord regardless when levied or any special assessments levied for improvements benefiting the Shopping Center that were levied before completion thereof; (xxxi) any taxes or assessments attributable to any undeveloped portion to the Shopping Center (or any land adjacent to the Shopping Center); (xxxii) any charges in the nature of impact fees attributable to Landlord’s development of the Shopping Center (or of a project which is adjacent to the Shopping Center); or (xxxiii) the amount by which any tax or assessment exceeds the amount Landlord would pay if the Shopping Center were Landlord’s sole asset and the rents therefrom its sole income.

 

            As discussed above, in a net lease, the tenant reimburses the landlord for all of its on-going operating costs (including, maintenance expenses, taxes, insurance and utilities) so that the minimum rents and percentage rents paid by the tenant are net to the landlord.  In such a lease it is important for the tenant and landlord to define carefully which expenses are to be included and which are to be excluded.  A tenant should also consider securing audit rights to make sure those definitions are being respected and recordkeeping requirements to be sure it can effectively exercise such an audit right. 

 

Tenants should also consider capping such expenses, or at least the “controllable” expenses (usually defined as all expenses other than those for taxes, utilities, and insurance).  Caps usually have two components.  The first component is to cap the expenses for the first year after the lease commences.  The second component is to provide that thereafter such expenses will not increase by more than a certain percentage.  The amount of the maximum percentage increase can either be tied to a number to be determined, such as CPI, or can be a fixed, typically between 3% and 7% annually.  Consideration should also be given to whether the cap is to be cumulative.  If the cap is cumulative, it will increase by the specified amount each year, regardless of whether actual expenses or the tenant’s share of such expenses equals or exceeds that amount.  A cumulative cap is calculated for the second year by multiplying the cap for the first year by the maximum percentage increase and is calculated for each subsequent year by multiplying the prior year’s capped amount by the maximum percentage increase.  (For the algebraically inclined, a fast way to calculate the cumulative cap for any year is to multiply the first year capped amount by the following amount:  (1+y)^(n-1); where y is the maximum percentage increase, expressed as a decimal, and n is the year for which the cap is being calculated.)   Thus, if the first year cap were $5.00 and the parties agreed to a 5% cumulative cap for future years, the amount of the cap for each of the next four years would be:  $5.25, $5.51, $5.79, and $6.08.

 

Non-cumulative caps are much simpler to calculate.  They are calculated by multiplying the amount of expenses paid by the tenant in the prior year by the percentage increase.  Thus, if the tenant paid $4.50 in expenses for the third year and the parties agreed to a 5% non-cumulative cap, then the cap for the fourth year would be $4.73; and if expenses in the fourth year equaled or exceeded that amount, then the cap for the fifth year would be $4.97.  That would be the case regardless of how much expenses were in the first or any other prior year.  Non-cumulative caps are less advantageous to landlords, as the tenant gets to carry the benefit of any decrease in expenses or of any amount by which actual expenses fall below the applicable cap in any given year forward to subsequent years.

 

                  b.  Gross lease

 

            Gross leases are increasingly rare.  Under a gross lease, the tenant pays only the base component of rent.  As such, the landlord must use a portion of that to pay its on-going operating expenses.  Accordingly, the base rents under a gross lease do not bear a direct relationship to the landlord’s real return or profit.

 

c.     Modified gross lease and gross-up provisions

 

            If the Building does not have at least one hundred percent (100%) of the rentable area of the Building occupied during any calendar year period (including any calendar year(s) falling within the Base Year), then the variable portion of Common Area Costs for such period shall be deemed to be equal to the total of the variable portion of Common Area Costs which would have been incurred by Landlord if one hundred percent (100%) of the rentable area of the Building had been occupied for the entirety of such calendar year with all tenants paying full rent, as contrasted with free rent, half rent or the like.  If, in any calendar year following the Base Year, as defined hereinbelow (a "Subsequent Year"), a new expense item (e.g. earthquake insurance, concierge services; entry card systems), is included in Common Area Costs which was not included in the Base Year Common Area Costs, then the cost of such new item shall be added to the Base Year Common Area Costs for purposes of determining the Additional Rent payable under this Article    for such Subsequent Year.  During each Subsequent Year, the same amount shall continue to be included in the computation of Common Area Costs for the Base Year, resulting in each such Subsequent Year Common Area Costs only including the increase in the cost of such new item over the Base Year, as so adjusted.  However, if in any Subsequent Year thereafter, such new item is not included in Common Area Costs, no such addition shall be made to Base Year Common Area Costs.

Conversely, as reasonably determined by Landlord, when an expense item that was originally included in the Base Year Common Area Costs is, in any Subsequent Year, no longer included in Common Area Costs, then the cost of such item shall be deleted from the Base Year Common Area Costs for purposes of determining the Additional Rent payable under this Article    for such Subsequent Year.  The same amount shall continue to be deleted from the Base Year Common Area Costs for each Subsequent Year thereafter that the item is not included.  However, if such expense item is again included in the Common Area Costs for any Subsequent Year, then the amount of said expense item originally included in the Base Year Common Area Costs shall again be added back to the Base Year Common Area Costs.

 

            The modified gross lease is a hybrid between a net lease and a gross lease.  Under a modified gross lease, the tenant pays a base rent and reimburses the landlord for some, but not necessarily all, of the on-going operating costs of the landlord.  The most common type of modified gross lease (often used for office leases) requires the tenant to reimburse landlord only for the amount by which the on-going operating costs for any year exceed the amount of such costs in a defined base year (or exceed a pre-determined “expense stop”).  The base year is usually the first year of the lease term.

 

            A problem in making base year comparisons is that the occupancy level may fluctuate from year-to-year and many of the expenses that are being compared may vary with occupancy.  For example, expenses associated with utilities, elevator use, janitorial services and maintenance and many other expenses will increase as the occupancy level increases.  (By contrast, some expenses, like those for taxes, exterior maintenance and landscaping, will vary little regardless of whether the building is completely full or virtually vacant.)  To address this problem, a tenant should insist that the base year expenses that vary with occupancy be “grossed up” so that they are not artificially low due to the building not yet being fully leased up.  And, by that same reasoning, a landlord should insist that the expenses that vary with occupancy that are used for comparison in future years also be grossed up so that the future year expenses are not artificially low. 

 

The negotiating point that arises regarding grossing up is to what level the expenses should be grossed up—that is, should they be grossed up assuming 100% occupancy or assuming some lesser occupancy rate?  To that question there is only one mathematically correct answer—the expenses that vary with occupancy should be grossed up assuming 100% occupancy.  The assumed occupancy rate here has nothing to do with anyone’s projections about what the actual occupancy rate is going to be; it has only to do with making sure there is a consistent basis for comparison throughout the lease term.  If any number other than 100% is used, the potential for distortions arises for any year in which the building is occupied to a greater extent than that other number.  In any such year other than the base year, the landlord would be recovering more for its variable expenses than it actually had to spend for those expenses.  If that distortion occurs in the base year, the tenant would benefit for the remainder of the term from a base year amount that is artificially high.  The only number that ensures no potential for distortions and, thus, no potential for over- or under-stating expenses is 100%. 

 

It is important to remember that only those expenses that vary with occupancy should be grossed up.  Non-variable expenses do not present the problem that the gross-up concept addresses.

 

            3.   Percentage rent

 

            In addition to Base Rent, for each Lease Year or partial Lease Year during the Term, Tenant shall pay to Landlord Percentage Rent in an amount equal to _____ % (the “Percentage Rent Rate”) of the amount by which Gross Receipts for the applicable Lease Year exceed the Breakpoint for that Lease Year.  In the event Tenant receives any rent abatement, rent credits or reduced rent pursuant to this Lease, then the Breakpoint will be reduced by the same proportion as Base Rent is reduced.  In addition, theThe Breakpoint amounts will be proportionately increased or decreased on a daily basis for any Lease Year that includes more or less, respectively, than twelve (12) full calendar months.  Percentage Rent will be due and payable annually in arrears on or before the 60th day following the end of each Lease Year.

           

            No later than the twentieth (20th) day after the end of each calendar month of the Term, Tenant shall submit to Landlord a written statement, certified as correct by an authorized officer orrepresentative of Tenant, that sets forth the total Gross Receipts of Tenant made in, on or from the Premises for the prior calendar month and the authorized deductions, if any, therefrom.  In addition, no later than the sixtieth (60ninetieth (90th) day after the end of each Lease Year, Tenant shall submit to Landlord a written statement, certified as correct by an authorized officerrepresentative of Tenant, that sets forth by calendar month the total Gross Receipts of Tenant made in, on or from the Premises during the preceding Lease Year (each such statement, an “Annual Gross Receipts Statement”).

 

            Tenant must keep full, complete and proper books, records, tax reports and accounts (the “Records”) of its daily Gross Receipts, in accordance with generally accepted accounting procedures and practices.  Tenant must retain the Records with respect to each Lease Year for not less than the later of (i) five (5three (3) years after the close of the Lease Year to which they relate and (ii) the resolution of all disputes (of which Tenant has received prior written notice) between Landlord and Tenant as to which those Records are or may be relevant (the “Retention Period”).  Landlord will have the right, any time within the Retention Period, upon at least ten (10) days’ prior written notice to Tenant and during regular business hours, to examine the Records and verify the accuracy of any statementaudit the Annual Statement of Gross Receipts for any of the immediately preceding three (3) Lease Years and, in connection with such audit, examine the Records relating to such Annual Statement of Gross Receipts.  Landlord will also have the right to cause an audit of the business of Tenant during the prior five (5) calendar years to be made by an employee of Landlord who is experienced in conducting audits or a certified public accountant of Landlord’s selectionshall have no right to audit any Annual Statement of Gross Receipts more than once, and Landlord shall not perform more than one such audit in any calendar year.  In no event will Landlord’s auditor be compensated on a contingency fee basis, and, as a condition precedent to Landlord being permitted to examine any Records, Landlord must provide a copy of Landlord’s compensation agreement with its auditor that does not include any contingency-based compensation.  If an audit discloses an underpayment of the Percentage Rent payable by Tenant for the period covered by the audit, then Tenant must immediatelyshall, within twenty (20) days following Tenant’s receipt of written demand therefor, pay to Landlord any additional Percentage Rent found to be payable by Tenant together with Interestinterest at the Agreed Rate from the date the Percentage Rent should have been paid.  If (i) Landlord’s audit discloses that Tenant’s calculation of Percentage Rent for the audited year resulted in an underpayment by more than twofive percent (25%) of the actual amount of Percentage Rent due for such year or (ii) Landlord conducted the audit because Tenant failed timely to provide one or more of the Gross Receipts reports required under this Lease, then Tenant must also pay the reasonable cost of such audit.  If an audit shows that Tenant has overpaid the amount of Percentage Rent due, Landlord will credit such overpayment against Tenant’s next due Percentage Rent payments of rent or other amounts payable hereunder or, if the Term has expired, promptly refund the overpayment to Tenant.

 

Percentage rent is a component of rent that is calculated by multiplying all or a portion of the tenant’s sales that are derived from the premises by a percentage rent rate.  The percentage rent rate typically varies according to the use.  Thus, the percentage rent rate is generally greater for lines of business that have higher profit margins and lower for lines of business that have lesser profit margins.  The issues in this area usually center on defining and monitoring which sales are included or excluded from the definition of tenant’s sales for purposes of determining percentage rent and on defining the portion of the sales that is to be considered in determining percentage rent. 

 

Although the terms and concepts are defined more fully in the text below, percentage rent can be expressed formulaically as follows:

 

Percentage Rent = PRR x (GR-BP)

 

where:

 

PRR is the percentage rent rate,

GR are the tenant’s gross receipts, defined as discussed below, and

BP is the gross receipts breakpoint over which tenant begins paying percentage rent.

 

(DRAFTER’S NOTE:  After an algebraic term is defined, it will not be redefined when used again elsewhere in this paper.)

 

                  a.  Defining gross receipts

 

            “Gross Receipts” means all gross income, rentals, revenues, payments, proceeds and other consideration received by Tenant from or relating to the Premises (whether denominated as “rent” or otherwise), specifically including, without limitation, all “basic” or “minimum” rent and percentage rent collected from subtenants of Tenant.  Except as otherwise provided in this Lease, “Gross Receipts” includes the full retail sales price offered by Tenant for all items and services sold and all gross income received by Tenant from all sales for cash and on credit of goods and merchandise of every kind and character and for services of every kind and character made, given or rendered by Tenant in or from the Premises or resulting from any orders taken and paid for goods, merchandise, services in, on or from the Premises though filled elsewhere and the gross amounts received from any and all other sources of income derived from Tenant’s business conducted in, on or from the Premises.  Notwithstanding the foregoing, “Gross Receipts” will not include the following items, and such may be deducted from Gross Receipts: (i) any sums paid out for any retail sales tax, retail excise tax, "value-added" tax, or similar tax imposed by any governmental authority and paid by Tenant, whether such taxes are collected from customers or absorbed by Tenant; (ii) any refunds to customers; (iii) the sale of gift certificates until redeemed at the Premises; (iv) interest, service or sales carrying charges (including, but not limited to, credit card service charges) or other charges, however denominated, paid for extension of credit on sales, which were not included in the sales price; (v) returns to shippers or manufacturers; (vi) bulk transfer or sale of products or merchandise (and/or sales or transfers to any other store or outlet owned or operated by Tenant); (vii) tips or gratuities; (viii) proceeds from the sale of trade fixtures, equipment and personalty not in the ordinary course of business; (ix) bad debts or uncollected amounts; (x) sales of promotional items at cost; (xi) condemnation or insurance proceeds; and (xii) merchandise, services or meals sold or given to employees of Tenant or complimentary merchandise, services or meals offered for promotional purposes, not to exceed 2% of Gross Receipts.

 

Obviously, the landlord is interested in capturing as many sales as possible and the tenant’s interest is in excluding as many sales as possible.  Accordingly, most landlord forms start with a very broad definition of gross receipts.  Note that the original landlord language in the example language includes not only amounts the tenant actually receives at the premises, but also amounts the tenant would have received had it charged and collected the full sales price for all items sold at the premises.  The landlord definition also extends beyond the premises to capture sales that occur elsewhere but that are in some way connected to the premises (such as when an order is placed at the premises and then delivered to the customer directly or to another store closer to the customer).  One practical consideration is whether the tenant’s accounting system is set up to track all of the types of sales and non-sales contemplated by the landlord’s definition of gross receipts and to track all of the itemized exclusions that the tenant requests.

 

            The broad landlord definition of tenant’s sales is usually countered by the tenant with a long list of exclusions from that definition.  In general, the sales a tenant seeks to exclude are those from which the tenant makes little or no profit (such as the exclusions for complimentary or employee-discounted items) and those which are not really retail sales at all (such as the exclusions for bulk transfers, returned items, sales of personal property other than inventory, and within-company transfers).  Also typically excluded are amounts charged for sales taxes, which artificially inflate the tenant’s total sales, with no resulting increase in profits to the tenant.  While taxes and the category of exclusions for transactions that aren’t really sales are generally not controversial if properly defined, the category of items on which tenant makes little or no profit is often more controversial.  The landlord is not concerned with whether a tenant in fact makes a profit on the sale of a particular item, in fact tenants often take losses on sales of items to move inventory.  As long as tenant makes a profit on its sales overall, there is money to pay percentage rent and the landlord should not be denied his share of those sales.  Who is right?  The right answer lies in how the percentage rent rate was arrived at—if it was determined assuming that the given exclusion would be excluded, then the exclusion should be permitted, and vice versa.  As a practical matter such details are rarely, if ever, actually considered in setting the percentage rent rate except to the extent they reflect broader market assumptions.  Thus, issues concerning gross receipts exclusions should generally be resolved with reference to market terms and the exclusions that are commonly given for the particular use type throughout the market.  Often particularly contentious sales exclusion issues are resolved by allowing the exclusion, but capping it as a percentage of sales for the applicable year.

 

            In order to enforce whatever gross receipts definition is eventually agreed upon, the landlord will need to establish in the lease recordkeeping requirements and audit rights.  The recordkeeping requirements are generally only a practical issue for the tenant.  Either the tenant keeps the requested records in the ordinary course of its business or it does not.  If the tenant does not, then the tenant may not be able to comply or to agree to the landlord’s requested recordkeeping requirements.  Two additional practical concerns for the tenant are whether the records are going to be kept in electronic or paper form (the lease should allow either, if in accordance with the tenant’s normal business practices) and how long the tenant has to retain those records.  Tenants and landlords alike will generally keep such records for at least the three (3)-year period within which the IRS may audit non-fraudulent tax returns and so, any period up to that should be acceptable to the tenant.

 

                  b.  Natural breakpoint

           

            The “Breakpoint” for each Lease Year shall means the quotient obtained by dividing Base Rent for such period by the Percentage Rent Rate (expressed as a decimal).

 

The final issue to be resolved in order to compute percentage rent is to define the portion of the tenant’s sales (as the parties have agreed to define that term) that the percentage rent rate will be applied to.  Other than in a percentage rent-only deal, in which no minimum rent is paid, the tenant will be obligated to pay percentage rent only on that portion of its sales which exceed a certain threshold, called a “breakpoint”.

 

The most commonly used breakpoint is a “natural breakpoint”.  The natural breakpoint is simply the minimum rent converted into a gross receipts figure based on the percentage rent rate.  In thus calculating the natural breakpoint, for any year in which the tenant’s sales exceed such a natural breakpoint, the combination of minimum rent and percentage rent due equals the amount of rent that would have been due had the deal been a percentage rent-only deal at the percentage rent rate.  Thus, a natural breakpoint deal can be thought of as a pure percentage rent deal with a minimum floor beneath which rent cannot fall (i.e., the minimum rent amount).  (As discussed more fully below, that is not the case if an unnatural or artificial breakpoint is used.)

 

            Expressed formulaically, the natural breakpoint can be calculated thus:

 

            BP = MR/PRR

 

            where

 

            MR is the minimum rent.

 

                  c.   Artificial breakpoint

 

            The Breakpoint for eachthe first Lease Year shall be $                           , for the second Lease Year shall be $_______________, . . ..             

           

An artificial breakpoint is a set number that is usually chosen so as to benefit either the landlord or the tenant in the situation in which the tenant’s sales exceed the defined breakpoint or would have exceeded a natural breakpoint, as applicable.  Because it is a chosen number, an artificial breakpoint cannot be calculated based on the minimum rent or the percentage rent rate.  If the artificial breakpoint is set low as compared with the natural breakpoint, then the tenant will pay more total rent in any year in which the artificial breakpoint is exceeded than it would have under a percentage rent-only deal.  If the artificial breakpoint is set higher than the natural breakpoint, then the tenant will pay less total rent in any year in which the natural breakpoint is exceeded than it otherwise would have. 

 

To illustrate the difference in total payments in an artificial breakpoint deal as compared with a natural breakpoint deal, several examples are provided below.  They assume the facts recited in the particular example and the following common assumptions:

 

            the tenant pays percentage rent based on a percentage rent rate of 5%, and

            the tenant’s sales for the applicable year equaled $2,500,000.00.

 

Example 1 – Assume tenant also pays minimum rent of $100,000.00 and that percentage rent is based on a natural breakpoint.  First, the natural breakpoint is calculated by dividing the $100,000.00 in minimum rent by the percentage rent rate (expressed as a decimal) of 0.05, which equals $2,000,000.00.  Next, the amount by which tenant’s sales exceeded that breakpoint is calculated:  $2,500,000.00 - $2,000,000.00 = $500,000.00.  That amount of gross receipts is then multiplied by the percentage rent rate of 0.05 to calculate the percentage rent due:  $500,000.00 x 0.05 = $25,000.00.  For comparison purposes, the total rent due for the year may be calculated by adding the percentage rent and the minimum rent for a total of:  $25,000.00 + $100,000.00 = $125,000.00.

 

Example 2 – Assume tenant pays only percentage rent.  The percentage rent due is calculated by multiplying the total sales of $2,500,000.00 by the percentage rent rate of 0.05:  $2,500,000.00 x 0.05 = $125,000.00.  Thus, as stated above, if a natural breakpoint is used, for any year in which sales exceed the natural breakpoint, the tenant pays the same amount of total rent regardless of how much minimum rent is provided for in the lease.

 

Example 3 – Assume tenant also pays minimum rent of $100,000.00 and that percentage rent is based on an artificially low breakpoint of $1,500,000.00.  First, the amount of sales on which percentage rent will be calculated is determined:  $2,500,000.00 - $1,500,000.00 = $1,000,000.00.  Then the percentage rent due is calculated:  $1,000,000.00 x 0.05 = $50,000.00.  Therefore, the total rent due would be:  $100,000.00 + $50,000.00 = $150,000.00.  Thus, the artificially low breakpoint produced a greater total rent amount.

 

Example 4 – Assume tenant also pays minimum rent of $100,000.00 and that percentage rent is based on an artificially high breakpoint of $2,500,000.00.  Tenant would pay no percentage rent in this example because its sales did not exceed the breakpoint.  Therefore, the total rent due would be:  $100,000.00 + $0.00 = $100,000.00.  Thus, the artificially high breakpoint produced a lesser total rent amount.

 

            Whether the breakpoint is natural or artificial one further issue that needs to be considered is whether percentage rent should be calculated and paid monthly (based on a pro-rated breakpoint), paid once at the end of each year, or paid monthly, but only after the annual breakpoint for the applicable year has been exceeded.  Most sophisticated retail tenants will insist on one of the latter two methods for paying percentage rent.  Sales for retail tenants may fluctuate wildly throughout the year and thus, although the tenant may exceed a monthly breakpoint in December, the tenant may fall well short of the breakpoint in February and may end the year under the annualized breakpoint.  If the tenant had paid percentage rent based on a monthly breakpoint for December, the landlord will have gotten more rent than the parties likely contemplated.

 

            4.   The premises

a.     Description

 

            The approximate location of the Premises is depicted generally by crosshatching on Exhibit   .  As more particularly provided for in Section    , Landlord reserves the right from time to time to change the size, layout and dimensions of the Shopping Center (including the Common Area), locate, relocate, alter and/or modify the number and location of building improvements, building dimensions, the number of floors in any of the buildings, parking areas, store dimensions, and the nature of the businesses, activities and uses to be conducted from time to time at, in or from the Shopping Center (including the Common Area); provided, however, notwithstanding the foregoing or any other contrary provision of this Lease, Landlord shall not: (i) change the location, size, layout or dimensions of the Premises as shown in Landlord’s Shell Drawings (as defined herein); (ii) construct any improvements in, nor make any changes to, the area marked “Restricted Area” on Exhibit A attached hereto; (iii) make any changes to the Common Areas as depicted on Exhibit A attached hereto that would materially and adversely affect access to, parking for, traffic flow about or the visibility of or from the Premises as shown on Exhibit A; or (iv) construct or permit any signage, improvements or other items over the Premises (other than those of or that serve Tenant).

 

            The premises must be identified in the lease either by address or site plan or any other reasonable means in order to satisfy the statute of frauds.  A legal description is not required unless the lease is to be recorded.  However, a legal description of the overall project is usually attached to the lease as an exhibit.  If the premises are identified only on a site plan or floor plan, care should be taken in drawing the lines that demarcate the premises, as the tenant is usually responsible for maintaining, insuring, and otherwise taking care of the area that is demarcated to be the premises.  If the lines are not carefully drawn, the tenant could end up with responsibility for structural and exterior elements or even a portion of another tenant’s premises, such as a common wall or other similar facility.

 

                  b.  Floor area—gross leasable area, usable square footage and rentable square footage

 

The term “floor area” means (a) with respect to the Premises and such other areas in the Shopping Center that are available from time to time for the exclusive use and occupancy by a tenant or other occupant, Landlord’s calculation of the number of rentable square feet of floor area of all floors in such subject space measured from the exterior faces of all exterior walls (and from the extensions thereof in the case of openings), but excluding any Landlord-required façade or storefront features, and from the center line of interior demising walls inclusive of the floor area of mezzanines and basements (unless otherwise excluded), and (b) with respect to kiosks, Landlord’s calculation of the rentable floor area of the footprint of each of the kiosks. Landlord and Tenant stipulate to all floor area calculations made from time to time by Landlord  Notwithstanding the foregoing, Tenant shall have the right to re-measure the Premises within thirty (30) days after the Delivery Date and within thirty (30) days following Tenant’s receipt of any re-measurement calculation form Landlord, and in the event the actual floor area is different than the floor area stated in Section   of this Lease or in Landlord’s re-measurement calculation delivered to Tenant, this Lease shall be amended to reflect the actual floor area of the Premises and any applicable provision of this Lease which is based upon the floor area of the Premises (including, without limitation, Tenant’s proportionate share) will be adjusted accordingly.

 

The example language is a typical retail measurement standard and it generally suffices to define the area to be measured.  However, consideration should be given to whether the measurement should stop at the interior glass line for storefronts (as the BOMA measurement standard calls for in the office context in determining usable area when walls that are primarily glass are concerned).  Storefront design is generally controlled by the landlord and is largely dictated on a project-wide basis by aesthetic concerns and a need for consistency.  If landlord has chosen a storefront design that extends out an unusually long distance, it seems unfair to require a tenant to pay rent on that, as the industry-standard “to the exterior of exterior walls” language would require.

 

Also, consideration should be given to the treatment of outdoor service areas constructed by the tenant, such as enclosed or unenclosed service yards.  As to those, the issue should be whether their existence takes away development rights the landlord would otherwise be able to use and would in fact use.  If they do, then a good argument can be made for including them in the floor area of the premises as the tenant’s requirement for them effectively deprives the landlord of leasable floor area. 

 

Finally, consideration should also be given to patios and mezzanine areas.  Tenants argue that patio areas are usable only a few months each year and require little or no additional capital investment by the landlord and, as such, tenant should pay only percentage rent from the sales made in such areas, and not minimum rent on the floor area of such areas.  Most landlords accept that, and the reality is that many tenants would simply elect not to have patio areas if landlords charged minimum rent on the floor area of the patio areas (an election that would cost the landlord in lost percentage rent).  However, in those jurisdictions and projects in which the fencing off of a patio area would take development rights from the landlord, the landlord should give this factor consideration in deciding whether to accept the tenant’s position. 

 

Mezzanine areas are used principally either for storage or for additional sales floor or seating areas.  If the mezzanine area is to be used principally for storage, the tenant will contend that because the area will not be used for revenue generation and because it is space made out of thin air, it should not be included in determining rent.  If the mezzanine area is to be used as a sales or seating area, the tenant will contend that it is “new” space that the landlord did not intend to make money off of any way and that landlord will reap the benefits of the new space in any event through increased percentage rent from the sales that will take place there.  Some landlords find those arguments unpersuasive—all stores have to use a certain portion of their premises for storage space and tenants generally pay the same rent on such space as any other portion of their premises, and the creation of a mezzanine area may well cut into landlord’s development rights for other spaces or portions of the project.  Nonetheless, many (but not all) landlords agree not to charge rent on mezzanine space as long as the tenant constructs it or pays for the construction of the mezzanine itself. 

 

Whatever floor area measurements standards and exclusions are ultimately agreed upon, the lease may also specify that the measured floor area is to be increased by a load factor for purposes of calculating rent.  The load factor (called an “R/U Factor”, which stands for rentable/usable factor) is usually calculated in accordance with standards published by the Building Owners and Managers Association (“BOMA”).  The R/U Factor purports to fairly allocate a portion of the interior common areas (such as hallways, public bathrooms, lobbies and other amenities) to each of the tenants of the project.  Load factors are rarely used in retail and industrial leases.  However, they are almost always provided for in office leases.

 

            If a tenant agrees to allow the floor area of its premises to be loaded (again, primarily in the office context), then it should consider requiring that all of the other lease economics (including tenant allowances) also be based on those loaded floor areas.  The tenant should also consider capping the R/U Factor so that it can have some certainty as to how much additional space will be allocated to its premises.

 

                  c.   Mezzanines, patios and service areas

 

Provided that and so long as Tenant (i) is open and operating its business in the Premises in accordance with all of the terms and conditions of this Lease, (ii) is not in default hereunder beyond applicable periods of notice and cure, and (iii) has received all applicable permits and licenses relating thereto and required therefor, Landlord hereby grants to Tenant the right, during the term of this Lease, to use the area adjacent to the Premises and marked as the “Patio Area” on Exhibit “___” hereto (the “Patio Area”) to be used in connection with the Permitted Use.  Tenant shall use its bestcommercially reasonable efforts to maintain decorum and reduce the noise levels from the operation of the Patio Area.  All furniture and other fixtures, trade fixtures, equipment and personal property to be used in connection with the Permitted Use in the Patio Area shall be subject to the approval of Landlord in Landlord’s sole discretion, which approval will not be withheld, conditioned or delayed unreasonably.  Without limiting other provisions applicable thereto: (i) Tenant also shall be responsible, at Tenant’s sole cost and expense, for furnishing, maintaining and replacing any and all furniture and other fixtures, trade fixtures and equipment and personal property to be used in connection with the Patio Area; (ii) Tenant’s operations in or about the Patio Area shall be conducted in compliance with all applicable laws, permits and approvals relating thereto; (iii) Tenant and its employees shall abide by any and all reasonable, non-discriminatory and uniformly-enforced rules and regulations as are consistent with this Lease and promulgated by the Landlord with respect to the foregoing or otherwise relative to Tenant’s activities in and about the Patio Area, including, without limitation, any such rules and regulations affecting hours of operation, occupancy, and/or crowd and noise levels, etc.; provided, however, Tenant shall have the right to (a) operate the Patio Area at all times that Tenant is open for business, (b) use the Patio Area for the Permitted Use, and (c) provide for at least [____] seats; (iv) notwithstanding the exterior location of the Patio Area, except as otherwise expressly provided to the contrary in this Lease, all provisions of this Lease applicable to the demised premises will apply with equal force to the Patio Area as though the Patio Area were a part of such demised premises, and sales in the Patio Area shall be included in Gross Receipts for the purposes of the calculation of Percentage Rent; and (v) in no event shall the Patio Area be enclosed or and covered except as depicted on Tenant’s Construction Drawings (as defined herein).

 

Notwithstanding anything to the contrary contained in this Lease, in the event that Tenant or its use of the Patio Area fail to comply withviolates Landlord’s reasonable, non-discriminatory and uniformly-enforced rules and regulations as are consistent with this Lease in any material respect, or otherwise so fail to comply with the foregoing and all applicable provisions of this Lease, and such failure continues for tentwenty (1020) or more days after notice thereof is given by Landlord to Tenant (but the second and any subsequent time in each lease-year that such notice is given then the period to cure shall be five (5) days and not ten), then, in any such event, and without limiting Landlord’s other rights and remedies on account of the continuation thereof and the resulting default by Tenant thereunder, Landlord shall have the right to (i) take such steps as Landlord determines to be necessary to remedy such failure, including, without limitation, the right,or (ii) exercisable by giving written notice thereof to Tenant, immediately to terminatesuspend all of Tenant’s rights hereunder to use and occupy the Patio Area, whereupon the Patio Area shall be removed from and cease for all purposes to be part of the Premises and Tenant promptly shall surrender and deliver up possession of the Patio Area to Landlord in accordance with the provisions of this Lease applicable to the delivery thereof upon the expiration of the term hereof with respect to the Patio Area portion of the demised premises for so long as such violation remains uncured; and Tenant will promptly pay to Landlord on demand all reasonable and actual costs and expenses incurred by Landlord in remedying any such failure, which shall be due and payable on demand as additional rent hereunder.  Any terminationsuspension of Tenant’s rights to use the Patio Area and the removal of such area from the Premises in accordance with the foregoing shall not affect this Lease insofar as it relates to the remainder of the Premises; and, without limitation, as no minimum rent or other charges attributable to the Patio Area or Tenant’s use thereof are imposed by the provisions of this Lease (except that all sales made by Tenant from the Patio Area shall be included in Gross Receipts), any such terminationsuspension of the Tenant’s rights to use the Patio Area and removal thereof from the Premises shall not reduce or otherwise affect the Base Rent or any other charges and obligations of Tenant pursuant to the provisions of this Lease.

 

Whether the floor area of mezzanines, patios and service areas should be included in determining base rent is discussed above.  Regardless of how that issue is resolved, the landlord should either expressly deem these areas to be a part of the premises or, with respect to the patio and service areas, define them as merely being licensed to the tenant and made terminable if the tenant fails to use or care for them.  In either case, all tenant obligations that are applicable to the premises should be made applicable to these areas as well, with two possible exceptions.  First, the parties may have agreed that no minimum rent would be payable on the floor area of such areas, as discussed above.  Second, the landlord may desire tighter design controls and sooner self-help rights and other remedies with respect to these areas (especially the patios and service areas, which will be visible from the common areas of the shopping center) than it requires for the other premises improvements and alterations and other portions of the premises. 

 

            5.   Identifying and protecting the common areas

 

                  a.  Site plan exhibit

 

The "Common Area" is the part of the Shopping Center available for the common use and benefit of the occupants of the Shopping Center, including, without limitation, parking areas, sidewalks, landscaping, curbs, loading docks, loading areas, private streets and alleys, lighting facilities and other areas and improvements provided by Landlord for the common use and benefit of all occupants.  During the Lease Term, Tenant, its subtenants, concessionaires, licensees, invitees, customers, and employees shall have the right to use the Common Area for parking and pedestrian and vehicular ingress and egress in common with Landlord, other tenants, and their respective subtenants, concessionaires, licensees, invitees, customers, and employees subject to the provisions of this Lease.

 

In a shopping center lease, the common areas are as important to the tenant as the premises themselves.  The premises are useless if customers cannot see or gain access to them or if there is little or no accessible parking.  (Those issues are also important in office leases, although to a much lesser extent.)   The site plan should thus be carefully examined by a tenant prior to signing a lease to ensure that it depicts the shopping center as presented to the tenant.  Changes to the site plan made after the lease is signed should be controlled as discussed in the next section.

 

                  b.  No-build and other protected areas

 

Except as expressly set forth in this Lease to the contrary, Landlord shall have the sole and exclusive control, management and direction of the Common Area and its use, and shall have the unilateral right and authority to determine the nature and extent of the Common Area and to make such changes, additions and/or reductions in and to the Common Area as Landlord from time to time may deem necessary or desirable, and in general otherwise to deal with the Common Area as contemplated in this Section      and otherwise in this Lease as Landlord from time to time may determine in the exercise of its reasonable judgment.  Without limitation of the foregoing, but subject to the last sentence of this grammatical paragraph, Landlord shall have the unilateral right and authority at any time and from time to (i) close all or any portion of the Common Area to make repairs or changes, prevent a dedication thereof or the accrual of any rights of any person or of the public therein, or for any other reasonable purpose; (ii) locate on the Common Area permanent and/or temporary kiosks, displays, carts, stands or other like improvements, and convert Common Area to other retail use and to convert retail use to Common Area, and in general reduce, expand, change and/or reconfigure the size, location shape and/or extent of the Common Area (including direction and flow of vehicular and pedestrian access); (iii) eliminate or add any space or improvements to the Common Area; (iv) use portions of the Common Area to facilitate any construction, repair, alteration or maintenance by Landlord or by any other person in writing authorized by Landlord; (v) enclose any or all of the Common Area; and (vi) exclude, restrain and/or expel any person from the use or enjoyment of the Common Area for violation of the rules promulgated by Landlord or other reasonable cause, provided, only, that the Premises shall remain reasonably accessible to Tenant for its Permitted Use.  Landlord shall have the exclusive right and authority exercisable in the good faith judgment of Landlord and upon prior written notice given to Tenant to modify Tenant’s Share upon any a reduction or expansion of the Common AreaNotwithstanding anything to the contrary contained herein, Landlord shall not: (A) construct any improvements in, nor make any changes to, the area marked “Restricted Area” on Exhibit __ attached hereto; (B) make any changes to the common areas as depicted on Exhibit A attached hereto which changes would materially and adversely affect access to, parking for or visibility of or from the Premises as shown on Exhibit __; or (C) locate any kiosks, displays, carts, stands or the like within [____ feet] from the front door of the Premises.

 

Given the overriding importance of the common areas to the tenant, the landlord should be restricted in its ability to change those areas.  Of course, landlords are reluctant to limit themselves with respect to an area they consider to be “theirs” and thereby, perhaps, forego opportunities to respond to changing market trends (or changes in landlord’s mind) in the future.  One resolution that recognizes both concerns is to prohibit only those changes to the common areas (vs. what is reflected on the exhibited site plan) that would “materially and adversely affect access to, parking for, traffic flow about or visibility of or from the premises”.  Some landlords believe such language is still too restricting and is so open-ended that they would have to come to the tenant for consent to virtually any change as they would never know for sure when those “material and adverse” impacts might be felt (or alleged).  This concern can be addressed by identifying the areas that are critical to the tenant on the exhibited site plan as a “No Build Zone” and stating that the landlord cannot make changes that would have the undesirable effects described above within that zone.  Consideration should be given to whether each of those concerns can be addressed in a single zone.  For example, the expected view corridor for a tenant’s premises and signage may be much larger than the parking field that the tenant expects to serve its premises.  Also, the primary access points leading to the premises may lie outside of the expected parking field.  Accordingly, different zones may need to be identified to protect each of the different elements of access, parking, traffic flow and visibility.

 

                  c.   Protection following casualty or condemnation

 

[FROM CASUALTY PROVISIONS:]  Unless this Lease is terminated as provided in this Article  , Landlord shall promptly commence to repair the damaged portions of the Common Areas and Shopping Center to the same condition as existed immediately prior to such damage, and Landlord shall complete such repair and restoration with due diligence.  Notwithstanding any contrary provision of this Lease, in the event Landlord has not restored the Common Areas [or No Build Zone] reasonably necessary for the operation of the Premises for the Permitted Use within ninety (90) days following the date of the casualty, Tenant shall have the right to (i) perform, at Landlord’s sole cost and expense, such repairs and/or restoration of the Common Areas [or No Build Zone] as are reasonably necessary for the efficient operation of the Premises for the Permitted Use, in which event Landlord shall reimburse Tenant for such costs within ten (10) days following Tenant’s demand for such payment, or (b) terminate this Lease upon written notice to Landlord at any time prior to Landlord’s completion of the repairs and restoration required hereunder.  In the event Landlord fails to reimburse Tenant for the costs of repairs or restoration under this Section ___, Tenant shall have the right to offset such unpaid costs against payments of rent due hereunder.

 

Given the importance of the common areas to the premises, it is important that they also be promptly reconstructed if damaged by a casualty or condemnation and that damage or condemnation to the critical common areas be treated as though it were damage to the premises themselves.  If, following a casualty, the landlord fails to timely commence or complete repairs to the critical common areas, then consideration should be given to whether a tenant should have a self-help right to make the needed repairs so that it can become operational again.  A tenant should also consider securing a termination right to deal with the situation in which all or a portion of the critical common areas are taken or relocated in connection with a condemnation and the remaining or relocated common areas are materially worse for the tenant in terms of access, parking, traffic flow or visibility.

 

            6.   Landlord “concessions”

 

            In order to induce a tenant to lease space in a particular project and, often, in order to secure higher rents than the landlord would otherwise obtain, landlords often offer “concessions” to their tenants.  I put the word “concessions” in quotation marks, because these tenant benefits are never provided free of charge.  Each one of them has to be incorporated into the landlord’s pro forma budget in deciding whether to agree to a deal and, thus, each one is priced into the rents.  In fact, the amount by which the rents are increased to accommodate these concessions can be calculated using a financial calculator or spreadsheet program by calculating what the payments would be on a fully-amortized loan having a term equal to the initial term of the lease and bearing an interest rate equal to the landlord’s internal (or target) rate of return.  Tenant concessions are, in reality, loans from the landlord that are paid back over the initial term of the lease in the form of increased rents. 

 

                  a.  Landlord’s work description

 

            All landlords start with a base building description (also called the landlord’s work letter) that is generally prepared by the architect for the project.  The base building description describes the work that the landlord agrees to provide to all of its tenants.  Some tenants have specialized requirements for landlord’s work and, thus, require revisions to the base building description.  Each of those revisions represents an increased cost to the landlord and should thus be considered in evaluating the economics of the deal.

 

            Depending on the deal, a landlord’s construction obligations can range from constructing nothing for its tenants (as in the case of a ground lease) all the way up to constructing everything needed to occupy the premises on the date they are delivered to the tenant (such complete construction is called “turn-key construction” because all the tenant has to do before operating from the premises is turn the key).  Whatever the landlord’s construction obligations are in the particular deal, it is important that they be described with specificity so that there is no vagueness as to what exactly the landlord will be providing.  General descriptions such as “cold dark shell”, “gray shell” and “vanilla shell” are not legal terms and are not sufficient descriptions of the work to be performed by the landlord.  The landlord’s work letter should be reviewed by the tenant’s architect to confirm that the tenant is getting all that the architect and tenant are expecting and that the architect will be able to work with the materials and specifications described in the landlord’s work letter in designing and constructing the tenant’s improvements.

 

            If possible, a copy of the permitted shell drawings showing all of the landlord’s work should be obtained and reviewed by the tenant and its architect to further minimize the risk of any misunderstandings.  Some tenants even go to the extent of preparing design drawings based on landlord’s shell drawings, having those pre-approved by the landlord and attaching those as an exhibit to the lease before the lease is signed.  If multiple descriptions and drawings are attached or referred to, they should be reviewed for consistency with each other and/or conflict resolution language should be added to resolve any inconsistencies.  In general conflicts should be resolved in favor of the more detailed, more architect-vetted and more recent drawings or descriptions.  The more detailed the parties’ drawings and work descriptions, the less likely future disputes are to arise.

 

                  b.  Tenant improvement allowance

 

Landlord agrees that it shall contribute towards the cost of Tenant’s Work (the “Tenant Improvement Allowance”) an amount up to $                 per square foot contained in the floor area of the Premises, subject to the terms set forth herein.  Landlord shall not be required to make such contribution unless this Lease is in full force and effect, Tenant is not in default beyond applicable notice and cure periods, Tenant has commenced the payment of Rent, and the Premises are free of all liens, claims or encumbrances caused by Tenant, its employees, agents, contractors, subcontractors or representatives (and otherwise in compliance with this Exhibit    and the remainder of the applicable terms and conditions of the Lease).  The Tenant Improvement Allowance shall only be used for alterations, improvements, fixtures and equipment which become part of or are attached or affixed to the realty, including HVAC to the extent included within Tenant’s Work, walls, floors and ceilings, but excluding trade fixtures, furniture and furnishings or other personal property.

Subject to the other provisions of this Exhibit   , the Tenant Improvement Allowance shall be made in a single lump sum payment on or before the thirtieth (30th) day following Tenant’s opening for business at the Premises pursuant to the terms of the Lease.  Prior to and as a condition precedent to Landlord’s obligation to pay the Tenant Improvement Allowance, Tenant shall deliver to Landlord: (i) a certificate stating that Tenant has incurred, in the performance of Tenant’s Work, costs at least equal to the amount requested in the certificate, such certificate to describe the nature of such costs and expenses and to include a copy of the bills, receipts or invoices evidencing such costs and expenses; (ii) evidence reasonably satisfactory to Landlord of payment of all costs incurred in connection with Tenant’s Work; (iiiii) unconditional final lien releases and/or waivers from Tenant’s general contractor, subcontractors, materialmen and suppliers and other parties who have performed work or services in connection with Tenant’s Work; (iv) a statement of Tenant’s contractor certifying that it has been paid all sums due to it and all subcontractors, materialmen and suppliers and all costs of labor, including payroll taxes and charges, have been paid; (v) evidence reasonably satisfactory to Landlord of payment of all costs incurred in connection with Tenant’s Work; (vi who performed Tenant’s Work; and (iii) a certificate of occupancy (or other governmental notice Tenant’s Work have been substantially completed) for the Premises and any other approvals of Tenant’s Work or which may be necessary for the conduct of Tenant’s business as may be required of any governmental authority; and (vii) an affidavit from Tenant’s director of construction or project manager having supervision over Tenant’s Work, to the effect that Tenant’s Work have been completed to the extent necessary to and in accordance with the plans and specifications approved by Landlord and in compliance with all governmental requirements.

A tenant improvement allowance is a sum of money that is paid to the tenant to reimburse the tenant for some or all of the cost of constructing its leasehold improvements.  As with the minimum rents, the amount of the allowance can be expressed as either a fixed amount or on a per square foot basis.  The tenant is usually limited to spending the allowance only on permanent leasehold improvements and building systems.  That ensures the landlord will have at least some salvage value in the items constructed using the allowance if the landlord evicts the tenant. 

 

Another issue is the timing of the payments.  Generally, landlords would rather delay payments as long as possible (ideally only after the work is completed and lien waivers from all contractors and suppliers have been delivered to the landlord) and tenants would rather be paid the allowance as soon as possible (ideally soon enough to use to make payments to contractors).  This issue should be resolved at the letter of intent stage based on the creditworthiness of the tenant.  If the tenant is creditworthy, then the risk of not paying contractors or of not being able to recover the money if it is mis-applied is relatively small and, thus, the landlord should, in that case, be willing to pay the bulk of the allowance sooner rather than later.  By contrast, a non-credit tenant presents a greater risk to the landlord, either that the funds will be mis-spent or that the tenant will not have the financial wherewithal and expertise to complete all payments and obtain lien waivers from its contractors and suppliers.  Accordingly, with such a tenant, the landlord should dispense little, if any, of the allowance before the tenant has completed all of its construction work (as evidenced by a certificate of occupancy or similar government sign-off and certificates of completion from the tenant’s architect and general contractor) and has obtained final, unconditional lien waivers from all of the tenant’s contractors and suppliers.  It is always good practice, even in dealing with a credit tenant, for the landlord to retain some percentage of the allowance until all lien waivers are obtained to ensure the tenant actually obtains those and to give the tenant an incentive to do so promptly.

 

                  c.   Late delivery penalties

 

Landlord shall deliver possession of the Premises to Tenant and Tenant shall accept possession of the Premises from Landlord on the Delivery Date.  The “Delivery Date” shall be the date Notice of Substantial Completion of Landlord’s Work shall have been given under this Section     .   Landlord in good faith shall endeavor to keep Tenant apprised from time to time of its anticipated Delivery Date.  For all purposes of this Lease, “Substantial Completion of Landlord’s Work” means the date on which Landlord shall give to Tenant written notice that Landlord’s architect has certified to Landlord that the Landlord’s Work is substantially complete to the point that Tenant or Tenant’s contractor may commence the construction of Tenant’s Work, which Landlord written notice (“Notice of Substantial Completion of Landlord’s Work”) and certification from Landlord’s architect shall be conclusive and binding upon Tenant.  Tenant acknowledges that Landlord’s Work may not be completed in its entirety on the Delivery Date and Landlord shall have the right to complete the balance of Landlord’s Work concurrently with the performance of Tenant’s Work.  Failure of Landlord to deliver possession of the Premises within any time period or in the condition provided for in this Lease shall not give rise to any claim by Tenant for damages or any other Liabilities against Landlord or permit Tenant to rescind or terminate this Lease.

Landlord shall deliver possession of the Premises to Tenant with Landlord’s Work complete on or before ______________ (the “Projected Delivery Date”).  Landlord in good faith shall endeavor to keep Tenant apprised from time to time of its anticipated Delivery Date.  In the event Landlord fails to deliver possession of the Premises to Tenant with Landlord's Work complete on or before the Projected Delivery Date, Tenant may terminate this Lease upon written notice to Landlord at any time prior to such delivery, in which event Landlord and Tenant shall be released from all liability hereunder accruing thereafter, except that Landlord shall be obligated to reimburse Tenant for Tenant's costs incurred in the planning and design of the Premises and the negotiation of this Lease within thirty (30) days after such termination.  The preceding obligation shall survive the termination of this Lease.  If Landlord fails to deliver the Premises to Tenant with Landlord’s Work complete on or before the Projected Delivery Date and Tenant does not elect to terminate the Lease, Tenant shall receive a rent credit towards its next due rental obligations equal to two (2) days rent for each and every day after the Projected Delivery Date until and including the day Landlord delivers possession of the Premises to Tenant with Landlord’s Work complete.  In the event Tenant receives the foregoing rent credit, the breakpoint, for purposes of determining percentage rent due (if any), shall be calculated as if Tenant had paid such credited rent to Landlord.

 

Good construction management and operational planning, especially for chain stores and restaurants, requires that the tenant know when the premises are going to be delivered.  Many retailers and restaurants base annual profit expectations and estimates that they report to their shareholders based on when and how many locations are projected to be open during the applicable reporting period.   Accordingly, the delivery dates promised by the landlord are very important to the tenant and therefore, from the tenant’s perspective, must have some teeth in them.  Most landlords will agree to give the tenant a termination right if delivery of the premises to the tenant is after the landlord’s outside projected delivery date and will often agree to reimburse the tenant for its out-of-pocket costs incurred in planning for the premises in that circumstance.  However, termination is generally not a practical option by the time a projected delivery date has passed (by that point any substitute premises the tenant will be able to find would likely have a longer delivery date and would require greater lead time than the length of time by which the landlord will miss its projected delivery date) and mere reimbursement of out-of-pocket expenses would not compensate the tenant for lost profits during the period between the landlord’s projected delivery date and the delivery date of the substitute premises.  Accordingly, the tenant may prefer a liquidated damages remedy in the case of a late delivery.  Ideally from the tenant’s perspective, such damages should be paid on a daily basis in a daily amount sufficient to compensate the tenant for its lost net profits and for increased construction and operational costs.

 

            7.   Security for tenant’s obligations

 

            The two principal economic considerations for any landlord are the amount of the rent to be paid by the tenant and the tenant’s ability to pay those rents.  Landlords typically require financial statements and other information from their tenants to determine the tenant’s creditworthiness.  If the tenant’s financials are not strong enough, additional security may be required from the tenant.  That security is usually comprised of some combination of security deposits, letters of credit, security interests (landlord’s liens), and guarantees.

 

                  a.  Landlord’s lien (grant, subordination and waiver)

 

            As security for the amounts due and to become due by Tenant hereunder, and the performance by Tenant of all terms, covenants and obligations hereunder, Tenant hereby grants to Landlord a first-priority lien and security interest on all of Tenant’s present and future tangible and intangible personal property in, on and about the Premises, including all products and proceeds thereof (including, by way of example, insurance proceeds from a casualty).  In order to perfect and enforce Landlord’s lien and security interest, Tenant agrees to execute upon request all required statements, in form and substance reasonably acceptable to Tenant, within ten (10) days of Landlord’s request.  Nothing herein shall prevent Tenant, if not in default hereunder, from disposing of its inventory or replacing its trade fixtures, furniture and furnishings, equipment, merchandise and stock-in-trade, signage and other personal property in the ordinary course of business and otherwise in accordance with the terms hereof.  At any time during the continuance of a default by Tenant beyond applicable notice and cure periods, in addition to any other right or remedy available to Landlord hereunder, at law or in equity, Landlord shall have the right to enter upon the Premises and seize any and all personal property of Tenant without incurring any claims by or liabilities to Tenant therefor and, if Tenant fails to redeem such by payment of all sums then due to Landlord hereunder, Landlord shall be entitled on five (5) days’ prior written notice to sell the same in whole or in part, at public or private sale and upon such terms and conditions as Landlord deems reasonable or advantageous.  After payment of all proper charges incident to such seizure and sale (including any administrative charge, reasonable attorneys’ fees and interest at the DefaultAgreed Rate) the proceeds shall be applied to the payment of all sums then due under the Lease, and any surplus remaining shall be paid to or for the benefit of Tenant.

 

[WAIVER OF LANDLORD’S LIEN—DELETE THE PRECEDING PARAGRAPH AND INSERT IN ITS PLACE:] Landlord hereby waives and covenants to waive any landlord’s lien or similar lien it might now or hereafter have in any of Tenant’s personal property.  Although such waiver shall be automatic and self-operative without the necessity of any further instrument, Landlord hereby agrees to execute promptly such further instruments as may be reasonably required by Tenant or Tenant’s lender to evidence such waiver.

 

[OR]

 

[SUBORDINATION OF LANDLORD’S LIEN] Landlord hereby agrees that any landlord’s lien or similar lien it might now or in the future have in any of Tenant’s personal property shall be subordinate to the lien of Tenant’s lender [OR ADD HERE THE TYPES OF LOANS TO WHICH LANDLORD’S LIEN WILL BE SUBORDINATE—E.G., first-priority liens of institutional lenders that secure loans whose terms prohibit the outstanding loan balances from ever exceeding [50%] of the value of the property in which a first-priority lien is perfected by the applicable lender].  Although such subordination shall be automatic and self-operative without the necessity of any further instrument, Landlord hereby agrees to execute promptly such further instruments as may be reasonably required by Tenant or Tenant’s lender to evidence such subordination.  Tenant must pay, as additional rent, all out-of-pocket costs and expenses incurred by Landlord in reviewing, negotiating and processing any request that it subordinate its lien pursuant to this Section ___. 

           

A landlord’s lien gives the landlord the right to seize and sell the tenant’s personal property that is located in the premises in order to satisfy a tenant default.  No statutory or common law landlord’s lien or right of distraint exists under Nevada law.  Accordingly, if the landlord desires to have a lien or security interest in the tenant’s personal property, then such a lien must be created pursuant to Article 9 of the Nevada Uniform Commercial Code. 

 

Consideration should be given to the value of such a lien.  The proceeds of a sale of the tenant’s personal property under foreclosure conditions may not be great and any proceeds that are received at such a sale may be subject to liens of other lenders.  Tenants who rely heavily on trade credit or inventory financing will likely have already pledged all or most of such property to other creditors, who will generally be first in line to collect any proceeds.  In fact, such tenants may insist that landlord expressly waive any landlord’s lien that the landlord might otherwise possess.  Because Nevada law does not create such a lien, no such waiver is needed as long as no lien is created in the lease.  Nonetheless, many lenders will require such an express waiver.  If the landlord agrees to waive this lien, care must be taken in drafting the waiver to ensure that it applies only to pre-judgment or consensual liens.  The landlord should have all available remedies to collect any judgment that it is ultimately able to obtain. 

 

An alternative to waiving the lien that protects the tenant’s ability to obtain financing and also gives the landlord the ability to use any proceeds that are left over after paying off all other secured lenders is for the landlord to agree to subordinate its security interest to that of any first lien, institutional lender of the tenant or purchase money security interest of any such lender.  If the applicable lender requires the landlord to enter into a separate subordination agreement, the landlord should agree to do so only if the subordination agreement is reasonably acceptable to the landlord and only if the tenant agrees to pay landlord’s out-of-pocket costs to review and negotiate the subordination agreement.

 

                  b.  Security deposit

 

            Concurrently with Tenant’s execution and delivery of this Lease, Tenant shall deposit with Landlord the amount of $                (the “Security Deposit”), which shall be held by Landlord as security for the faithful observance and performance by Tenant of the terms, covenants, obligations and conditions of this Lease to be observed and performed by Tenant. The Security Deposit is neither an advance payment of Rent nor a measure of Landlord’s damages in the event of a default by Tenant.

            Landlord shall have the right, at Landlord’s sole discretion, to apply all or any portion of the Security Deposit to remedy or cure any default by Tenant, to repair damage caused by Tenant to any part of the Shopping Center, and to perform on behalf of Tenant any obligations under this Lease that Tenant shall fail to perform, and the further right to apply the Security Deposit to reimburse Landlord for any liabilities, claims, losses, causes of action, charges, penalties, damages, costs or expenses suffered or incurred by Landlord by reason of a default by Tenant.  If any portion of the Security Deposit is so applied, within ten (10) days following written demand by Landlord, Tenant shall deposit funds with Landlord in an amount sufficient to restore the Security Deposit to the full amount set forth in this Section   .  Landlord shall not be required to segregate the Security Deposit from its general funds, and Tenant shall not be entitled to interest thereon.  Landlord shall be a debtor with respect to the Security Deposit and not a trustee and shall have no fiduciary or other duties with respect to the Security Deposit that are inconsistent with a creditor-debtor relationship.  Without limitation of the foregoing, Tenant shall have no right to require that Landlord apply any portion of the Security Deposit to the payment of any Rent or for any other purpose.  The Security Deposit will be the property of Landlord upon Landlord’s receipt thereof, subject to Landlord’s obligation to repay the Security Deposit as and to the extent provided for in this Lease.  Tenant shall not encumber or assign its interest in the Security Deposit.

            If Tenant fully observes and performs every provision of this Lease to be observed and performed by Tenant, the Security Deposit, or any balance then remaining (less any amount which has been applied as permitted under this Section   ), shall be returned to Tenant at Tenant’s last known address within thirty (30) days after the later of (a) the expiration or earlier date of termination of this Lease and (b) the date Tenant has fully satisfied Tenant’s surrender obligations hereunder.

 

            A security deposit is a payment that the landlord collects when the lease is signed that may be drawn upon during the term of the lease if needed to satisfy a tenant default.  In reality, few landlords set aside security deposits as separate funds.  Instead, such funds are usually put to immediate use by the landlord for whatever purposes the landlord elects.  Consequently, it is important that the landlord be treated as a debtor with respect to the security deposit because the alternative model—that of trustee of a trust account or true deposit—would impose fiduciary and other duties that are inconsistent with the landlord’s probable treatment of the deposit.  Because the landlord will not usually be obligated to treat the account as a trust account, the deposit will be especially vulnerable to becoming part of the bankruptcy estate of the landlord if the landlord goes into bankruptcy.  Accordingly, some tenants prefer to post letters of credit instead.

 

                  c.   Letter of credit

 

Tenant shall  deliver to Landlord an irrevocable, transferable and unconditional letter of credit (the “Letter of Credit”) issued by and drawn upon _________ Bank at ______________________________ or another commercial bank (in either case, the “Issuing Bank”) which other commercial bank is a member bank of the New York Clearing House Association and has offices for banking purposes in Clark County and has a net worth of not less than [$50,000,000,000.00].  The Letter of Credit shall (regardless of the Issuing Bank): (i) have a term of not less than one year, (ii) be in a form approved by Landlord in its reasonable discretion, and in any event be presentable and payable in [city, state], (iii) be for the account of Landlord (and permit multiple transfers and additions of beneficiaries by Landlord and its transferees, at Tenant’s sole cost and expense, to be paid or reimbursed, at Landlord’s election, by Tenant as additional rent), (iv) be in the amount of $__________, (v) conform and be subject to the International Standby Practices 1998, International Chamber of Commerce Publication No. 590, (vi) be fully transferable by Landlord without any fees or charges to Landlord therefor, (vii) provide that Landlord shall be entitled to draw upon the Letter of Credit upon presentation to the Issuing Bank of an unconditional sight draft only, and (viii) provide that the Letter of Credit shall be deemed automatically renewed, without amendment, for consecutive periods of one year each year thereafter during the period prior to the expiration or sooner termination of this Lease (and thereafter for so long as Tenant remains in any portion of the Premises), unless the Issuing Bank shall send notice (the “Non-Renewal Notice”) to Landlord by registered mail, return receipt requested, not less than sixty (60) days next preceding the then expiration date of the Letter of Credit that the Issuing Bank elects not to renew such Letter of Credit, in which case Landlord shall have the right, if the Letter of Credit is not renewed or replaced by a Letter of Credit that complies with this Section    by the date which is thirty (30) days prior to the expiration date of the Letter of Credit by sight draft on the Issuing Bank, to receive the monies represented by the then existing Letter of Credit, and to hold until disbursed as required to be paid by Tenant in accordance with the terms of this Lease such proceeds.  Tenant hereby agrees to cooperate, at its expense, with Landlord to promptly execute and deliver to Landlord any and all modifications, amendments, and replacements of the Letter of Credit, as Landlord may reasonably request to carry out the terms and conditions of this Section    .  In the event Tenant has provided a Letter of Credit, Landlord shall have the right to use, apply or retain proceeds of the Letter of Credit to the same extent as Landlord may use, apply or retain the Security Deposit as set forth in Section   .  Landlord may draw on the Letter of Credit, in whole or in part, form time to time, at Landlord’s election, and if Landlord partially draws down the Letter of Credit, Tenant shall, within ten (10) days after Tenant’s receipt of notice thereof, restore all amounts drawn by Landlord, or cash security instead.  Landlord may draw the entire balance of the Letter of Credit at any time following an Event of Default by Tenant, may apply the portion thereof that is owed by Tenant to the satisfaction of Tenant’s obligations under this Lease, and may treat the remainder of the proceeds of the Letter of Credit as a Security Deposit, whereupon Tenant must immediately deposit with Landlord, as an addition to the Security Deposit, funds sufficient to cause the Security Deposit to equal the amount of the Letter of Credit prior to making any draws thereon.

 

            A letter of credit is an agreement by an issuing bank to pay a certain sum upon the demand of a person holding the letter of credit who satisfies the conditions of the letter of credit.  As mentioned above, for bankruptcy-related reasons, the letter of credit may be preferred (over a security deposit) by the tenant.  The landlord may also prefer a letter of credit due to concerns about a tenant bankruptcy.  If the tenant goes into bankruptcy, then the landlord will likely be prohibited from drawing on the security deposit for at least some period.  However, because the letter of credit comes from a third party, it should not be affected by the tenant bankruptcy.  As a practical matter, it is my understanding that it is nonetheless good practice for a landlord to seek bankruptcy court approval before drawing even on a letter of credit, although it is still a much faster process than would be involved in drawing on a security deposit.

 

            For the landlord, it is important that the letter of credit be “clean and evergreen”.  “Clean” means the letter should be free of any conditions to its being drawn—the issuing bank should be obligated to pay the letter of credit proceeds upon presentation of a pre-agreed form of sight draft.  “Evergreen” means the letter should either be self-renewing after the expiration of its term or the tenant should be obligated to replace the letter of credit with a new letter before the prior letter expires (so the landlord can draw on the old letter while it is still in effect if needed to ensure that its security is maintained).  The lease should permit the landlord to draw the entire letter of credit, even if only a portion of that is needed to satisfy a tenant default.  Landlord should have the option of treating any unused portion of the letter of credit proceeds as a security deposit so that multiple draws are not required, especially in the case of a default that will require multiple payments over a period of time or a default the damages from which will not be fully ascertainable immediately.

 

            Whether a security deposit or a letter of credit is used, the tenant may request that the amount of the deposit or letter decline over the term of the lease (as the magnitude of the remaining obligations declines).  Thus, the tenant may propose a “burn-off” based on straight-line amortization over the initial term.  It is obviously a business point as to whether the landlord is willing to agree to such a request.

 

                  d.  Guarantees

 

Landlord's obligations under this Lease are expressly conditioned upon Landlord’s receipt of a guarantee in the form attached as Exhibit __ (the “Guarantee”) from ________________________ (“Guarantor”), which Guarantee Tenant shall cause to be executed and delivered concurrently with the execution and delivery of this Lease.  In the event of any default or breach of Tenant’s obligations under this Lease, Landlord may proceed directly against Tenant, Guarantor or anyone else responsible for the performance of the Tenant’s obligations under this Lease without first exhausting Landlord’s remedies against any other person or entity responsible therefor to Landlord, or any security held by Landlord or Tenant.

 

            If the tenant’s financial status and financial enhancements are still not sufficient to assure the landlord the tenant will be able to meet its financial obligations, the tenant may be required to provide one or more guarantees of its obligations.  Under a guarantee, the guarantor agrees to be responsible for the tenant’s lease obligations. 

 

For the landlord, it is important that “suretyship” defenses be waived in the guarantee.  In general, when a person is merely secondarily liable for an obligation, as opposed to being directly liable for the performance of the obligation, the person (also called a “surety”) benefits from what are called “suretyship” defenses.  Suretyship defenses protect a surety from the consequences of certain actions of the landlord and of certain agreements between the landlord and the tenant to which the surety was not a party.  Thus, as an example, if the landlord extends a tenant’s payment deadline and the consequence of that extension is that the tenant is free to divert its funds to another use, then a surety may argue that the landlord cannot collect from the surety to the extent the lender was harmed by such a diversion.  The bulk of the text of a typical guarantee is devoted to waiving such defenses.

 

            Another important point addressed in the text of a guarantee is to prohibit or limit payments between the guarantor and the tenant following a tenant default and to subordinate any debts or obligations between the tenant and the guarantor to the obligations of the tenant under the lease.  Such prohibitions and limitations can stop or slow the draining of tenant financial resources by the guarantor, who will often be a principal or other controlling party of the tenant.

 

            8.   Services to be provided by landlord

The “Normal Business Hours” of the Project are defined as 8:00 A.M. to 6:00 P.M.  Subject to Force Majeure and any power outage(s) which may occur in the Project when the same are out of Landlord’s reasonable control, as long as Tenant is not in default under any covenants of this Lease, Landlord shall pay for and furnish to the Premises, the following services:

a.         necessary elevator facilities on business days during Normal Business Hours and at least one elevator subject to call at all other times;

b.         Tenant thermostat-controlled air conditioning and heating as reasonably required for comfortable use and occupancy under ordinary office conditions during the Normal Business Hours and capable of maintaining an air conditioning temperature of 70 degrees or cooler and of maintaining a heating temperature of 75 degrees or warmer throughout the applicable seasons.  During other hours Landlord will provide such air conditioning and heating through Premises heat pump override system which shall be connected to the building HVAC system.  In connection with such after-hours electrical usage, Landlord may (but shall not be obligated to) install separate meters to measure such excess usage.  The cost for after-hours service per hour for closed loop system units shall be subject to adjustment by Landlord from time to time; provided such cost shall not exceed Landlord's actual costs of providing such after hour service including without limitation the reasonable allocation of supervision costs and depreciation with respect to such after hours' usage and an administrative fee, not to exceed 10% of such actual costs.  Except as herein otherwise provided, Landlord shall in no event be required to supply central heating or air conditioning other than during Normal Business Hours;

 

c.         electrical facilities during Normal Business Hoursall hours to furnish sufficient power for lighting in the Premises, typewriters, voice writers, calculating machines, personal computers, and other machines of similar low electrical consumption; but not including electricity required for any other item of electrical equipment which use is in excess of that which is customary for first-class general office use;

d.         hot and cold water for lavatory and drinking purposes in the Premises during Normal Business Hoursall hours;

e.         basic janitorial services on business days consistent with those provided to comparable office projects in the area in which the Project is located;

 

f.          access to and use of the parking facilities serving the Premises twenty-four (24) hours per day, seven days per week.

 

g.         uniformed guard service to the Project on a twenty-four (24) hours per day, seven (7) days per week basis, solely for the purposes of providing surveillance of the Project and information and directional assistance to persons entering the Project.

 

            There are several significant differences between office and retail leases, including the greater importance of the size, configuration and location of the common areas in a retail lease and the importance of achieving the proper tenant mix in a retail lease, as discussed elsewhere in this paper.  Another important difference is that the tenant in an office lease is generally provided with an array of services by the landlord.  It is in the landlord’s interest not to identify those services in the lease as obligations or to include as little detail about them as possible.  From the tenant’s perspective, it is important that the lawyer and tenant review the various marketing brochures and marketing materials that were presented to the tenant to induce it to lease space in the landlord’s project to identify what services and amenities were advertised and/or promised to the tenant.  The landlord should be obligated in the lease to provide each of those services and amenities throughout the term of the lease.  If the landlord objects to any such items, the tenant should consider whether it would still be willing to enter into the lease if the applicable advertised service or amenity is not provided or is discontinued during the term, with or without a corresponding rent reduction. 

 

The drafting cannot stop with simply listing the promised services and amenities.  For each service or amenity, specifics must be added about when and how often and at what levels of quantity, quality and service such services and amenities will be provided or made available.  Otherwise, the landlord could, for example, comply with its obligation to provide HVAC by providing 90-degree air conditioning in the summer and 60-degree heat in the winter.  Below is a list of services and amenities that are generally provided for, although landlords often promote additional services and amenities that tenants count on in entering into office leases:

 

                  a.  Elevators

                  b.  HVAC

                  c.   Hot water

                  d.  Janitorial

                  e.   24-hour access

                  f.    Conference/community room access

                  g.  Security personnel

 

The sample language above elaborates on the above-listed services and amenities.

 

      II.  Details of the Lease--Avoiding Lease Pitfalls Through Careful Drafting

 

A.    Commencement of lease issues

 

There are two important commencement dates in any lease.  The first is the date on which the lease itself commences, and the second is the date on which the rent obligation commences.  Rent should generally begin when the premises are ready for occupancy or, at least, after the expiration of the tenant’s build-out (or fixturization) period.

 

However, the tenant and landlord will each usually have many obligations that will have to be undertaken before the premises are ready for occupancy.  Those obligations include the preparation or participation in the preparation of construction plans, the securing of government permits and approvals, the hiring of contractors, and the completion of each party’s construction work.  It is also important to the landlord that the tenant’s insurance and indemnity obligations apply at least from the time the tenant first enters onto the premises and important to the tenant that such obligations of the landlord apply from the date of the lease.  Therefore, the lease itself should commence on the date it is signed, regardless of when rent commences.

 

The determination of the rent commencement date is usually a function of when the tenant’s build-out period begins and how long that build-out period should last.  These are both business points.  However, the tenant will not want rent to commence until the tenant can realistically be up and running and bringing cash flow in its doors to pay the rent from.  That means that the length of the build-out period should be a few days longer than the tenant’s typical construction schedule.  From the tenant’s perspective, the build-out period should begin only after landlord has completed all of the landlord’s work, landlord has approved tenant’s drawings, tenant has received all required governmental permits and approvals, all contingencies have been satisfied and, if applicable, tenant has received a non-disturbance agreement from the landlord’s lender.  By contrast, the landlord will be concerned about receiving a rent stream by a definite time and as soon after the lease is signed as can be negotiated.  Thus, the landlord will prefer a shorter build-out period and will prefer to delete any conditions to the commencement of that period that are entirely or partially outside of landlord’s control.  Accordingly, tying the commencement of the build-out period to tenant obtaining permits or to tenant’s receipt of a non-disturbance agreement are often controversial issues that the landlord and tenant must resolve.

 

1.   Construction of the premises and tenant improvements

 

            Landlord shall deliver possession of the Premises to Tenant and Tenant shall accept possession of the Premises from Landlord on the Delivery Date.  The “Delivery Date” shall be the date Notice of Substantial Completion ofLandlord delivers actual and exclusive possession of the Premises to Tenant with Landlord’s Work shall have been given under this Section   substantially complete.  Landlord shall endeavor to keep Tenant apprised from time to time of its anticipated Delivery Date.  The term “Substantial Completion of Landlord’s Worksubstantially complete” means the date on which Landlord shall give to Tenant written notice that Landlord’s architect has certified to Landlord that the Landlord’s Work (as defined in Exhibit   )’s Work is substantially complete, which Landlord written notice (“Notice of Substantial Completion of Landlord’s Work”) and Landlord’s architect certification shall be conclusive and binding upon Tenant except for minor punch list items that do not interfere with or limit Tenant’s ability to commence and pursue its work in the Premises and that may be completed without material interference with Tenant’s ability to commence and pursue its work.  Tenant hereby acknowledges that Landlord’s Work may not be completed in its entirety on able to complete all punch-list items of Landlord’s Work before the Delivery Date.  However,  and Landlord shall have the right to complete the balance of Landlord’s Work concurrently with the performance of Tenant’s Workcomplete such punch-list items within thirty (30) days following the Delivery Date.  Tenant shall not have the right to enter the Premises prior to the Delivery Date except with Landlord’s prior consent in each instance.  If Tenant enters the Premises prior to the Delivery Date, then (i) Tenant shall do so at Tenant’s sole risk and shall hold Landlord harmless and indemnify Landlord for, from and against any and all liabilities, claims, losses, causes of action, charges, penalties, damages, costs or expenses for any (A) delay in the completion of Landlord’s Work, (B) damage to property or equipment, and/or (C) personal injury or death, arising as a consequence of such Tenant entry, except to the extent such liabilities, claims, losses, causes of action, charges, penalties, damages, costs or expenses arise from the negligence or intentional acts or omissions of Landlord or Landlord’s agents, contractors or employees, and (ii) such entry shall be upon all terms and conditions of this Lease (including Article   respecting insurance) other than the obligation of the Tenant for the payment of the rent.  Failure of Landlord to deliver possession of the Premises within any time period or in the condition provided for in this Lease shall not give rise to any claim by Tenant for damages or any other liabilities against Landlord or permit Tenant to rescind or terminate this Lease.

            Tenant shall (a) commence Tenant’s Work promptly after the Delivery Date, Tenant’s receipt of all permits, licenses and approvals necessary for the completion of Tenant’s Work, and Tenant’s receipt of non-disturbance agreements from the holder of each Existing Mortgage and pursue the same to completion pursuant to the provisions of Exhibit  , and (b) complete Tenant’s Work and open the Premises for business to the public, fully stocked and staffed, on or before the one hundred twentieth (120th) day following the Delivery Date, Tenant’s receipt of all permits, licenses and approvals necessary for the completion of Tenant’s Work, and Tenant’s receipt of non-disturbance agreements from the holder of each Existing Mortgage (the “Required Opening Date”). 

Within fivesixty (560) days after the later to occur of the Required Opening Date or the date that Tenant shall open the Premises for business to the public (or at any other time requested by Landlord), Tenant shall execute and deliver toeither Landlord or Tenant may prepare a certificate or letter acknowledgment in form and substance reasonably satisfactory to the other party Landlord setting forth the Delivery Date, Rent Commencement Date, the floor area of the Premises, the scheduled expiration date and such other dates and terms as reasonably may be requested by Landlord.  If Tenant shall fail to execute and deliver such certification within five (5) days following Landlord’s request therefor, Landlord’s determinations shall be final and binding on Tenant.  If neither party requests such a certificate within such sixty (60) days, then the Premises shall not thereafter be re-measured and shall be deemed to contain the square footage set forth above for all purposes under this Lease for the remainder of the Term, subject to re-measurement following a casualty or condemnation as provided in this Lease.

 

The work to be performed by the landlord should be carefully and specifically detailed in the lease, as discussed more fully above.  The tenant will be responsible for the construction of whatever additional improvements and the installation of whatever additional fixtures are required by the tenant to operate the premises. 

 

Other items concerning the construction of the premises that should be addressed include plan submission and approval requirements, contractor approval requirements, special insurance requirements, bonding requirements, construction rules and lien waivers.  In each case, tenant should ascertain whether the requirements are consistent with the tenant’s usual practices or would place an unwarranted burden on the tenant.

 

2.   Opening and on-going co-tenancy requirements

 

            If at any time fewer thanbusiness is not being conducted in the Shopping Center by (a) tenants occupying at least [seventy five percent (75%)] of the tenant’sfloor area of the Shopping Center (excluding Tenant) are required pursuant to their leases to be open and operating in the Shopping Centerand (b) [at least ______ (___) of] the following co-tenants:  [LIST SPECIFICALLY REQUIRED CO-TENANTS HERE] or other similar substitute co-tenants that are approved by Tenant in its reasonable judgment (collectively, the “Co-Tenancy Requirement”), Tenant shall be entitled to either: (1) discontinue its business operations at the Premises (although this Lease shall not terminate) for so long as the Co-Tenancy Requirement is not satisfied and the same shall not be deemed a default hereunder, nor shall Tenant pay any additional rent, fees or damages as a substitute for Percentage Rent during such period of closure; or (2) continue operating the Premises and pay, as an alternative to Percentage Rent and Base Rent payable hereunder, an alternative rent in the amount of one half of the Base Rent that would otherwise be payable hereunder, for so long as the Co-Tenancy Requirement is not satisfied.  In the event that Tenant discontinues business at the Premises because of a failure to satisfy the Co-Tenancy Requirement and the Co-Tenancy Requirement is later satisfied, then Tenant shall have ninety (90) days to re-commence operations at the Premises.

 

[Initial Opening & Continuous Operation] Notwithstanding anything to the contrary contained in this Lease, Tenant shall not be required to open for business to the public until at least [seventy-five percent (75%)] of the tenant’sbuilding square footage in the Shopping Center (excluding Tenant) are required by their leases to beis occupied and open for business to the public (the “Initial Co-Tenancy Requirement”), and if Tenant elects to wait until the Initial Co-Tenancy Requirement is met, then the Rent Commencement Date shall not occur until such date as Tenant opens for business to the public.  Further, Tenant’s obligation thereafter to continuously operate at the Premises is specifically conditioned upon the occupancy by other retail tenants of at least seventy percent (70%) of the tenantsleasable square footage in the Shopping Center (excluding the Premises) being required by their leases to be open for business to the public (the “Continuing Co-Tenancy Requirement”).  In the event the Continuing Co-Tenancy Requirement is not satisfied, Tenant may, at its sole option, discontinue its business operations at the Premises (although this Lease shall not terminate) for so long as the Continuing Co-Tenancy Requirement is not satisfied and the same shall not be deemed a default hereunder, nor shall Tenant pay any additional rent, fees or damages as a substitute for Percentage Rent during such period of closure.  In the event that Tenant discontinues business at the Premises because of a failure to satisfy the Continuing Co-Tenancy Requirement and the Continuing Co-Tenancy Requirement is later satisfied, then Tenant shall have ninety (90) days to re-commence operations at the Premises.

 

[Continuous Operation] Tenant’s obligation to continuously operate at the Premises is specifically conditioned upon the occupancy by other retail tenants of at least [seventy percent (70%)] of the tenant’sleasable square footage in the Shopping Center (excluding the Tenant) being required by their leases to be open for business to the publicPremises) (the “Co-Tenancy Requirement”).  In the event the Co-Tenancy Requirement is not satisfied, Tenant may, at its sole option, discontinue its business operations at the Premises (although this Lease shall not terminate) for so long as the Co-Tenancy Requirement is not satisfied and the same shall not be deemed a default hereunder, nor shall Tenant pay any additional rent, fees or damages as a substitute for Percentage Rent during such period of closure.  In the event that Tenant discontinues business at the Premises because of a failure to satisfy the Co-Tenancy Requirement and the Co-Tenancy Requirement is later satisfied, then Tenant shall have ninety (90) days to re-commence operations at the Premises. 

 

The principal rationale for leasing space in a shopping center as compared with leasing other space is that a shopping center contains a mix of tenants, each of which will draw its own set of customers and all of which, when taken together, will draw more total traffic than each tenant would be able to draw if located in an isolated space by itself.  In addition, many tenants believe that their own uses are best complemented by certain other tenants or types of tenants that draw a similar demographic to that of the tenant.  Accordingly, substantial vacancies in the rest of the shopping center or the failure of a particular co-tenant to open in the shopping center can undermine a tenant’s traffic and profit projections and, thus, a major rationale for locating within the shopping center.  Tenants therefore often seek co-tenancy requirements from their landlords to ensure that the tenant’s expectations about the center are met. 

 

Defining the co-tenancy requirements themselves is a matter that only the business people can do, as they know best what their co-tenancy expectations for a particular shopping center are.  Consideration should be given to the indicia that are to be examined to determine whether the agreed-upon co-tenancy requirement has been satisfied.  Commonly used indicia can include the mere signing of letters of intent with the co-tenants, having fully-signed non-contingent leases with the co-tenants, the co-tenants being obligated to open or the co-tenants actually being open and operating.  One concern with requiring the co-tenant to be open and operating is that if too many other tenants have similar co-tenancy requirements, they could have the effect of no tenant being required to be open because no other co-tenant is in fact open.  Such a situation would not be tenable for most landlords.  Thus a co-tenancy requirement that can only be satisfied by the opening of the store of the applicable co-tenant should be avoided.

 

The remedy for a co-tenancy failure can also be controversial.  Remedies for a co-tenancy failure might include:

 

§            a termination right, with or without reimbursement from the landlord for tenant’s leasing, design, permitting and construction costs;

§            a right to cease operating from the premises (go dark) coupled with relief from any radius restrictions;

§            a reduction in minimum and/or percentage rent or conversion to percentage rent only;

§            if prior to the commencement of rent, a right not to prepare plans, apply for permits or proceed with construction until the co-tenancy failure ceases;

§            if the co-tenancy failure occurs at the commencement of the rents, a right not to open until the co-tenancy failure is satisfied; or

§            any combination of the foregoing remedies.

 

B.      On-going lease issues

1.   Use clauses

a) Permitted use

 

The Premises may be used and occupied by Tenant (and only those assignees and subtenants permitted hereunder) only for the construction, operation and maintenance of a [         ]for any retail purpose allowed by applicable law (the “Permitted Use”).

 

Tenant shall use the Premises (a) only for the Permitted Use and for no other use or purpose and (b) solely and specifically under the Trade Name (as defined in Section   ) and under no other trade name and (c) store or stock only the merchandise that Tenant is permitted to sell at retail pursuant to this Lease and applicable law, and no other merchandise. Nothing herein shall be deemed to grant to Tenant an exclusive or preferential right to the Permitted Use in the Shopping Center.

 

            Tenant must comply with all present and future federal, state and local laws, ordinances, orders, rules and regulations, including, without limiting the generality of the foregoing, the Americans with Disabilities Act, the Occupational Safety and Health Act and environmental laws and must timely procure, or cause its subtenants to procure, as applicable, all permits, certificates, licenses and other authorizations required by applicable laws relating to the use and occupancy of the Premises; provided, however, in no event will Tenant be required to make any improvements to the Common Areas or to portions of the Premises Landlord is required to maintain hereunder.

 

To a shopping center landlord, the single most important non-economic business term in any lease is the use clause.  Achieving just the right tenant mix can mean the difference between a successful shopping center and an unsuccessful shopping center.  The landlord’s chief means of controlling that mix is through the permitted use clause.  The permitted use clause defines the uses to which the tenant may put the premises. 

 

Accordingly, a great deal of time and thought should be spent by the landlord to limit the tenant’s use so that the tenant operates the premises as contemplated.  This may be aided by visiting other stores of the tenant, viewing the tenant’s website, reviewing the tenant’s marketing materials and conducting similar diligence, with the goal of capturing just what it is about that tenant that makes it unique and more desirable than its competitors or other uses that the landlord chose not to include in its shopping center.  If it is a restaurant, for example, consideration should be given to cuisine type; price points; level of food service (from waiter service to counter pick up); whether there are separate bus personnel, captains and waiters or whether those roles are all taken on by the waiters; quality of napkins (from linen to paper); quality of flatware and china (from disposable plastic to fine china); whether tablecloths are used; whether food is prepared in advance or to order; how many items are on the tenant’s menu; how many courses are on the menu; whether alcohol may be served; whether food may be taken away from the premises; and whether the tenant is permitted to deliver food.  Obviously, the more similar uses as are permitted in the same shopping center, the more important it will be to precisely define each of those permitted uses so as to minimize overlapping uses.  Thus, a precise definition of a restaurant’s permitted use will be more important in a shopping center with several restaurants than in a shopping center with only one or two restaurants.

 

The permitted use clause is less important in an office lease, as all of the tenants will essentially be permitted to use their premises for office uses.  However, even in that context, consideration should be given to whether the office tenant will be permitted to see customers or clients at the premises.  Also, if the first floor is occupied by any retail tenants, the landlord and tenant should consider whether any exclusive uses granted to those tenants might inadvertently apply.  (For example, a first floor bank’s exclusive use clause may effectively (although probably not intentionally) prohibit other financial service providers from having their offices in the office portion of the building, even though those other providers do not provide their services on a retail basis from the project.) 

 

One important permitted use clause drafting consideration is to be clear that only the specifically defined use is permitted, by adding language such as “and for no other use or purpose” to the end of the permitted use clause.  Otherwise, the clause may be construed so that it does not limit the tenant’s use but merely serves as an example of one permitted use.

 

Enforcement of permitted use clause restrictions, especially those relating to the quality and pricing of a tenant’s offerings, may expose the landlord to claims of unreasonable restraints on trade or to claims under state and federal anti-trust and restraint of trade laws.  However, most landlords are willing to assume those possible risks (which are less of a concern than they were in the late 1970s and the early 1980s when the Federal Trade Commission more actively engaged in enforcement activities with several major tenants and landlords) in favor of having greater control over their tenant’s uses.

 

b) Prohibited uses

 

Without limiting any other provision of this Lease, Tenant covenants and agrees to be bound by any and all tenant exclusives granted by Landlord in the Shopping Center that are set forth on the attached Schedule ___ (in any instance, a “Tenant Exclusive”).  Tenant shall not use or permit the use of the Premises in a manner that violates any Tenant Exclusive, and shall have the obligation to provide to Landlord such disclosure or information as reasonably may be requested by the Landlord from time to time in order to substantiate Tenant's compliance with all Tenant Exclusives or to respond to any claim that any Tenant Exclusive has been violated by Tenant.  Without limitation of any other provision of this Lease, Landlord shall have the right to enjoin any continuing violation of any Tenant Exclusive by Tenant.

 

Tenant shall not:  (a) except for the ordinary operation of the Premises for the Permitted Use, permit anything to be done in or about the Premises nor bring or keep anything therein that in any way increases the existing rate of, or adversely affects any, fire or other insurance upon the Premises or the Shopping Center, or its contents, or cause a cancellation of any insurance policy covering the Premises or the Shopping Center, or its contents; (b) materially and unreasonably injure or, annoy, or obstruct or interfere with peaceful enjoyment and occupancy of any occupants of the Shopping Center; (c) except for reasonable levels of music in Tenant’s outdoor patio area, use any loudspeakers or audio or visual equipment or other devices so as to be heard or viewed outside of the Premises; (d) emit any noise, odors, fumes or smoke other than Tenant’s normal [cooking] odors, fumes and smoke; (e) install, maintain or use any mechanical equipment that causes vibration that may be transmitted to the structure of the building containing the Premises or to any other space in such building; (f) use the Premises for any improper, unethical, immoral, unlawful, sexually oriented or explicit, or other objectionable or offensive purpose; (g) conduct or permit any fire, bankruptcy, auction, “closeout,” “going out of business” or similar sale; (h) use any part of the Shopping Center (other than the inside of the Premises and Tenant’s outdoor patio area) for the sale, display or storage of any merchandise or for the solicitation of customers or any other business, occupation or undertaking; (i) install or use any coin- or token-operated vending machine or other equipment or device for the sale of any goods, wares, merchandise, food, beverages and/or services (including pay-telephones, pay-lockers, pay-toilets, scales, amusement devices, slot machines and/or other gambling devices or machines for the sale of beverages, foods, candy, cigarettes or other commodities), except that Tenant shall have right to install vending machines in non-sales areas of the Premises for use only by Tenant’s employees; (j) install or use any automated teller or other cash or credit dispensing equipmentintentionally omitted; (k) use any portion of the Premises as living quarters, sleeping quarters or for lodging purposes; (l) keep or place any merchandise or other personal property or other obstruction in any part of the Common Area; (m) permit signage or other media prohibited under Section    ; (n) commit or allow to be committed any waste upon the Premises; or (o) place a load upon the Premises exceeding the live load per square foot of floor area specified for the building containing the Premises (with Landlord reserving the right to reasonably prescribe the weight and positions of safes and other heavy equipment to be installed in the Premises so as to safely distribute weight).   Without limitation of any other right or remedy of Landlord under this Lease, at law or in equity, and without constituting a waiver of any default by Tenant, if Tenant fails to comply with its obligations under this Section    for a period of fiveten (510) days after written notice given by Landlord to Tenant, Landlord shall have the right (but not the obligation), upon at least forty-eight (48) hours prior written notice to Tenant, to enter onto the Premises and cure such failure on behalf of Tenant.  In such event, Landlord shall not be liable for and Tenant hereby waives any and all claims against and/or liabilities of Landlord arising out of any damage or injury to the Premises or any property situated therein or for any interruption of Tenant’s business conducted in or about the Premises, except to the extent such liabilities, claims, damages, injuries or interruptions arise from the negligence or intentional acts or omissions Landlord, and any and all costs and expenses thereby incurred by Landlord (together with reasonable attorneys’ fees and interest at the DefaultAgreed Rate), shall be paid by Tenant as additional rent uponwithin thirty (30) days following Landlord’s demand therefor.

 

None of the following uses or operations shall be made, conducted or permitted by Landlord on or with respect to all or any part of the Shopping Center or any land adjacent thereto and owned or leased by Landlord or its affiliates:  (i) any assembly, manufacture, distillation, refining, smelting, agriculture or mining operations; (ii) any mobile home or trailer court, labor camp, junkyard, mortuary, stock yard or animal raising; (iii) any drilling for and/or removal of subsurface substances; (iv) any dumping of garbage or refuse, other than in enclosed receptacles intended for such purpose; (v) any automobile, truck, trailer or recreational vehicle sales, rental, leasing or body and fender repair operation; (vi) any flea market and/or swap meet; (vii) any massage parlor (provided that such prohibition shall not prohibit or restrict the providing of massages in a health or fitness club), adult book shop, movie house or other establishment selling or exhibiting pornographic materials or other pornographic use; provided, however, that such restrictions shall not preclude the (a) showing of films in any first rate motion picture theater, so long as such motion picture theater does not show any picture that has received an "X-rating" from the Motion Picture Association of America or any successor to the Motion Picture Association of America which rates motion pictures or any other pictures that are considered pornographic by the city in which the Premises are located, and (b) sale or rental of adult books, magazines or videos as an incidental part of the business of a general purpose bookstore normally found in a first class retail center; (viii) any tattoo parlor or any establishment selling drug related paraphernalia; (ix) any bar, tavern or nightclub; provided, however, the foregoing shall not prohibit the operation of a bar, tavern, or nightclub as a part of any restaurant provided that the sale of alcohol from such bar, tavern or nightclub does not exceed sixty percent (60%) of such restaurant's gross receipts; and (x) any abortion clinic or drug rehabilitation clinic.

 

Most leases contain two types of use prohibitions applicable to tenants.  First, retail tenants are usually specifically forbidden from engaging in any of the exclusive uses granted or expected to be granted to any other tenants of the shopping center.  Second, tenants of all types are usually forbidden from engaging in nuisances and other uses that detract from the value of the shopping center or project (such as the emission of odors and fumes, the storage of garbage, drilling or manufacturing operations, and so on).

 

Tenants may also be concerned about the uses to which the rest of the Shopping Center may be put, especially if the Shoping Center has been represented to be a “first-class” shopping center.  Accordingly, the tenant may also insist on restricting any part of the Shopping Center from being put to any noxious or unseemly uses or to uses that would overburden the common areas.

 

c) Exclusive use

 

For so long as (a) no event of default by Tenant then exists, (b) Tenant is operating within the Premises in accordance with the Permitted Use, and (c) Tenant has not assigned this Lease or sublet the PremisesTenant is operating the Premises as a [OR: for the sale of] _______________ (the “Exclusive Use”), until the expiration or prior termination of this Lease (or surrender of the Premises to Landlord or any reentry or repossession by Landlord) and for so long as this Lease is in effect and Tenant is open and operating for business for the Permitted Use, Tenant shall have the exclusive right in the Shopping Center to engage in the sale of [                ] subject to the terms hereof, , Landlord, its affiliates, successors and assigns agree that they shall not lease to, sell to, or permit any tenant or other occupant engaged in the Exclusive Use within the Shopping Center, or upon any land owned by Landlord or its affiliates adjacent to the Shopping Center, if any (such exclusive right, the “Exclusive Right”), provided however that such Exclusive Right shall not restrict or prohibit, and shall not be deemed to restrict or prohibit, the sale by any other tenant of the Shopping Center of [                               ].  Landlord will use reasonable efforts to enforce such restriction, but, so long as Landlord includes such restriction in the applicable lease or purchase agreement, Landlord will not be liable to Tenant if another owner, tenant or occupant violates such restriction.In the event the Exclusive Right is breached, Tenant shall be entitled to pay, in lieu of Base Rent, Percentage Rent and Additional Rent, [                        ] percent (___%) of Tenant’s monthly Gross Receipts during the period of the violation of the Use Restriction, which amount shall be payable in arrears within twenty (20) days after the end of each calendar month during the period of such violation.  If a violation of the Exclusive Right continues for 60 days or more, then in addition to any other rights or remedies available to Tenant at law or in equity, Tenant may terminate this Lease upon written notice to Landlord at any time prior to the date that the violation of the Exclusive Right ceases. 

 

The foregoing restriction shall not apply to (i) tenants in the Shopping Center under leases that are fully signed and delivered during any period of time that Tenant fails to operate the Premises for the Exclusive Use, (ii) the owners or occupants of the [anchor parcel] shown on the Site Plan, (iiiii) any tenants or occupants of any parcels where a purchase agreement for the sale of such parcels has been executed prior to the date hereof, or (iiiiv) tenants whose leasesin the Shopping Center that (a) have beenwritten and executed prior to the date hereof, or to any successors, assignees or subtenants under such leases.  This agreement of Landlord shall operate only to the extent Landlord’s covenants and agreements are not contrary to public policy or contrary to law.  leases with Landlord as of the date hereof and (b) have the legal right to violate such exclusive use right pursuant to their existing leases as of the date hereof (“Existing Tenants”); provided, however, to the extent Landlord has control over any change in use by such Existing Tenants or any assignment, transfer or subletting of any Existing Tenants, then Landlord shall exercise such control to the extent reasonably possible in order to prevent a violation of such exclusive use right.

An exclusive use clause grants to the tenant the right to engage in a specific use within the shopping center or a portion thereof.  Unless the lease is recorded, the exclusive use clause will be enforceable only against the landlord and not against other tenants.  Thus, from the tenant’s perspective, it is important that the lease provide for adequate remedies to motivate the landlord to enforce the tenant’s exclusive use clauses.  It is important from the landlord’s perspective that the exclusive use clause not apply to existing tenants. 

 

Consideration should be given to whether the exclusive use clause should prohibit landlord from permitting the exclusive use in the shopping center or whether the landlord’s obligations end when it inserts a prohibition in its other tenants’ leases against engaging in the exclusive use.  If the latter, then the landlord would not be obligated to enforce the other tenant’s lease.  There are good reasons a landlord may not want to enforce the other tenant’s lease.  Enforcement of the exclusive use clause may expose the landlord to the same anti-trust and restraint of trade claims as are discussed above in connection with permitted use clauses, and, in any event, courts generally seek to interpret such restrictions narrowly and in favor of permitting the tenant to engage in the exclusive use if capable of being interpreted that way.  Also, Landlords are reluctant to commit themselves to pursuing protracted litigation to enforce what they view to be tenant concessions.  Thus, many landlords will not agree to enforce the exclusive use clause of one tenant against another tenant or will agree to do so only if the tenant that wants its use clause enforced agrees to indemnify the landlord against the consequences of any such litigation. 

 

Regardless of how tenants who violate their leases are treated, all agree that the tenant who is granted an exclusive use right should be entitled to some kind of remedy if the landlord itself fails to prohibit future tenants from engaging in an exclusive use.

 

One important drafting consideration is that the exclusive use clause should generally be narrower than the permitted use clause.  Also, if the tenant discontinues its operations or changes its use, then the exclusive use clause should terminate or at least be suspended and landlord should be free to find another tenant to engage in the exclusive use so that that aspect of its tenant mix is satisfied.  Similarly, if the tenant commits an event of default, then, at least while that default exists, the landlord should be free to enter into another lease if it finds another tenant to engage in the exclusive use.

 

d) Radius restrictions

 

Neither Tenant, any affiliate of Tenant nor any other person or entity in which Tenant has a financial interest or who or which has a financial interest in Tenant (other than stock of Tenant if such stock is publicly traded), at any time after the date of this Lease, directly or indirectly, either individually, as a partner, stockholder (other than stock held in a public company) or otherwise, shall own, operate or otherwise become financially interested in any business in any material respect similar to or competing with the business constituting the Permitted Use (“Competing Interest”) within five (5) miles of the Shopping CenterPremises (“Retail Restriction Limit”). This Section    shall not apply to (i) any Competing Interest operating within the Retail Restriction Limit on the date of this Lease and identified on Exhibit   , so long as such existing Competing Interest hereafter continuously is operated, or (ii) any other [restaurant] concept owned by or under common ownership with Tenant, including but not limited to _______________.  If Tenant violates this Section   , then, without limiting Landlord’s rights and remedies under this Lease, at law or in equity, Landlord shall have the right and option to (a) immediately declare such violation to be a default hereunder and/or (b)(as Landlord’s sole and exclusive remedy), to include for the duration of such violation the gross receipts made from any such Competing Interest within inthe calculation of the Gross Receipts under this Lease.  If in accordance with the foregoing Landlord elects to include the gross receipts from such Competing Interest within Gross Receipts under this Lease, then Tenant agrees that all gross receipts of and all books and records from such Competing Interest shall be subject to the provisions of Section    .

 

As discussed elsewhere in these materials, a major factor in a retail landlord’s decision to lease to a particular tenant is that tenant’s ability to draw traffic into the shopping center.  The presence of another nearby location of the tenant may divert some of that traffic from the landlord’s shopping center to the shopping center that contains the other tenant location.  Moreover, if the tenant’s lease provides for percentage rent, a landlord will be concerned that another nearby location would divert sales away from the tenant’s premises in the shopping center and thereby reduce the percentage rent the landlord would otherwise be entitled to.  Accordingly, most shopping center leases restrict the tenant from having another location near the shopping center.  How “near” to the shopping center the restriction should apply is often a controversial matter.  The tenant obviously prefers a smaller restricted area so as to maintain flexibility as to future locations.  Landlords generally prefer more extensive restricted areas.  The appropriate balance between the landlord’s and tenant’s positions is for the restriction to apply only to the area from which the tenant expects to draw its customers.  Thus, tenants that rely on neighborhood traffic (such as a local pizza delivery shop or convenience store) should reasonably be restricted only within the applicable neighborhood.  By contrast, tenants that depend on city-wide or regional traffic such as a department store or wholesale club store might reasonably be restricted on a city- or region-wide basis. 

 

The restricted area may be identified either by a distance from any boundary of the shopping center or from the premises, by identifying the streets that comprise the boundaries of the restricted area or by drawing the boundaries of the restricted area on a map attached to the lease as an exhibit.  If a distance is specified, the distance may be specified as a distance measured along public streets or along a straight line, in either case emanating from the applicable starting point.

 

Radius restrictions are subject to the same restraint of trade and anti-trust considerations as have been discussed above in connection with permitted and exclusive use clauses.  In addition, there is extensive case law that permits enforcement of radius restrictions only if such restrictions are reasonable as to their term, extent and other aspects.  Accordingly, an overly-aggressive radius restriction is likely to be unenforceable and, thus, it is in the landlord’s interest to ensure that the restriction is reasonable.

 

Consideration should be given to the remedies the landlord will have if a radius restriction is violated.  Some leases provide for liquidated damages, usually in an amount deemed sufficient to compensate for lost percentage rent.  It is also common to provide that the sales from the tenant’s other location be treated as though they were made from the premises for purposes of calculating percentage rent.  (If such a remedy is provided, care must be taken to ensure that the recordkeeping, reporting and auditing provisions of the percentage rent provisions of the lease be extended to apply equally to sales from the other location.)  Finally, injunctive relief is also often available to the landlord as a remedy for a radius restriction violation. 

 

2.   Covenants to open and operate

 

Tenant acknowledges that the success of the Shopping Center depends, in material part, on Tenant opening the Premises for business as of the Required Opening Date and that Landlord’s damages arising from Tenant failing to open the Premises as of the Required Opening Date would be extremely difficult and impractical to determine. As such, if Tenant shall fail to complete Tenant’s Work and open the Premises for business to the public, fully stocked and staffed, as of the Required Opening Date, then, Landlord shall have the right and option upon written notice given to Tenant to declare such failure a default hereunder and thereupon terminate this Lease and be entitled to the rights and remedies provided to Landlord under this Lease, at law or in equity, or, in the event Landlord does not so terminate this Lease, Tenant shall pay to Landlord as Base Rent for the period from the Required Opening Date until the date Tenant shall so complete Tenant’s Work and open the Premises for business one hundred twenty-five percent (125%) of the amount of Base Rent that otherwise would be payable by Tenant hereunder. 

From and after the sixtieth (60th) day following the Rent Commencement Date, subject to temporary closures due to fire or other casualty, condemnation, remodeling, periodic cleaning, force majeure or legal holidays, Tenant shall conduct the Permitted Use continuously and uninterruptedly, with diligence and efficiency, keep in stock a full and ample line of merchandise and maintain an adequate sales force so as to maximize Gross Receipts and keep display windows, exterior signage and exterior advertising adequately illuminated, continuously during the hours the Shopping Center is open to the public and, with respect to illumination, during such after-hours times, as from time to time designated by Landlord.  Tenant acknowledges that Landlord’s willingness to enter into this Lease is contingent upon the continuing obligation of Tenant to carry and display merchandise in the Premises that is consistent with the merchandising and display standards established for the Shopping Center from time to time, including holiday displays.  If Landlord at any time shall determine that Tenant’s merchandise and/or displays fail to satisfy Shopping Center standards, Landlord shall have the right upon written notice given to Tenant to require that Tenant immediately take action to bring its merchandise and displays up to then Shopping Center standards and, if requested by Landlord, to engage the services and implement the recommendations of a merchandising and display specialist.  If Tenant fails to comply with the provisions of this Section    in all material respects to the satisfaction of Landlord within sixty (60) days of such foregoing notice, then, in addition to Landlord’s other rights and remedies under this Lease, at law or in equity, Landlord shall have the right and option to increase Base Rent to one hundred twenty-five percent (125%) of the amount of Base Rent that otherwise would be payable by Tenant hereunder, prorated on a daily basis for each such full or partial day Tenant fails to comply with the provisions of this Section   .  Tenant acknowledges that its failure to comply with this Section     shall cause Landlord to suffer damages which will be difficult to ascertain and that the increased Base Rent payable by Tenant under this Section    shall represent a fair estimate of such damages.

 

[IF NO CONTINUOUS OPERATIONS COVENANT] Notwithstanding any contrary provision of this Lease, Tenant shall not be required to remain open for business or to operate the Premises for more than one (1) day during its normal business hours following the Commencement Date, nor shall the same be deemed an Event of Default hereunder; provided that if Tenant ceases doing business at the Premises for more than one (1) year (excluding periods of closure due to casualty, condemnation or periodic remodeling), Landlord shall have the option to terminate this Lease by sixty (60) days written notice to Tenant at any time prior to Tenant’s resumption of operations in the Premises.  If Landlord elects to terminate this Lease, Landlord shall pay the Termination Payment, upon the termination date and both Landlord and Tenant shall be released from any further liability accruing hereunder after such date.  Landlord’s payment obligation shall survive the termination of this Lease.  As used in this Lease, “Termination Payment” means the unamortized portion of the costs incurred by Tenant in the construction of its leasehold improvements in excess of the Tenant Improvement Allowance (as defined herein), assuming such costs are amortized on a straight-line basis over the Term (or the portion thereof remaining at the time such improvement is made).  Notwithstanding the foregoing, Tenant shall be entitled, one time during the Term, to nullify Landlord’s termination pursuant to this Section ___ by delivering to Landlord, within thirty (30) days after receipt of Landlord’s notice of termination, a notice of Tenant’s election to recommence its operations at the Premises within ninety (90) days after the date of Tenant’s nullification notice.  If Tenant thereafter fails to reopen for business in the Premises within such ninety (90) day period, Landlord’s notice of termination shall then be effective upon the expiration of such ninety (90) day period without any further action on the part of either party.

 

As stated elsewhere in these materials, a shopping center landlord depends on the presence of its tenants in order to draw traffic to the shopping center.  Landlords are also concerned about projecting an image of success in their shopping centers, and vacant space sends a strong signal that the shopping center is not successful.  In addition, some tenants may have co-tenancy provisions that would be triggered by other tenant vacancies.  Finally, property insurance rates are typically higher for vacant space than for occupied space.  Thus, in a retail lease it is of critical importance to a landlord that each tenant be open and operating throughout the term of the lease.

 

Most chain retail tenants also view the continuous operations obligation as being critical, although to a different result.  Most such tenants view the ability to go dark as essential to their ability to respond to market conditions and to close stores that are so unsuccessful that they lose more money when they are open than when they are closed, even after taking into account the continuing rent obligations of the tenant.  Accordingly, as a compromise, some landlords agree to forego the continuous operations obligation in favor of a right to terminate the lease and take the premises back if the tenant remains closed for an extended period.  One issue that arises under that compromise (where it is acceptable to the tenant at all) is whether the landlord should reimburse the tenant for the tenant’s unamortized leasing, development and construction costs related to the tenant’s non-removable improvements, to the extent those costs exceed any construction allowance provided by the landlord.

 

3.   Repair obligations

 

Landlord’s Repair Obligations. Landlord shall maintain, in first-class order, condition and repair, and make repairs to the Common Areas, the structural portions of the Premises, the foundation, floor, exterior structural walls, interior load bearing walls, outside face of exterior walls and the exterior roof of the Premises (which obligation shall be exclusive of doors, storefronts, frames, plate glass, security grilles and similar enclosures and Tenant’s signage, the maintenance and repair of which shall be the obligation of Tenant), in each instance as and to the extent deemed necessary by Landlord in Landlord’s solereasonable discretion.  Notwithstanding the preceding, Landlord shall not be responsible for the repair of (i) any damage caused by any act, error or omission of Tenant or Tenant’s employees, agents or customers, all of which shall be the obligation of Tenant; (ii) repairs due to fire or other casualty (which repairs shall be subject to the provisions of Article   ); (iii) repairs due to a taking or condemnation by a governmental or quasi-governmental authorities (which repairs shall be subject to the provisions of Article   ); and (iv) anyLandlord shall also maintain, in first-class order, condition and repair, the building systems serving the Premises, all utilities located within the Premises and not exclusively serving the Premises, and all utilities located outside of the Premises up to the point of connection to the Premises.  Any alterations, demolition or improvementsand/or improvements to the Common Areas or portions of the Premises landlord is required to maintain that are required by any governmental or quasi-governmental authorities arising from Tenant’s use or occupancy of the Premises, Tenant’s conduct of business and/or the construction or installation of any of Tenant’s leasehold improvements.shall be the obligation of Landlord, at Landlord’s sole cost and expense.

If Landlord fails to make any required maintenance, repair or replacement to the Premises or the Common Areas that is reasonably necessary to the efficient operation of Tenant’s business at the Premises, then, after five (5) days written notice (or such shorter period of time in the event of imminent danger to person or property or other emergency or comparable cause), Tenant has the right (but not the obligation) to make the repair or replacement for Landlord, and Landlord shall reimburse Tenant for its actual costs incurred therein within fifteen (15) days after demand therefor.  If Landlord fails to reimburse Tenant for such costs within said fifteen (15) day period, Tenant may deduct such amount from its rent payments due hereunder.  Any amount not paid by Landlord within fifteen (15) days shall bear interest at 15% per annum from the due date until paid or deducted from Tenant’s rent.

Tenant’s Repair Obligations. Except for items Landlord is required to repair and maintain pursuant to Section ___ above, Tenant shall have the obligation to repair and maintain the Premises in first-class order, condition and repair, and maintain the Premises in a clean and presentable condition at all times.  Such obligation includes the obligation to maintain, repair and replace interior surfaces of exterior and demising walls, exterior doors and entrances, service doors, locks and closing devices, all door and window moldings and trim, all partitions, door surfaces, floor covering, fixtures, equipment and appurtenances thereof, lighting, plumbing fixtures (including any grease traps, grease lines and piping, if any), toilet facilities and fixtures, plumbing and sewer lines and systems wherever located thatwithin and exclusively serveserving the Premises, all windows and other glass, window sashes, window frames, showcases, storefronts, security grilles and similar enclosures, and Tenant’s signage, and other mechanical and operational systems and installations located within and exclusively serving the Premises, all of which obligations at the option of Landlord shall be performed by contractor(s) selected and approved by Landlord.  Any alterations, demolition and/or improvements to portions of the Premises Tenant is required to maintain hereunder that are required by any governmental or quasi-governmental authorities respecting or arising from Tenant’s use or occupancy of the Premises, Tenant’s conduct of business and/or the construction or installation of any of Tenant’s leasehold improvements shall be the obligation of Tenant and shall be undertaken by Tenant if upon and within the Premises, and by Landlord (at theat Tenant’s sole cost and expense of Tenant, as Additional Rent) if elsewhere in the Shopping Center.  Except for Landlord’s repair obligations set forth herein, Landlord shall have no obligation to Tenant to repair or maintain the Premises, or improvements within the Premises or any other portion of the Shopping Center.

If Tenant fails timely to keep, preserve and repair the Premises or any other system or installation as and in the manner provided for in this Section   , then, without limiting any other right or remedy of Landlord under this Lease, at law or in equity, Landlord shall have the right after five (5) days’ written notice given to Tenant (or such shorter period of time in the event of imminent danger to person or property or other emergency or comparable cause), to perform Tenant’s obligations as provided for hereunder at the cost and expense of Tenant, as Additional Rent.

 

The landlord’s repair obligations are usually defined with great specificity in the lease, and the tenant is usually obligated to repair everything in the premises that is not specifically landlord’s obligation.  In defining landlord’s obligations, care should be taken by the landlord not to provide that landlord will make “structural” repairs.  Rather “load-bearing members” or other more specific language should be used.  Some courts have interpreted “structural” to mean unusual or extraordinary, leading to landlords having obligations to repair items they would not expect.  From the tenant’s perspective, the landlord should be obligated to repair any utilities and other elements that require access to the common areas or another tenant’s premises and to repair any building systems and installations inside the premises that do not exclusively serve the tenant’s premises, in addition, if the lease is a space lease in a multi-tenant or other landlord-owned building, to repairing any agreed-upon components of the building shell. 

 

4.   Subletting and assignment

 

Except as otherwise expressly provided in this Article__, Tenant may not directly or indirectly voluntarily, involuntarily or by operation of law convey, transfer, sell, assign, lease, sublease, license, grant concessions, franchise, gift, hypothecate, mortgage, pledge, encumber or hypothecate any interest in this Lease or the Premises (each, a “Transfer”)  without Landlord’s prior written consent, which consent will not be withheld, conditioned or delayed unreasonably.  In determining whether or not to grant its consent to the Tenant’s Transfer request, Landlord may consider any reasonable factor.  Landlord and Tenant agree that failure to satisfy any one of the following factors, or any other reasonable factor, will be reasonable grounds for denying Tenant’s request:

 

            (i)         the tangible financial net worth of the proposed Transferee, as evidenced by financial statements certifiedprepared by an independent certified public accountant (or certified by an authorized representative of the proposed Transferee, if the financial statements of such proposed Transferee are not prepared in the normal course of the proposed Transferee’s business), must be sufficient to meet Tenant’s obligations under this Lease and shall in no event be less than $25,000,000;

            (ii)        use of the Premises by the proposed Transferee (a) will not violate or create any potential violation of any laws; (b) will not violate any agreement affecting the Premises, Landlord or the Shopping Center, including, without limitation, any so-called exclusive agreements; (c) will not disrupt the tenant mix at the Shopping Center; (d) will otherwise be consistent with uses being conducted by reputable tenants leasing space in similar shopping centers; (ec) will not constitute a nuisance (in the legal use of the word) or unreasonably disturb or endanger other tenants of the Shopping Center or interfere with their use of their respective premises; and (fd) will not involve any of the activities proscribed under this Lease; and

            (iii)       the proposed Transferee shall have a minimum of five (5) years of experience in managing and operating retail business similar to the Permitted Use.

Tenant must submit such information as Landlord may reasonably request in connection with Tenant’s request for consent to a Transfer, including financial statements and tax returns in order to evaluate the solvency, financial responsibility and the business acumen and experience of the proposed Transferee.  Tenant shall pay all out-of-pocket costs incurred by Landlord in connection with any proposed assignment or sublease requiring Landlord’s consent, and shall pay any brokerage commission incurred by reason of any such proposed assignment or sublease.  The rights of Tenant under this Section    are personal to Tenant, and shall not be assigned to nor inure to the benefit of any other party.  If Tenant is a corporation, unincorporated association, limited liability company or a partnership, the transfer of forty nine percent (49%) or more of any stock or other ownership interest in such corporation, association, limited liability company or partnership will be deemed a Transfer within the meaning of and subject to the provisions of this Article _.  Each Transfer must be by an instrument in writing, in a form reasonably satisfactory to Landlord, and must be signed by the Tenant and the Transferee or Subtenant, in each instance, as the case may be.  No Transfer will relieve Tenant of any obligations under this Lease, nor will Landlord’s consent to one Transfer constitute a waiver of Landlord’s approval rights with respect to subsequent Transfers.  Notwithstanding any assignment or subletting, Tenant and any guarantor of Tenant’s obligations under this Lease shall at all times remain fully liable for the performance of all of Tenant’s obligations under this Lease (notwithstanding future assignments, sublettings, and regardless of whether or not Tenant’s approval has been obtained for such future assignments or sublettings).

Each transferee, must agree in writing for the benefit of Landlord to assume, to be bound by, and to perform the terms, covenants and conditions of this Lease to be done, kept and performed by Tenant, including the payment of all amounts due or to become due under this Lease.  One executed copy of such written instrument must be delivered to Landlord. 

 

If Tenant Transfers all or substantially all of its interest in this Lease or the Premises, then, so long as the Transfer remains in effect, the Base Rent will be increased, effective as of the date of such Transfer by an amount equal to one-half (1/2) of the positive difference (the “Transfer Premium”), if any, between the Base Rent required to be paid by Tenant pursuant to this Lease, as adjusted, and the considerationrent payable by any such Transferee pursuant to such Transfer. In no event may the Base Rent, after such, less Tenant’s costs and expenses incurred in connection with the Transfer, be less than the Base Rent specified in the Section    above.

 

If Tenant proposes to Transfer all or substantially all of Tenant's interest in this Lease or the Premises pursuant to a Transfer for which Landlord’s consent is required hereunder, Landlord may, at Landlord's option, upon notice to Tenant (the "Assignment Recapture Notice") and payment to Tenant of the Termination Payment [DEFINED ABOVE IN SECTION II(b)(2) (Continuous Operations)] within thirty (30) days after Landlord's receipt of [Tenant's request for consent] [OR: Tenant’s notice to Landlord that Tenant intends to seek a proposed Transferee for the Premises, this Lease or any interest in either], elect to recapture the Premises, and within sixty (60) days after notice of such election has been given to Tenant, this Lease will terminate; provided, however, Tenant may nullify Landlord’s termination under this sentence by withdrawing Tenant’s [request for consent to such Transfer] [OR: notice] within thirty (30) days following Tenant’s receipt of the Assignment Recapture Notice.  If Tenant proposes to sublet all or any part of the Premises, Landlord may, at Landlord's option, upon notice to Tenant (the "Sublease Recapture Notice") and payment to Tenant of the portion of the Termination Payment that relates to the improvements constructed by Tenant in the recaptured space within thirty (30) days after Landlord's receipt of Tenant's [request for consent] [OR: notice], elect to recapture such portion of the Premises as Tenant proposes to sublet, and within sixty (60) days after notice of such election has been given to Tenant, this Lease will terminate as to the portion of the Premises recaptured; provided, however, Tenant may nullify Landlord’s termination under this sentence by withdrawing Tenant’s [request for consent to such sublease] [OR: notice] within thirty (30) days following Tenant’s receipt of the Sublease Recapture Notice.  If only a portion of the Premises is recaptured, the Base Rent payable under this Lease will be proportionately reduced.  If all or a portion of the Premises is recaptured by Landlord pursuant to this Section   , Tenant will promptly execute a termination agreement in form and substance reasonably acceptable to Tenant for the purpose of setting forth the termination date with respect to the Premises or the recaptured portion thereof, and prorating the Base Rent and other charges to that date.  If Landlord does not elect to recapture as set forth above, Tenant may thereafter enter into a valid assignment or sublease with respect to the Premises, provided that, if required hereunder, Landlord consents thereto pursuant to this Article  , and provided, further, that (i) such assignment or sublease is executed within ninety (90) days after Landlord has given Landlord's consent, and (ii) Tenant pays all amounts owed to Landlord under this Lease, and (iii) there does not exist an Event of Default as of the effective date of the assignment or sublease.

Notwithstanding anything to the contrary contained in this Article ____ or elsewhere in this Lease, Landlord's consent shall not be required and it shall not be deemed an assignment, sublease or Transfer of this Lease: (i) in the event of a merger where Tenant is the surviving entity or the sale of substantially all of Tenant's assets to a reputable [___________________] owner/operator; (ii) in the event of an assignment or sublease of all or a portion of Tenant’s interest in this Lease or the Premises to any entity controlling Tenant, controlled by Tenant or under common control with Tenant; (iii) in the event of an assignment of all of any part of its interest in this Lease or in the Premises to a franchisee; (iv) in the event of  the transfer of Tenant’s stock on a recognized national market or the issuance of additional stock in a private placement; (v) in the event of the transfer of Tenant’s stock to its employees pursuant to an employee stock ownership plan or other arrangement with one or more employees; or (vi) in the event of any transfer of Tenant’s stock by gift, bequest or inheritance.

Assignment by Landlord.  In the event of the transfer and assignment by Landlord of its interest in this Lease and all of Landlord’s right, title and interest in and to the portion of the Shopping Center, including the Premises, transferred or assigned by Landlord, Landlord shall thereby be released from any further obligations hereunder to the extent that the transferee assumes Landlord’s obligations subject to and in accordance with the conditions and limitations herein contained, and Tenant agrees to look solely to such successor in interest of Landlord for performance of such obligations.  Any security given by Tenant to secure performance of Tenant’s obligations hereunder mayshall be assigned and transferred by Landlord to such successor in interest, and Landlord shall thereby be discharged of any further obligation relating thereto.

Chances are the landlord agrees to lease space to a particular tenant because of certain unique attributes of that tenant, including the tenant’s creditworthiness, the tenant’s operations history, the tenant’s compatibility with other tenants, the target demographic of the tenant, the tenant’s reputation and any number of other factors.  The landlord seeks to protect its tenant choice by limiting the tenant’s ability to assign the lease to others or to sublease the premises to another person.  However, few sophisticated tenants will agree to an absolute prohibition on assignments or a restriction that allows the landlord to withhold its consent in the landlord’s sole, subjective discretion.  Instead, most such tenants insist that the landlord be reasonable (or at least be reasonable if the tenant’s proposed assignee satisfies certain objective tests that are specified in the lease) in approving or disapproving any assignment or subletting requests.  Such tenants further insist that they be allowed to make company-wide changes to their corporate structure or sell their entire companies without restriction.  Most landlords find such tenant requirements to be acceptable for chain tenants, so long as the original tenant remains fully liable for all lease obligations and the use of the premises are not changed.

 

Other issues that arise in this context are whether the landlord should have the right to recapture the premises following an assignment or subletting request by the tenant and how any rents that the assignee has agreed to pay should be split if they exceed the rents provided for in the original lease.  A recapture right may be exercised as an alternative to denying consent, especially where the landlord is concerned that its denial may be challenged as unreasonable.  Such a right allows the landlord to exclude unacceptable transferees from the shopping center, to control competition with the existing tenant for prospective tenants (if, for example, the landlord also has vacant space for lease), and capture the full amount of any rent increases.  However, such a recapture right will interfere with the tenant’s efforts to market the space to others unless the right is limited so that the landlord must exercise it, if at all, prior to the tenant beginning its marketing efforts.  If the recapture right is exercised, most tenants will require that they be reimbursed for the unamortized costs they incurred in constructing their non-removable improvements in the premises.  Also, to protect tenant’s right to sell its business or make corporate-wide changes, the recapture right should not be exercisable in those circumstances discussed above where landlord’s consent is not required under the lease.

 

5.   Landlord relocation rights

 

Landlord shall have the right to relocate the Premises to another part of the Center in accordance with the following:

1.                   Decor.  The new Premises shall be substantially the same in size, and nature as the Premises described in this Lease, and shall be placed in that condition by Landlord at its cost.

 

2.                   Relocation.  The physical relocation of the Premises shall be accomplished by Landlord at its cost.

 

3.                   Notice.  Landlord shall give Tenant at least thirty (30one hundred eighty (180) days notice of Landlord's intention to relocate the Premises.

 

4.                   Time.  The physical relocation of the Premises shall take place on a weekendat a time convenient to Tenant in Tenant’s reasonable discretion and shall be completely accomplished before the Monday following the weekend in which the relocation takes place.  If the physical relocation has not been completed in that time, rentwithin forty-eight (48) hours.  Rent shall abate in full from the time the physical relocation commences to the time it is completed.

 

5.                   Costs.  All incidental costs incurred by Tenant as a result of the relocation, including, without limitations, costs incurred in changing address on stationary, business cards, directories, advertising, and other such items, shall be paid by Landlord, in a sum not to exceed Five hundred Dollars ($500.00) within ten (10) days following Tenant’s demand therefor.

 

6.                   Size.  If the relocated Premises are smaller than the Premises as they existed before the relocation, rent shall be reduced to a sum computed by multiplying the rent specified in Section      by a fraction, the numerator of which shall be the total number of square feet in the relocated Premises and the denominator of which shall be the total number of square feet in the Premises before the relocation.

 

7.                  Location.  The Premises may be relocated only to space numbers _____________________ and may be relocated only to a location that does not have materially [greater] [OR, DEPENDING ON THE CLIMATE: less] exposure to sunlight.

 

8.                  7. Amendment.  The parties shall immediately execute an amendment to this Lease in form and substance reasonably acceptable to Tenant stating the amount of the new rent, the address of the relocated premises and the expiration date of the lease.

 

During the term of a lease, it is possible that the landlord may wish to reconfigure or remodel the shopping center.  Because a lease is a real property interest, a tenant whose premises are within the portion of the shopping center that is to be affected by such a reconfiguration or remodeling may be able to prevent such a relocation or remodeling by refusing to move or change its premises.  Accordingly, leases often reserve a right for the landlord to relocate the tenant or reconfigure the tenant’s premises during the term of the lease.  Often a tenant bargains for a particular space because of its visibility or its location on an end-cap or next to an escalator or other major point of access.  Accordingly, many tenants will not agree to such rights on the part of the landlord or will agree to them only if the tenant is to be located to a particular space or area that the tenant thinks is a better location than the one it originally leased.  Often such tenants will also require termination rights and termination payments to compensate them for lost profits while they find alternative and possibly less desirable premises.  Whether a landlord will agree to those accommodations is a business point.  However, most landlords will agree to pay all costs of the move (including re-printing business cards and marketing materials) and costs of readying the new space for tenant occupancy.  They will also agree that any space to which the tenant is relocated will have reasonably equivalent traffic flow and visibility and, if utilities are a concern, will not have materially greater or less, as applicable, exposure to sunlight.

 

6.   Tenant expansion rights

 

Provided that as of the date of the giving of the Offer Notice (as defined hereinafter), (x) Tenant is the Tenant originally named herein, (y) Tenant actually occupies all of the Premises originally demised under this Lease and any premises added to the Premises, and (zy) no Event of Default or event which but for the passage of time or the giving of notice, or both, would constitute andan Event of Default has occurred or is continuing, if at any time during the term of this Lease any lease for any portion of the Offered Space (as defined hereinafter) shall expire and if Landlord intends to market the Offered Space to prospects for lease with third parties (a “Proposed Tenant”) other than the tenant then occupying such space (or its affiliates), Landlord shall first alloffer Tenant the right to include the Offered Space within the Premises.  For the purposes of this Lease, the “Offered Space” shall mean ___________________.

 

Such offer shall be made by Landlord to Tenant in a written notice (the “Offer Notice”) which notice shall designate the space being offered and shall specify the terms for such Offered Space that Landlord intends to submit to prospective tenants in an effort to market the Offered Space.  Tenant may accept the offer set forth in the Offer Notice by delivering to Landlord an unconditional acceptance (“Tenant’s Notice”) of such offer within fivetwenty (520) business days after delivery by Landlord of the Offer Notice to Tenant.  Time shall be of the essence with respect to the giving of Tenant’s Notice.  If Tenant does not accept (or fails to timely accept) an offer made by Landlord pursuant to the provisions of this Article   with respect to the Offered Space designated in the Offer Notice, Landlord shall be under no further obligation with respect to such space by reason of this Article     unless Landlord proposes to enter into a lease on terms different from the material economic terms set forth in the Offer Notice (in which case a new Offer Notice must be sent in accordance with this Article   ).  In order to send the Offer Notice, Landlord does not need to have negotiated a lease with any particular Proposed Tenant but may merely have determined on what basisthe material economic terms upon which it will market the Offered Space to Proposed Tenants.  Tenant must make its decision with respect to the Offered Space as long as it has received a description of such material economic terms.

 

Tenant must accept all Offered Space offered by Landlord at any one time if it desires to accept any of such Offered Space and may not exercise its right with respect to only part of such space.  In addition, if Landlord desires to lease more than just the Offered Space to one tenant, Landlord may offer to Tenant pursuant to the terms hereof all such space which Landlord desires to lease, and tenant must exercise its rights hereunder with respect to all such space and may not insist on receiving an offer for just the Offered Space.  If Tenant at any time declines any Offered Space offered by Landlord, Tenant shall be deemed to have irrevocably waived all further rights under this Article  , and Landlord shall be free to lease the Offered Space to any Proposed Tenant including on terms which may be less favorable to Landlord than those set forth in the Offer Notice. 

 

Just as landlords are concerned about having flexibility to reconfigure and relocate tenant premises, tenants are often concerned about having room to grow if their existing premises are successful.  Accordingly, many tenants (especially office and industrial tenants, but also some retail tenants) wish to have the right to add an adjacent space to their existing space.  Landlords are understandably concerned about restricting the future use of their property and, as such, are reluctant to agree to such expansion rights.  Nonetheless, some landlords are willing to allow their existing tenants a right of first offer if the defined expansion space becomes available in the future.  Under such a right of first offer, the landlord agrees that, before it markets the space to others, it will first offer the space to the existing tenant on the same terms that it intends to offer the space to others.  The tenant then has the option of either accepting the offer or waiving its expansion right (usually for the remainder of the lease term).  Some rights of first offer are drafted so that the landlord has to present a new offer to the tenant each time it is revised to be more tenant-favorable during the course of landlord’s marketing efforts.  Before granting any expansion rights, the landlord should consider, among other factors, whether the tenant has sufficient credit to support the increased financial obligations associated with the increased premises size.

 

7.   Landlord financing issues

 

At some point during or prior to the term of the lease, the landlord will likely finance or re-finance its project.  In connection with any such financing, the landlord’s lender may require that the tenant enter into agreements and/or sign amendments to the tenant’s lease to address issues that will be critical to the lender in the event of a foreclosure.  The two principal agreements that a lender is likely to seek are estoppel certificates and agreements of subordination, non-disturbance and attornment.  Such documents are often required of all or a substantial proportion of all tenants prior to a lender funding a loan.  Thus, delays in obtaining such documents from tenants will often cause delays in landlord obtaining its funding and may be especially problematic if the proceeds of a new loan are required to pay off an existing lender or are otherwise already committed by the landlord.  Accordingly, provisions must be made for obtaining such documents timely and for adequate remedies to deal with any tenant delays.

 

a) Estoppel certificates

 

Within tentwenty (1020) days after request therefor by Landlord (or by any mortgagee of whom Tenant has been given notice pursuant to this Article   )Tenant’s receipt of a certificate in form and substance reasonably acceptable to Tenant, Tenant agrees to deliver a certificate addressed to Landlord a statement in writing in such form and substance as may be reasonably required by Landlord certifying (a) the date of commencement of this Lease; (b) the fact that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect, and stating the date and nature of such modifications); (c) the date to which the Rent and other sums payable under this Lease have been paid; (d) that there are no current defaults under this Lease beyond applicable notice and cure periods by either Landlord or Tenant except as specified in Tenant’s statement; and (e) such other matters as are reasonably requested by Landlord.  Any such statement conclusively may be relied upon by any purchaser or prospective purchaser or any mortgagee or prospective mortgagee of the Premises or the Shopping Center. Tenant’s failure to deliver such statement within such time periodfive (5) days following Tenant’s receipt of written notice from Landlord that the twenty (20)-day time period set forth above has expired shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord, that there are no uncured defaults in Landlord’s performance, and that not more than one (1) month’s Base Rent has been paid in advance of its due date.

 

Estoppel certificates aid the lender in its due diligence efforts by confirming factual matters that the lender cannot ascertain by an examination of the lease or that the lender fails to discover in its own review of the lease.  Typically, the tenant is asked to certify that no defaults exist, when the lease commenced, the size of the premises, the amounts of the rents, and other matters of interest to the lender.  Because it is difficult to predict exactly what will be required by a given lender, the forms of these agreements cannot usually be agreed upon at the time the lease is signed.  On the other hand, most tenants will not and cannot be expected to agree to sign whatever document is placed in front of them by the lender or landlord as the document may contain provisions that limit or adversely affect rights provided to the tenant under the lease.  Consequently, many tenants will insist that they not be required to sign any documents unless such documents are “reasonably acceptable” to the tenant.  That is often too vague for most landlords given that the tenant could delay landlord’s funding by refusing to agree to the form presented.  One possible solution is for the tenant to agree to sign estoppel certificates that are provided in the lender’s “standard form”.  That will likely not provide any more comfort to the tenant, as the “standard” form is just as likely to undermine important tenant rights as any other form.  Thus, an additional solution might be to attach a form that the tenant would be willing to sign in the event the tenant and the lender cannot agree upon the form of an estoppel certificate.

 

b) Subordination, non-disturbance and attornment agreements

 

This Lease is and at all timesLandlord hereby represents and warrants that the Premises is not subject to any mortgage, deed of trust, ground lease or security interest that is superior to the Lease, except for _____________________________________ (each, an “Existing Mortgage”).  Landlord agrees to obtain and deliver to Tenant a non-disturbance agreement in form and substance reasonably acceptable to Tenant (a “Non-Disturbance Agreement”) from the holder of each Existing Mortgage, providing in the event Landlord defaults under such Existing Mortgage, Tenant's possession of the Premises shall not be disturbed so long as Tenant is not in default of this Lease beyond any applicable cure period.  If Landlord is unable to obtain and deliver a Non-Disturbance Agreement from each such holder within seventy-five (75) days after the mutual execution and delivery of this Lease, then Tenant may terminate this Lease upon written notice to Landlord at any time prior to delivery thereof.  Upon Tenant’s receipt of a Non-Disturbance Agreement from the applicable interest or lien holders, this Lease shall be subject and subordinate to: (a) Allall ground or underlying leases now or hereafter delivered with respect to the Premises (each a “Superior Lease”), and (b) the lien of all mortgages and deeds of trust now or hereafter granted by Landlord in any amount and encumbering the Premises and/or the Shopping Center, any Superior Lease or Landlord’s interest or estate in any of them, including all advances thereunder (each a “Mortgage”), and all renewals, modifications, consolidations, replacements and extensions of any of the same.  The provisions hereof are intended to be automatic and self-executing and do not require the necessity of any further action by either party or any additional document being executed by Tenant for the purpose of effecting the same.  Tenant neverthelessTenant agrees to execute and deliver, within tentwenty (1020) days following any written request by or on behalf of Landlord,Tenant’s receipt of a document in form and in substance required by Landlord or Landlord’s Mortgageereasonably acceptable to Tenant, any such documents evidencing the priority or subordination of this Lease with respect to any such Superior Lease or Mortgage, and Tenant’s attornment agreement with respect thereto on terms provided for in this Article   .  If Tenant fails to comply with the foregoing, Tenant waives the provisions of any current or future statute, rule or law which may give or purport to give Tenant any right or election to terminate or otherwise adversely affect this Lease and the obligations of Tenant hereunder in the event of any foreclosure proceeding or sale.

One of the most basic principles of property law is that of “first in time, first in right”.  Liens, conveyances and other matters affecting title will control over each other in the order in which they are granted or, if the recording act is applicable, recorded without knowledge of the prior lien, conveyance or other matter on the part of the prior-recorded interest holder.  Thus, if a deed of trust is entered into or, if applicable, recorded after the lease is entered into, then the lease will have priority over the deed of trust.  The lease in that case would not be affected by a foreclosure of the deed of trust.  By contrast, if the deed of trust had been granted or, if applicable, recorded prior to the lease, then a foreclosure of the deed of trust would result in the termination of the lease (unless additional steps are taken to subordinate the deed of trust prior to the foreclosure).

 

Consequently, if the deed of trust is entered into after the lease (as in the case of a re-financing), the lender will be concerned that, following a foreclosure, it might be assuming obligations under the applicable lease that it would not be willing to assume (such as those that result from the prior landlord’s breaches or agreements to extraordinary obligations) or that the tenant will refuse to recognize the lender as its new landlord.  Those concerns can be dispensed with if the tenant agrees to subordinate its lease (that is, agree that its lease will be considered later in time for purposes of determining the deed of trust’s priority), to attorn to (that is, recognize as its landlord) the lender as its landlord in the event of a foreclosure and to waive certain prior defaults and obligations of the tenant’s landlord if the lender becomes the tenant’s landlord by virtue of any such foreclosure.  In exchange for those agreements, a tenant will require the lender to agree that it will not disturb the tenant if the lender forecloses and that the lease will remain in effect, except as specifically modified in tenant’s agreement with the lender.

 

By contrast, if a deed of trust exists at the time the lease is signed, and thus, the tenant’s lease would be subordinate, the tenant may require that the lender enter into an agreement like the one described above so that the tenant can obtain the above-discussed non-disturbance protections.  Most national tenants and retail tenants who plan to invest heavily in non-removable improvements will insist on obtaining warranties from the landlord as to whether any deeds of trust exist at the time the lease is signed and will further insist that non-disturbance agreements be obtained from the holders of each such deed of trust prior to signing the lease or during a short contingency period after the lease is signed.  Some tenants will also provide that all plan submission and construction deadlines provided for in the lease or the work letter be delayed until all required non-disturbance agreements are obtained.

 

8.   Special issues concerning gaming approvals

a) Privileged licenses

 

Tenant acknowledges that Landlord’s business is or may be subject to and exist because of privileged licenses issued by governmental authorities relating to casino gaming (“Gaming Authorities”).  Upon Landlord’s or any Gaming Authority’s request from time to time, Tenant must disclose the names of:  (i) all officers and directors of Tenant, if Tenant is a corporation, (ii) all members and managers of Tenant, if Tenant is a limited liability company, (iii) all general and limited partners of Tenant, if Tenant is a general partnership, a limited partnership, a limited liability partnership or any similar type of entity, (iv) all persons having executive, directorial, or supervisory authority over Tenant, and (v) all persons having a material relationship with or having the power to exercise significant influence over Tenant (“Material Persons”) if Tenant is any other form of business organization.  Tenant must keep such disclosures updated contemporaneously with any changes therein.  In addition, Tenant must disclose:  (A) regardless of whether Tenant is a publicly traded corporation, the names of all persons who own or control more than ten percent (10%) of the total ownership interests in Tenant, and (B) unless Tenant is a publicly traded corporation on a national stock exchange, the names of all persons who own or control any ownership interests in Tenant and the names of all lenders and sources of financing.  If requested to do so by Landlord or any Gaming Authority, Tenant shall obtain any license, qualification, clearance or the like which shall be requested or required of Tenant by any Gaming Authority or any regulatory authority having jurisdiction over Landlord or any Affiliate of Landlord.  If Tenant fails to satisfy such requirement or if Landlord or any Affiliate of Landlord is directed to cease business with Tenant by any such authority, or if Landlord shall in good faith determine that Tenant, or any of its officers, directors, employees, agents, designees or representatives, or partner, owner, member, or shareholder, Material Persons, or any lender or financial participant (a) is or might be engaged in, or is about to be engaged in, any activity or activities, or (b) was or is involved in any relationship, either of which could or does jeopardize Landlord’s business, reputation or such licenses, or if any such license is threatened to be, or is, denied, curtailed, suspended or revoked, then, at Landlord’s option, Landlord may immediately terminate this Lease without liability to any person or require Tenant immediately to (x) terminate any relationship with the person which is the source of the problem, or (y) cease the activity creating the problem.  If Tenant does not comply with item (x) or (y) above, then Landlord may require Tenant to specifically perform such obligation (the parties recognizing that damages or other remedies would be inadequate under the circumstances).

 

If the premises are part of a casino or are leased by a landlord who holds a gaming license, that gaming license will be one of the most valuable assets the landlord owns.  Under the Nevada Gaming Control Act, the gaming authorities have broad authority to review and disapprove the contracts and other activities of gaming licensees and those with whom they deal.  Accordingly, a landlord who is a gaming licensee will insist that its tenants disclose the names of all those who have substantial roles in the ownership and management of the tenant.  If a problem is discovered with respect to any such disclosed persons, the landlord will require that remedies exist to dissociate the problematic person from the landlord and, if necessary, the tenant.  These rights typically include the right to force the tenant to terminate its relationship with the problematic person, the obligation of the tenant to comply with any gaming authority requirements and the right of the landlord to terminate the lease if the tenant fails to timely comply with either gaming authority requirements or the direction of landlord to terminate the problematic relationship.

 

b) 24-hour restaurant requirement

 

In order to obtain and maintain a nonrestricted gaming license, the landlord must have and keep in operation a restaurant accessible to the casino on a twenty-four (24)-hour per day, seven (7)-day per week basis.  Thus, for the restaurant that landlord intends to satisfy this requirement, the landlord will require a full term, 24-hour per day operating covenant.  The landlord will also likely provide for special liquidated damages and/or other remedies for any period of closure that was not caused by the landlord.  Such a breach will also typically not be subject to any grace, notice or cure periods prior to being deemed an event of default.

 

c) Compliance with laws—non-disparagement requirements

 

The landlord will also be concerned about the tenant taking actions that draw unwanted attention from gaming authorities.  Accordingly, when the landlord is a gaming-licensee, there are often additional lease provisions (as compared with a typical retail lease) governing confidentiality and that prohibit the tenant from making disparaging comments about the landlord. 

 

9.   Casualty

 

Tenant promptly shall notify Landlord of any fire or other casualty occurring to the Premises or any other portion of the Shopping Center.  If the Premises or the Common Area appurtenant thereto shall be damaged by any casualty, subject to delays for insurance adjustment and payment, issuance of permits, approval from any Landlord’s mortgagee and other force majeure events, and subject further to all other terms of this Article   and the Lease is not terminated, Landlord shall restore the damaged Premises (except for such work which is the responsibility of Tenant pursuant to this Article  ) and such Common Area (“Restoration”).  Except for modifications required by zoning and building codes and other applicable laws which were not in effect on the Delivery Date, Restoration shall be made to substantially the same condition of the Premises and affected Common Area as they existed prior to the casualty.  Tenant shall be responsible for the repair, restoration or replacement of all Tenant’s leasehold improvements, trade fixtures, furniture and furnishings, equipment, merchandise and stock-in-trade, signage and other personal property. Tenant shall com­mence such repair and restoration and the installation of such personal property promptly upon Landlord’s delivery of possession of the Premises to Tenant and Tenant’s receipt of all necessary permits, licenses and approvals, and diligently shall prosecute such work and installation to completion no later than [ninety (90) days ] [SHOULD BE THE SAME PERIOD AS TENANT’S INITIAL CONSTRUCTION OF TENANT’S WORK] following Landlord’s delivery of possession of the Premises to Tenant and Tenant’s receipt of all necessary permits, licenses and approvals.

If (a) the Premises or appurtenant Common Area are damaged by a casualty not covered or required hereunder to be covered by insurance or the insurance proceeds available to Landlord are less than the cost of Restoration, or (b) the Restoration cannot be completed within one hundred twenty (120) days after the date of casualty in Landlord’s sole judgment, or (c) more than twenty-fiveand the cost to restore such damage exceeds thirty percent (30%) of the replacement cost of the Shopping Center, or (b) more than fifty percent (2550%) of the Shopping Center is damaged by a casualty, or (dc) the Casualty occurred during the last twenty-four (24twelve (12) months of the Term, or (e) Restoration and the use of insurance proceeds shall not have been approved Landlord’s mortgagee, (f) or the Premises or appurtenant Common Area are damaged by a casualty covered or required hereunder to be covered by insurance and the cost to restore such damage exceeds fiftyeighty percent (5080%) of the replacement cost thereofof the Shopping Center, then in any such event, Landlord shall have the option either (i) to undertake Restoration, in which event this Lease shall continue in full force and effect except that Rent shall be abated as provided in Section   , or, (ii) to terminate this Lease upon written notice given  to Tenant at any time within ninety (90) days after the date of the casualty, whereupon this Lease shall terminate as of the date specified in such notice, which date shall be not less than thirty (30) days nor more than sixty (60) days after the date of such notice.  It shall be a condition precedent to any right of Landlord to terminate this Lease as a result of a casualty that Landlord also terminate the leases of all other tenants of the [Shopping Center/“Termination Zone” depicted on Exhibit __ hereto].  In addition, in the event of a casualty not affecting the Premises, it shall be a further condition precedent to Landlord’s right to terminate this Lease that Landlord deliver to Tenant concurrently with its notice of termination readily available funds equal to the value of Tenant’s leasehold improvements in excess of the unamortized portion of construction allowance paid by Landlord for Tenant’s initial construction of the Premises assuming such allowance is amortized over the Term on a straight line basis.

Landlord shall not be liable for or subject to any claims or damages to Tenant (including inconvenience or annoyance to Tenant or loss of or injury to Tenant’s business or use or access of all or any part of the Premises) resulting in any way from any casualty or Restoration.  Notwithstanding any contrary provision of this Lease, if a casualty is due to the negligence or willful misconduct of Tenant or any of the Tenant Parties, Tenant shall be responsible for the cost of any insurance deductible, which shall be payable to Landlord upon demand.; provided, however, the rent, percentage rent (but the breakpoint shall not be reduced and for purposes of calculating percentage rent any sums abated hereby shall be treated as paid) and Common Area Costs hereunder shall abate from the date of such casualty until the Premises and all Common Areas reasonably necessary for the operation of Tenant’s business at the Premises have been fully restored.   

If as a result of a casualty, Landlord shall desire to demolish the entire building containing the Premises as part of Restoration (whether or not the Premises suffered any damage), Landlord shall have the right to demolish the building and terminate this Lease upon written notice given to Tenant at any time within ninety (90) days after the date of casualty, whereupon this Lease shall terminate effective as of the date such demolition work is commenced or any earlier date specified in such notice, which date shall be not less than

 Notwithstanding any contrary provision of this Lease, in the event of (i) total or partial damage or destruction of the Premises; or (ii) damage or destruction to the Common Areas necessary for the efficient operation of Tenant’s business at the Premises, Landlord shall provide to Tenant within thirty (30) days after the date of such notice.  casualty written notice with Landlord’s reasonable estimate of the time period required for repairs and restoration of such damage and destruction.  Tenant shall have the right to terminate this Lease upon written notice to the Landlord within forty-five (45) days after receipt of Landlord’s notice if the necessary repairs or restoration cannot reasonably be completed within 180 days after  the date of such casualty.   In addition, Tenant shall have the right to terminate this Lease in the event of total or partial damage or destruction of the Premises within the last two (2) years of the Lease term.  If Landlord undertakes the Restoration of the Premises and/or the Common Areas necessary for the efficient operation of Tenant’s business at the Premises but fails to complete the same within 210 days after the date of the casualty, Tenant shall have the right to terminate this Lease upon written notice to Landlord at any time prior to completion of such restoration. 

If this Lease is terminated pursuant to this Article  , all proceeds from Tenant’s insurance under Section   covering any and all leasehold improvements shall be paid to Landlord and Tenant hereby assigns to Landlord all rights to receive such insurance proceeds.  All proceeds for Tenant’sthen Tenant shall be entitled to its insurance proceeds, if any, recovered as a result of such casualty for its trade fixtures, furniture and furnishings, equipment, merchandise and stock-in-trade, signage and other personal property of Tenant shall be paid to and belong Tenantsignage, and all items of its trade dress which give the distinctive look of a [Tenant Trade Name], and all items that contain Tenant’s logo, trade name or trademarks, and all inventory and the value of its leasehold improvements in excess of the unamortized portion of construction allowance paid by Landlord for Tenant’s initial construction of the Premises assuming such allowance is amortized over the Term on a straight line basis.

Landlord and Tenant agree that the provisions of this Article   constitute an express agreement between Landlord and Tenant with respect to any casualty, and supersede and are in lieu of the provisions of any applicable law, statute or regulation now or hereafter in effect that provide remedies for damage or destruction of leased premises

 

A casualty is a sudden destruction of property, whether caused by fire, earthquake or other human or natural causes.  The landlord’s primary concerns in the event of a casualty to its project are:  securing sufficient insurance proceeds to restore the damaged property, ensuring its rent stream is unaffected by the casualty, and having flexibility in restoring the project to respond to changes in law or market trends or to make changes that are otherwise necessary or desirable to the landlord.  The tenant’s primary concerns following a casualty are:  securing sufficient insurance proceeds to restore the damaged property or to prepare a new location for occupancy; ensuring that its revenue stream is unaffected by the casualty; the landlord completing its restoration work (both to the building shell and to the common areas) so that the tenant can become operational as soon after the casualty as practical; having the flexibility to move to another center or project, especially if the landlord’s restoration work will take too long or if the destruction occurs near the end of the lease term.

 

Generally, following a casualty, each party is responsible for restoring the work that it constructed at the beginning of the lease term, unless either party exercises a termination right provided for in the lease.  Typically each party will have termination rights in the event of a major destruction (usually defined in terms of restoration costs or the expected repair time), of a destruction occurring near the end of the term, or of a destruction that is neither covered nor required to be covered by the terminating party’s insurance.  If the lease is terminated, then the property insurance proceeds received by the parties are usually divided by allocating the portion attributable to the tenant’s personal property and, if applicable, to the unamortized amount paid by the tenant for the construction of tenant’s work (after subtracting, if applicable, the amount of any construction allowance paid by the landlord).  The landlord is usually entitled to the remainder of the property insurance proceeds.  If no termination right is exercised, then during the period of restoration, the tenant is usually entitled to a rent abatement (which should be paid for by the landlord’s rent insurance).

 

10. Condemnation

 

In the event of a taking or appropriation under the right of eminent domain or otherwise by a taking in the nature of inverse condemnation, with or without litigation, or a transfer by agreement in lieu thereof (a “Taking”), of all or a substantial partsubstantially all of the Premises, the Shopping Center or the Common Area, Landlord shall have the right upon written notice given to Tenant within thirty (30) days after receipt of notice of such Taking, to terminate this Lease effective as of the date possession is surrendered pursuant to the Taking.  It shall be a condition precedent to any right of Landlord to terminate this Lease as a result of a taking that Landlord also terminate the leases of all other tenants of the [Shopping Center/“Termination Zone” depicted on Exhibit A hereto].  If (a) all of the Premises is acquired by such Taking, or (b) a Taking of the Premises substantially impairs Tenant’s use of the remainder of the Premises as contemplated by this Leaseso much of the Premises or the Common Areas are Taken that the Premises cannot reasonably be used by Tenant for the same purposes as immediately prior to the Taking or (c) a Taking of any other portion of the Shopping Center substantially impairs access toPremises which renders the Premises and/or Tenant’s use of the Premisesno longer one contiguous unit, then Tenant thereby shall have the right and option upon written notice given to Landlord within tenthirty (10) days after Tenant first receives notice of such Taking30) days following the date of surrendering possession to terminate this Lease, such termination to be effective as of the date possession is surrendered pursuant to such Taking.  In addition, in the event a partial taking of the Premises occurs within the last two (2) years of the Term, Tenant shall have the right, at its election, to terminate this Lease.  If there is a Taking of fifteenfifty percent (1550%) or more of the floor area of the Shopping Center and/or any portion of the parking areas available for the Shopping Center that parking for the Shopping Center does not comply with applicable laws, then and in either instance Landlord shall have the right upon written notice given to Tenant within ninety (90) days after receipt of notice of such Taking to terminate this Lease effective as of the date possession is surrendered pursuant to the Taking.  Following a termination of this Lease under this Article  , rentals shall be apportioned and adjusted as of the date of termination.  The provisions of any applicable statutes, ordinances or other applicable laws governing a Taking of the Premises or the Shopping Center are hereby waived by Tenant, it being the intention of the parties that the express terms of this Lease shall control under any circumstances in which such provisions might otherwise be applicable.

 

 

In the event of a Taking of a portion of the Premises, the Shopping Center or the Common Area that does not give rise to a right of termination of this Lease under Section    above, then, except as provided in the penultimate sentence of this Section   , such Taking shall constitute a partial taking hereunder and neither party shall have the right to terminate this Lease, but Base Rent and Tenant’s Share of Costs shall be reduced with respect to the portion of the Premises to which Tenant is deprived on account of such Taking (based upon the ratio of the floor area in the Premises before and after such Taking).  In addition, Landlord shall proceed to make a functional unit of the remaining portion of the Premises, the Shopping Center and/or the Common Area, as applicable (but only to the extent of approval by Landlord’s mortgagee, if any, and the receipt by Landlord of proceeds therefor from the condemning authority), and.   If the Lease shall not be terminated as aforesaid, then Landlord shall, within a reasonable time after possession is physically taken, repair or rebuild what remains of the Premises for Tenant's occupancy to a complete architectural unit as similar as practical to that existing immediately prior to such taking and this Lease shall continue in full force and effect; and a just proportion of the Base Rent, Percentage Rent (but the breakpoint will not be reduced and all amounts abated hereunder will be treated as paid for purposes of calculating Percentage Rent) and Tenant’s share of Common Area Costs shall be abated based upon the proportion that the usable square footage of the Premises during reconstruction bears to the square footage of the Premises immediately prior to such Taking and reconstruction until such repairs and rebuilding are completed.  Following reconstruction, the Base Rent, Percentage Rent (but the breakpoint will not be reduced and all amounts abated hereunder will be treated as paid for purposes of calculating Percentage Rent) and Tenant’s share of Common Area Costs shall be abated based upon the proportion that the square footage of the Premises following such Taking bears to the square footage of the Premises immediately prior to such taking, for the remainder of the Lease term.  Tenant promptly shall restore its leasehold improvements and its fixtures, furniture and furnishings, signage and equipment to as similar as practical the same condition asthat existed immediately prior to such Taking.

No award for any partial or entire Taking shall be apportioned, andExcept as provided herein, Landlord shall be entitled to receive the entire amount of any award made or given in such Taking, without deduction or apportionment for any estate or interest of Tenant, it being expressly understood and agreed by Tenant that no portion of any such award will be allowed or paid to Tenant for any so called “bonus” or “excess value” of this Lease, and such bonus or excess value shall be the sole property of Landlord and hereby is assigned by Tenant to Landlord.  Tenant agrees not to assert any claims against Landlord or the condemning authority for any compensation arising from such Taking.  Without limitation of the foregoing, if any portion of the Premises is Taken, Tenant will have the right to recover from the condemning authority (but not from Landlord) any compensation as may be separately awarded or recoverable by Tenant forany damages payable for and specifically designated as compensation for, depreciation to, and cost of the removal of Tenant's stock, equipment and trade fixtures installed by Tenant at its own cost which are not part of the realty, the Taking of Tenant’s movable trade fixtures, furniture and furnishings, unattached equipment and other personal property belonging to Tenant and which, pursuant to the provisions of this Lease, would remain Tenant’s property at the expiration or earlier termination of this Lease; provided, however, that such claim shall in no way diminish or otherwise affect the award otherwise payable to Landlord, loss of Tenant’s business, relocation expenses, and the value of its leasehold improvements in excess of the unamortized portion of construction allowance paid by Landlord for Tenant’s initial construction of the Premises assuming such allowance is amortized over the Term on a straight line basis, and to the extent Landlord receives condemnation proceeds for the foregoing, it shall promptly pay the same to Tenant.

In the event of a Taking of all or any portion of the Premises for temporary use, then this Lease will remain unaffected thereby except that, during such temporary Taking, Base Rent, Percentage Rent (but the breakpoint will not be reduced and all amounts abated hereunder will be treated as paid for purposes of calculating Percentage Rent) and Tenant’s Share of Costs shall abate with respect to that portion of the Premises which Tenant is unable to use on account of such temporary Taking (based upon the ratio of the floor area in the Premises before and during such temporary Taking) to the extent that Landlord shall receive proceeds (a) from any rental abatement insurance (after applicable deductions) or (b) from any condemnation award directly attributable to the loss in Rent due to suchand Tenant will be entitled to all compensation payable by the condemning authority (in excess of the amounts payable in connection therewith for the rent amounts abated hereunder, which amounts shall be paid to Landlord) as a result of the temporary Taking of all or any portion of the Premises (or applicable part, as the case may be).  For purpose of this Section   , a temporary Taking shall be defined as a taking for a period of one hundred twenty (120) days or less.

Government authorities and certain other entities have the power to condemn (or take) the property of another.  Such a condemnation (also called a taking) may affect or involve all or a portion of a project.  Following any condemnation, the landlord’s and tenant’s concerns are similar to those that are present in the context of a casualty, except that an award for resulting damages will be available from the condemning authority and that condemnations are generally permanent.  Because a taking is permanent, additional termination rights need to be provided for to deal with the situation in which restoration is not possible or practical because a needed portion of the project no longer exists.  Also, the possibility exists that access to, parking for, traffic flow about or visibility of or from the premises would be taken or altered in a way that would adversely affect the premises.  Accordingly, the tenant should have termination rights to address that situation. 

 

If the lease is ultimately terminated due to a condemnation, the condemnation award should be divided in the same way that property insurance proceeds are divided following a casualty, as discussed above.  If the lease is not terminated, then the tenant should have two separate abatements.  First, from the date of the taking until the premises and common areas are restored, rent should abate to the extent the premises are rendered unusable by such restoration.  Second, after the premises and common areas are restored, rent should abate based on the proportion of the premises that are taken.

 

C.    End of lease issues

 

1.   Default and remedies: what every landlord (and tenant) should know

 

The topics under this section are more fully discussed in the materials provided by my co-presenter.  However, I have provided example language below for each topic for reference and discussion purposes.

 

a) Defining the events of default

 

The occurrence of any one or more of the following events will constitute events of default (each, a "default" or "Event of Default"):

 

            (a)       Tenant fails to pay Rent or any other amounts payable by Tenant under this Lease as and whenwithin ten (10) days following Tenant’s receipt of written notice from Landlord that such payment is past due and payable; or

 

            (b)       Tenant breaches or violates any provision of this Lease that is described in such provision as a “default” or “Event of Default” or for which a specific performance or notice and cure period is provided and Tenant fails to perform such action or cure such violation within the time period therein provided; or

            (b)       Intentionally omitted; or

 

            (c)        The making by Tenantcommencement of any action for a general assignment or general arrangement for the benefit of creditors where such action is not dismissed within ninety (90) days after the commencement; the filing by or against Tenant of a petition to have Tenant adjudged bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy; the filing against Tenant of a petition to have Tenant adjudged bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy where such action is not dismissed within ninety (90) days after the filing; the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty ninety (3090) days; or the commencement of any action for the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease where such action is not dismissed within ninety (90) days after the commencement thereof; or

 

            (d)       Tenant abandons or vacates the PremisesIntentionally omitted; or

 

            (e)        Tenant fails to perform any of its other promises, obligations, covenants or agreements in this Lease within thirty (30) days after receipt of written notice thereof from Landlord (plus, if such failure to perform cannot be cured within thirty (30) days, then such additional time as may be reasonably necessary to cure such failure so long as Tenant has commenced such cure within said thirty (30)-day period and has thereafter diligently prosecuted the same to completion).

 

The waiver by Landlord of any breach of any term, covenant or condition herein contained will not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained.  The subsequent acceptance of Rent or any other sum of money hereunder by Landlord will not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent or other sum.  No endorsement or statement on any check or any letter accompanying any check or payment of a lesser amount of any Rent or other sum hereunder may be deemed an accord and satisfaction, and Landlord's acceptance of such check or lesser amount will be on account only and without prejudice to Landlord's right to recover the balance of such rent or other sum, none of Landlord's rights and remedies being affected thereby.  No covenant, term, or condition of this Lease may be deemed to have been waived by Landlordeither party unless such waiver is in a writing signed by Landlordthe waiving party.

 

b) Rent acceleration

 

Upon the occurrence of any Event of Default, Landlord will have the right to pursue and enforce any and all rights and remedies available to Landlord hereunder or at law or in equity, including, without limitation, to terminate this Lease, in which event Tenant agrees to pay Landlord on demand the sum of (i) all Rents and other sums due hereunder prior to the entry of a judgment fixing those amounts (plus interest thereon at the Agreed Rate), plus (ii) all loss and damage which Landlord suffers by reason of such termination, whether through inability to relet the Premises on satisfactory terms or otherwise, plus (iii) the amount by which the present value of future rentals (after the date of such judgment) due for the remainder of the Term exceeds the amount of such rent loss that Tenant proves could have been reasonably avoidedfair market rental value of the Premises for such period.

 

c) Self-help evictions

 

In the event of any Event of Default by Tenant, Landlord will have the right to terminate this Lease, in which event Tenant and anyone claiming through Tenant, shall, at Landlord’s election, immediately surrender the Premises to Landlord and if Tenant or anyone claiming through Tenant fails to do so, Landlord may, without prejudice to any other remedy that it may have hereunder or under applicable law, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises, or any part thereof, without being liable for prosecution or for any claim for damages.  Landlord shall also have the right, with or without terminating this Lease, to reenter the Premises to remove all persons and property from the Premises.  Such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant.  If Landlord shall elect to re-enter the Premises, Landlord shall not be liable for damages by reason of such re-entry.  Landlord shall also have the right to do whatever Tenant is obligated to do under the terms of this Lease, and Tenant agrees to reimburse Landlord on demand for any expenses which Landlord may incur in effecting compliance with Tenant’s obligations hereunder and to pay Landlord an administrative fee in the amount of 15% of such expenses to cover Landlord’s administrative costs in connection therewith, together with Interest thereon until paid by Tenant.  Following such re-entry by Landlord, Landlord shall have the right to receive the Rent and other payments due hereunder as the same become due or payable, as well as all rental and other income derived from the Premises; and Tenant agrees to pay Landlord on demand any deficiency in the Rent provided for herein that may arise by reason of Landlord’s reletting of the Premises.

 

NRS 40.253(5)(b) authorizes the landlord “Upon non-compliance with the notice [either to pay rent or quit the premises within five (5) days] . . . [e]xcept when the tenant has timely filed [an] affidavit [which states that the tenant has tendered payment or is not in default in the payment of rent] and a file-stamped copy of it has been received by the landlord or his agent, and except when the landlord is prohibited pursuant to NRS 118A.480 [which relates to residential leases], the landlord or his agent may, in a peaceable manner, provide for the nonadmittance of the tenant to the premises by locking or otherwise.”  NRS 40.253(5)(b) (emphasis added).  Thus, self-help eviction for rent defaults is permitted under Nevada law upon compliance with the applicable statutory requirements.

 

d) Late charges and default interest: enforceability issues

 

The term “Agreed Rate” means the prime commercial rate of interest charged from time to time by Bank of America, National Association (or, if the same does not exist, such other comparable bank selected by Landlord), plus five percent (5%) per annum, but not to exceed the maximum rate of interest allowable under law.

 

If Landlord or Tenant fails to pay any Rent or any other amount due hereunder to Landlordthe other when due, Landlord or Tenant, as applicable, shall be entitled to (a) interest on the unpaid amount at the Agreed Rate from the date payment was due and payable, and (b) a service charge equal to five percent (5%) of the overdue amount per instance.  If payment by Tenant is made by a check that is dishonored by the drawing bank, Tenant shall pay to Landlord a service charge equal to Fifty Dollars ($50.00) and, in addition, Landlord shall have the right to require that all future payments of Rent be made by wire transfer or bank check. Tenant acknowledges that the late payment of Rent or the tender of a dishonored check shall cause Landlord to incur costs and expenses not contemplated by this Lease, the exact amounts of which will be extremely difficult to ascertain, and that such service charges represent fair  represents a fair estimate of the costs and expenses that Landlord would incur by reason of Tenant’s late payment of Rent or tender of a dishonored check. The imposition of such service charges shall neither constitute a waiver of Tenant’s Default with respect to any overdue amount nor prevent Landlord from exercising any other right or remedy available to Landlord under this Lease, at law or in equity.

 

            Given that Nevada’s usury law allows the landlord to charge any rate that is agreed to in writing, the provision of a default interest rate that is not unconscionable will be enforceable in Nevada.  See NRS 99.050-040.  However, late charges are liquidated damages and, thus, will be enforced only to the extent they bear a reasonable relationship to the actual loss sustained by the landlord as a result of the late payment.  See Harmony v. Sawyer, 98 Nev. 544, 547 (1982).

 

e) Holdover remedies

 

If Tenant remains in possession of all or any part of the Premises after the expiration of the Term with the consent of Landlord, then Tenant will be deemed a tenant of the Premises at sufferance at will, subject to all of the terms and provisions hereof, except as to the Term and any further extension or renewal thereof and as to Base Rent, which Base Rent (without adjusting the Breakpoint) will be equal to twoone hundred fifty percent (200150%) of the Base Rent in effect during the last Lease Year of the original Term or, as the case may be, any applicable extension or renewal thereof.  In addition, Tenant agrees to protect, defend (with counsel reasonably acceptable to Landlord), indemnify, save and keep harmless Landlord, against and from all liabilities, claims, losses, causes of action, charges, penalties, damages, costs or expenses arising out of, resulting from or in connection with Tenant’s failure to surrender possession of the entire Premises upon the expiration of the Term, except to the extent such liabilities, claims, losses, causes of action, charges, penalties, damages, costs or expenses arise from the negligence or intentional acts or omissions of Landlord or Landlord’s agents, contractors or employees.

 

f)    Other landlord remedies

 

Landlord expressly reserves all rights and remedies available to Landlord under applicable law.  Upon a default hereunder, then without limiting any right or remedy provided to Landlord at law or in equity (all of which rights and remedies together with the rights and remedies set forth in this Lease  are non-exclusive of and cumulative with each other), Landlord shall have the right and option to do any one or more of the following:

(i)         Collect Sublease Rents. Collect rents payable under any sublease or license relating to the Premises (or appoint a receiver to collect such rent) and otherwise perform Tenant’s obligations at the Premises, it being agreed, however, that neither the filing of a petition for the appointment of a receiver for Tenant nor the appointment itself shall constitute an election by Landlord to terminate this Lease.

(ii)        Cure Default.  Cure the default at Tenant’s sole cost and expense, without waiving or releasing Tenant from any obligation hereunder.  If at any time Landlord pays any sum or incurs any cost or expense as a result of or in connection with curing any Tenant default, the amount thereof (together with Landlord’s administrative charge, reasonable attorneys’ fees and interest at the Agreed Rate), shall be paid by Tenant to Landlord upon demand.

(iii)       Disposition of Property. Landlord shall have the right to dispose of any trade fixtures, furniture and furnishings, equipment, merchandise and stock-in-trade, signage and other personal property of Tenant remaining on the Premises in accordance with applicable law.  Landlord may, at Landlord’s option, either (a) retain possession of all of Tenant’s trade fixtures, furniture and furnishings, equipment, merchandise and stock-in-trade, signage and other personal property left in the Premises or (b) require Tenant at any time to forthwith remove same, and if not so removed within five (5) days after written demand by Landlord, to take title and possession of the same and to sell or otherwise dispose of the same, without thereby incurring any claims, liabilities, or obligations to Tenant for any such property or the proceeds of sale thereof.  Notwithstanding any contrary provision of this Lease, all items of Tenant’s trade dress or which contain Tenant’s trademark, trade name or logo shall remain property of Tenant at all times and in no event will Landlord have the right to use or sell such items.

g) Tenant remedies for landlord’s default

 

In the event Landlord will not be in default of any provision of this Lease prior to the expiration of at leastfails to perform any of its obligations hereunder, and such failure continues for thirty (30) days or more after written notice from Tenant (plus such additional time as may reasonably be required to cure Landlord’s failure, if such cure reasonably, if such failure cannot reasonably be cured within such thirty (30) days) after written notice from Tenant specifying Landlord’s failure.  All obligations of Landlordthirty (30) days, such additional time as is reasonably necessary to cure so long as Landlord commenced such cure within said thirty (30)-day period and diligently prosecuted the same to completion), then Tenant shall have the option to pursue any and all remedies available at law or in equity and the following remedies, all of which shall be construed to be cumulative and non-exclusive with each other and with all other remedies set forth in this Lease or that are available at law or in equity: (a) the right to sue for damages; and/or (b) the right to an injunction or other equitable relief; and/or (c) cure the default at Landlord’s sole cost and expense, without waiving or releasing Landlord from any obligation hereunder.  If at any time Tenant pays any sum or incurs any cost or expense as a result of or in connection with curing any Landlord default, the amount thereof (together with Tenant’s administrative charge, reasonable attorneys’ fees and interest at the Agreed Rate), shall be paid by Landlord to Tenant upon demand..  All obligations of either party hereunder will be construed as covenants, not conditions; and Tenant may not terminate this Lease for breach of Landlord’s obligations hereunder.  If any part of the Premises is at any time subject to a first mortgage or a first deed of trust to which this Lease is subordinate, and this Lease or the rentals due from Tenant hereunder are assigned by Landlord to a mortgagee, trustee or beneficiary (“Lienholder”) and Tenant is given written notice of the assignment including the post office address of Lienholder, then Tenant shall also give written notice of any default by Landlord to the Lienholder, specifying the default in reasonable detail and affording the Lienholder a reasonablethe opportunity to make performance for and on behalf of Landlord within the time period granted Landlord hereunder for such performance.  If and when the Lienholder has made performance on behalf of Landlord, the default shall be deemed cured. 

 

Tenants generally seek to have all available equitable and legal remedies in the event of a landlord default.  In addition, tenants may require special remedies to deal with situations in which the tenant cannot wait for the landlord’s notice and cure periods to expire.  Thus, a tenant may require rent abatements or rent credits in the event of a utility interruption or may require self-help rights if the landlord fails to complete essential repairs or replacements timely.  Those special remedies are generally included in the provisions to which they relate.

 

h) Limitations on Recovery Against Landlord

 

The liability of Landlord to Tenant for any default by Landlord under this Lease or arising in connection herewith or with Landlord's operation, management, leasing, repair, renovation, alteration or any other matter relating to the Shopping Center or the Premises shall be limited solely and exclusively to an amount which is equal to the interest of Landlord in the Premises, provided that in no event shall such liability extend to any sales orShopping Center, together with any rental and sales income and proceeds and any condemnation and insurance proceeds received by Landlord in connection with the Shopping Center or the Premises. 

 

            From the landlord’s perspective, the foregoing limitation on landlord’s liability is one of the most important non-business terms in the lease.  This provision is discussed more fully in my materials on liability matters.

 

2.   Early termination rights

 

A tenant or a landlord may require an early termination right that could be exercised if the premises fail to generate the contemplated level of sales.  Such a termination right is typically exercisable only if the party exercising it reimburses the other party for the unamortized expenses of the other party incurred in entering the lease and improving the premises.  An additional termination payment may also be required to compensate the other party for lost profits/rents resulting from the termination.

 

3.   Renewal rights

 

Landlord hereby grants to Tenant the right to extend the Term of this Lease (individually, an “Extension Option,” and, collectively, the “Extension Options”) for two (2) additional successive terms of five (5) years each (individually, an “Option Term, and, collectively, “Option Terms”) by giving to Landlord written notice of extension (a “Notice of Exercise”) in each instance at least onesix (16) yearmonths (but not more than eighteentwelve (1812) months) prior to the expiration of the then current Term.  Each Option Term shall be upon the same terms and conditions as set forth in this Lease, except that the Base Rent during each Option Term shall be              .  If Tenant shall fail to give timely Notice of Extension of any Extension Option, Tenant shall be deemed to have waived such Extension Option and this Lease shall expire with the expiration of the then current Term.  Landlord shall have no obligation to notify Tenant in advance of any impending deadline for the exercise of any Extension Option.  Notwithstanding the foregoing, Tenant shall not have the right or authority to exercise any Extension Option (i) during the continuance of any default beyond applicable notice and cure periods by Tenant under this Lease; (ii) during the period that any monetary obligation due and payable to Landlord continues unpaid, or (iii) as to any Extension Option other than the first Extension Option, if any prior Extension Option shall not have been timely exercised.

 

Renewal or extension rights are often provided for in leases.  Issues in this area usually center on how the rent will be calculated (fixed amount versus an amount based on then-prevailing market rates) and by when the right must be exercised.  Obviously, the renewal right must be exercised prior to the date by which landlord anticipates it will need to list the premises in order to secure a new tenant before the expiration of the existing tenant’s lease.

 

D.    Miscellaneous (but not to be ignored) lease provisions

 

1.   Making sense of insurance, indemnity, waiver, subrogation waiver and exculpation provisions

 

Indemnity.  ToExcept to the extent such liabilities, claims, losses, causes of action, charges, penalties, damages, costs or expenses arise from the negligence or intentional acts or omissions of Landlord, Landlord’s lender or their respective agents, contractors or employees, to the fullest extent permitted by law, Tenant will, at Tenant’s sole cost and expense, indemnify, defend (with counsel reasonably acceptable to Landlord) and hold free and harmless Landlord, Landlord’s lender, and their respective agents, contractors and employees for, from and against all liabilities, claims, losses, causes of action, charges, penalties, damages, costs or expenses (including reasonable attorneys' fees and costs) of whatsoever character, nature and kind, whether to property or person, whether by direct or derivative action, and whether known or unknown, suspected or unsuspected, or latent or patent, arising from (a) any personal injury, bodily injury or property damage whatsoever occurring in or at the Premises; (b) the use or occupancy, or manner of use or occupancy, or conduct or management of the Premises or of any business thereon; or (c) any act, error, omission or negligence of Tenant or Tenant’s agents, contractors or employees in, on or about the Premises or the Shopping Center.

Except to the extent such liabilities, claims, losses, causes of action, charges, penalties, damages, costs or expenses arise from the negligence or intentional acts or omissions of Tenant or Tenant’s agents, contractors or employees, to the fullest extent permitted by law, Landlord will, at Landlord’s sole cost and expense, indemnify, defend (with counsel reasonably acceptable to Tenant) and hold free and harmless Tenant and Tenant’s agents, contractors and employees for, from and against all liabilities, claims, losses, causes of action, charges, penalties, damages, costs or expenses (including reasonable attorneys' fees and costs), of whatsoever character, nature and kind, whether to property or person, whether by direct or derivative action, and whether known or unknown, suspected or unsuspected, or latent or patent, arising from (a) any personal injury, bodily injury or property damage whatsoever occurring in or at the Shopping Center, excluding the Premises; and (b) any act, error, omission or negligence of Landlord or Landlord’s agents, contractors or employees in, on or about the Shopping Center.

Waivers.  ToExcept to the extent such liabilities, claims, damages, losses, penalties, litigation, demands, causes of action, suits, proceedings, judgments, disbursements, charges, assessments and expenses arise from the negligence or intentional acts or omissions of Tenant or Tenant’s agents, contractors or employees, to the fullest extent permitted by law, Tenant, on behalf of itself and its agents, contractors and employees, hereby waives all liabilities, claims, damages, losses, penalties, litigation, demands, causes of action (whether in tort or contract, in law or at equity or otherwise), suits, proceedings, judgments, disbursements, charges, assessments and expenses (including attorneys' and experts' fees and expenses incurred in investigating, defending or prosecuting any litigation, claim or proceeding) against Landlord arising from the following: (a) any personal injury, bodily injury or property damage occurring in or at the Premises; (b) any loss of or damage to property of Tenant or Tenant’s agents, contractors or employees located in the Premises or other part of the Shopping Center by theft or otherwise; (c) any personal injury, bodily injury or property damage to Tenant or Tenant’s agents, contractors or employees caused by other tenants of the Shopping Center, parties not occupying space in the Shopping Center, occupants of property adjacent to the Shopping Center, or the public or by the construction of any private, public or quasi-public work occurring either in the Premises or elsewhere in the Shopping Center; (d) except as expressly set forth herein to the contrary, any interruption or stoppage of any utility service or for any damage to persons or property resulting from such stoppage; or (e) business interruption or loss of use of the Premises suffered by Tenant; (f) any latent defect in or upon the Premises; (g) damages or injuries or interference with Tenant’s business, loss of occupancy or quiet enjoyment and any other loss resulting from the exercise by Landlord of any right or the performance by Landlord of any obligations under this Lease; (h) any bodily injury to an employee of Tenant or Tenant’s agents or contractors arising out of and in the course of employment of the employee and occurring anywhere in the Shopping Center; or (i) any consequential, special or indirect damages suffered by Tenant.

Waiver of Subrogation.  Landlord and Tenant each hereby waive any liabilities, claims, damages, losses, penalties, litigation, demands, causes of action, suits, proceedings, judgments, disbursements, charges, assessments and expenses one may have against the other on account of any liabilities, claims, damages, losses, penalties, litigation, demands, causes of action, suits, proceedings, judgments, disbursements, charges, assessments and expenses occasioned to Landlord or Tenant, as the case may be, or their respective property, the Premises, or their contents, arising from any risk generally covered by a “causes of loss - special form” property insurance policy and from any risk covered by any policy of property insurance then in effect (whether or not the party suffering the liabilities, claims, losses, causes of action, charges, penalties, damages, costs or expenses actually carries any insurance, recovers under any insurance or self-insures) or which right of recovery arises from loss of earnings or rents resulting from loss or damage to any such property.  In addition, Landlord and Tenant, for themselves and on behalf of their respective insurance companies, waive any right of subrogation that any such insurance company may have against Landlord or Tenant.  It is the intent of the parties that the parties will look solely to their respective insurance companies for recovery in the foregoing cases.  For the purpose of the forgoing waivers, all deductibles, self-insurance and co-insurance maintained by the waiving party shall be treated as valid and collected insurance proceeds as though paid to the waiving party by a third-party insurer.

 

a) The relationships among such provisions

 

For a more thorough discussion of the topics in this Section, I have included a separate article that discusses these issues in the context of restaurant leasing.  Except for some of the particular examples cited in the article, that article applies equally to all types of commercial leases.

 

b) Key components of a sound insurance provision

 

Tenant’s Insurance.  From and after the date of this Lease, Tenant must carry, at Tenant’s sole cost and expense, the following types of insurance, in the amounts specified below or in such higher amounts as required by Landlord:

(i)         Occurrence-based Commercial General Liability insurance (written on the then-current ISO form bearing that name (or the industry-recognized successor to that form), or a form providing broader coverage) covering the Premises and Tenant’s activities within the Shopping Center, with combined single limits of not less than $1,000,000.00 per occurrence, $2,000,000.00 general aggregate; $2,000,000.00 products-completed operations aggregate; and $1,000,000.00 personal and advertising injury, adjusted annually by Landlord in its reasonable judgment.  Such policy must include an endorsement that includes contractual liability coverage for personal and advertising injury.  Cross suits exclusions applicable to the additional insured must not be included.  If Tenant insures multiple locations under the same policy, a per location aggregate endorsement must be included.  In addition, if Tenant operates a valet parking program, Tenant must maintain (i) automobile insurance for owned, hired and non-owned vehicles, including the loading or unloading thereof, with liability limits of not less than One Million Dollars ($1,000,000.00) per accident combined single limit for bodily injury (including but not limited to wrongful death) and property damage and (ii) garage keeper’s direct primary physical damage insurance covering autos left with Tenant for storage or safekeeping and having comprehensive and collisions limits of not less than Five Hundred Thousand Dollars ($500,000.00) per occurrence;

 

(ii)        Causes of Loss-Special Form Building and Personal Property insurance (written on the then-current ISO forms bearing those names (or the industry-recognized successors to those forms), or forms providing broader coverage), together with endorsements (or separate policies) to provide coverage for (i) Ordinance or Law, (ii) war risks, when and to the extent such insurance is obtainable from the United States of America or an agency thereof, (iii) if the Premises are located within a flood zone, flood disaster pursuant to the Flood Disaster Protection Act of 1973, (iv) earthquake and volcanic eruption risk, (v) demolition and increased cost of construction coverage, (vi) if applicable, sprinkler leakage insurance, (vii) Utility Service—Direct Damage, and (viii) if applicable, Spoilage Coverage, all of which insurance policies and endorsements must cover the full replacement cost of all Tenant Personal Property, and all alterations, improvements and betterments to the Premises now existing or to be added, as updated from time to time during the Term;

 

(iii)       Causes of Loss-Special Form Business Income (and Extra Expense) Coverage insurance (written on standard ISO forms bearing those names (or the industry-recognized successors to such forms), or forms providing broader coverage), in adequate amounts to avoid co-insurance provisions, for an adequate period of time of not less than 12 months, taking into account the reasonable time period required to rebuild and/or replace the insured property.  Such policy (or separate policies, as applicable) must cover at least the same causes of loss as are required to be covered in connection with the property policy in clause (ii), above, to the extent generally available to similarly-situated tenants in the Shopping Center and other similar shopping centers;

 

(iv)       Insurance covering the full replacement cost of all plate glass on the Premises, provided, however, Tenant may self-insure this risk;

 

(v)        Boiler and machinery insurance on all boilers, pressure vessels, gas-fired equipment, air conditioning equipment and systems exclusively serving or located upon the Premises.  Such insurance must be in an amount not less than one hundred percent (100%) of the full replacement cost of the Improvements and all personal property of Tenant from time to time in or upon the Premises;

 

(vi)       If Tenant distributes, sells, serves or furnishes alcoholic beverages in the ordinary course of its business at the Premises, then Tenant shall maintain and keep in full force and effect throughout the Term, Liquor Liability Insurance in an amount not less than Five Million and 00/100ths Dollars ($5,000,000.00) written on a combined single limit per occurrence basis.  At least One Million and No/100 Dollars ($1,000,000.00) of such insurance coverage must be primary coverage and the remaining Four Million and No/100 Dollars ($4,000,000.00) of such coverage may be pursuant to an umbrella or excess liability policy; and

 

(vii)      Worker’s Compensation Insurance that complies with all applicable statutory requirements, together with Employer’s Liability insurance (Nevada Stop Gap) in an amount not less than Five Million and 00/100ths Dollars ($5,000,000.00) for each injury, accident or illness.   If self-insured, Tenant shall submit at least fourteen (14) days prior to the Rent Commencement Date and annually during the Term thereafter a certificate of compliance to Landlord confirming that Tenant has fulfilled its self-insurance requirements.  Both such policies must contain waivers of subrogation in favor of Landlord.

 

General Requirements.  All policies of insurance to be procured by Tenant must be issued by insurance companies having a general policy holders rating of not less than B+/IX in the most current available “Best’s Key Rating Guide” and be qualified to do business in the state where the Premises is located.  All property policies must be issued in the name of Tenant, and must name Landlord, Landlord’s lender and Landlord’s management agent as additional loss payees with respect to any losses in excess of $__________ in the aggregate.  All liability policies obtained by Tenant must name Landlord, Landlord’s lender and Landlord’s management agent as additional insureds to the extent of Tenant’s indemnity obligations under this Lease.  In addition, Tenant’s liability policies must be endorsed as needed to provide cross-liability coverage for Tenant, Landlord and Landlord’s lender and must provide for severability of interests.  All liability policies must contain a provision that Landlord, Landlord’s lender and Landlord’s management agent, although named as additional insureds, will nevertheless be entitled to recovery under the policy for any loss occasioned to such parties by reason of the acts or omissions of Tenant or Tenant’s agents, contractors or employees.  All insurance policies delivered to Landlord must contain a provision that the company writing the policy will give Landlord thirty (30) days prior written notice in the event of any cancellation or lapse or the effective date of any material change in the policy, including any reduction in the amounts of insurance.  All policies of Tenant must be written as primary policies to the extent of Tenant’s indemnity obligations under this Lease and must provide that any insurance that Landlord or Landlord’s lender may carry is strictly excess, secondary and non-contributing with any insurance carried by Tenant to the extent of Tenant’s indemnity obligations under this Lease.  The insurance requirements contained in this Article   are independent of Tenant’s waiver, indemnification and other obligations under this Lease and will not be construed or interpreted in any way to limit Tenant’s obligations under this Lease.

Blanket Policy.  Tenant’s obligation to carry the insurance required by this Article    may be brought within the coverage of a so-called blanket policy or policies of insurance carried and maintained by Tenant; provided, however, that the coverage afforded Landlord will not be reduced or diminished by reason thereof, and provided further that the requirements set forth in this Article    are otherwise satisfied.  If Tenant uses such a blanket policy, Tenant must deliver to Landlord satisfactory evidence that the Premises has been properly added to the blanket policy and evidence that the insurance company that issued the blanket policy has allocated to the Premises the type of insurance coverage in the amounts required by this Article   , with the limitations of liability required by this Lease.  Tenant will permit Landlord at any reasonable time to inspect any policies of insurance of Tenant.

            Increased Premia.  Except in connection with the ordinary operation of the Premises for the Permitted Use, Tenant may not do or suffer to be done, or keep or suffer to be kept, anything in, upon or about the Premises that will contravene any of Landlord's policies insuring against loss or damage by fire or other hazards, or that will prevent Landlord from procuring such policies from companies acceptable to Landlord or which will in any way cause an increase in the insurance rates upon any portion of the Premises.  Tenant must pay to Landlord as additional rent upon demand the amount of any increase in premiums for insurance resulting from any violation of the first sentence of this Section   , even if Landlord has consented to the doing of the act or the keeping of the item upon the Premises that constituted such a violation (but payment of such additional rent will not entitle Tenant to violate the provisions of the first sentence of this Section   ).

 

            Right to Cure.  If Tenant fails to maintain any insurance required to be maintained under this Lease and that failure continues for more than five (5) days following Tenant’s receipt of written notice from Landlord, then, in addition to any other remedies available to Landlord under this Lease, Landlord shall have the right to procure such insurance on Tenant’s behalf, in which event Tenant must immediately reimburse Landlord for the amount advanced by Landlord, and pay Landlord an administrative fee in the amount of 15% of the amount thus advanced (for Landlord’s processing and other administrative costs in connection therewith), and pay Landlord interest at the Agreed Rate on the amount advanced and the foregoing-described administrative fee from the date of the advance until fully paid by Tenant.

 

c) Insurance certificates

 

Evidence of insurance meeting the requirements hereunder must be delivered to Landlord prior to any entry by Tenant upon the Premises and thereafter, executed copies of renewal policies or certificates thereof must be delivered to Landlord at least thirtyten (3010) days prior to the expiration of the term of each such policy. 

 

The industry-standard forms of insurance certificates (ACORD forms) include a statement that the insurer will “endeavor to” deliver notice to the certificate holder of any cancellation of the policy.  Most insurers will delete the “endeavor to” language and, thus, obligate themselves to provide notice of cancellation to the certificate holder.  However, those forms also contain language stating that the certificates may not be relied upon by those to whom they are delivered.  The effectiveness of that language has been upheld by courts, and few, if any, insurers will delete that non-reliance language.  Accordingly, the only reliable way for a landlord to verify that a tenant has complied with its insurance requirements is to obtain and review copies of the tenant’s insurance policies.

 

d) Consequential damages

 

To the fullest extent permitted by law, Landlord and Tenant waiveseach waive all liabilities, claims, losses, causes of action, charges, penalties, damages, costs or expenses, of any character, nature and kind, against Landlordthe other arising from any consequential, special or indirect damages suffered by Landlord or Tenant., as applicable.  [THIS PROVISION SHOULD EITHER BE DELETED OR MADE RECIPROCAL BY THE TENANT.  THE FOREGOING REVISIONS MAKE THIS PROVISION RECIPROCAL.]

 

Direct damages are the cost of performing the breached obligations.  Incidental damages are the additional costs incurred to effect that substitute performance.  All of the other damages that result as a consequence of a contract breach are consequential damages.  Thus, in the case of a roof leak that results from landlord’s failure to maintain the roof as required under the lease, the costs of causing the roof to be repaired are the tenant’s direct damages, the cost of finding the roofer and paying any additional emergency call or similar charges are included in the tenant’s incidental damages, and the profits that were lost by the tenant because it had to shut down and the cost of repairing the tenant’s personal property and improvements inside the premises that were damaged by the water leak are included in the tenant’s consequential damages.  Many lease forms require the tenant to waive consequential and, sometimes, even incidental damages.  That, of course, leaves the tenant with very limited damages remedies that do no fully compensate the tenant for the landlord’s default.  In some cases, it may mean the tenant has no damages remedies, as in the case of a breach of an exclusive use provision or of a restriction on noxious uses or changes to the shopping center, as tenant’s only damages in those cases will be consequential. 

 

In light of those concerns, many landlords will offer to make the waiver reciprocal—that is, to also agree to waive the landlord’s consequential damages—with or without exceptions from the waiver for violations of the holdover prohibition or of the provision requiring the tenant to return lender-required documents.  Of course, those exceptions probably represent two of the few circumstances in which a landlord would actually suffer consequential damages.  Accordingly, those exceptions very nearly swallow up the “reciprocal” waiver itself.  Even if those exceptions are not present, as a practical matter, a reciprocal waiver will generally favor the landlord much more than the tenant.  The landlord’s profits are the minimum and percentage rents to be paid by the tenant and those will be recoverable by the landlord as direct damages if the landlord terminates the lease or tenant’s right to possession following a tenant default.  Thus, as a practical matter, a reciprocal waiver means the landlord still gets to recoup its lost profits while the waiver prevents the tenant from doing so and what appears to be a reciprocal solution is only superficially so.

 

            2.   Other miscellaneous provisions

 

a)    Hazardous Materials

 

"Environmental Laws" means all federal, state and local laws, ordinances, rules, regulations, guidelines, decisions and orders now in effect or hereafter enacted that deal with the regulation or protection of the public health or environment (including the ambient air, groundwater, surface water and land, including sub-strata land), including, without limitation, all of the following:  the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. § 9601 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. § 5101 et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq.; the Toxic Substances Control Act, 53 U.S.C. § 2601 et seq.; the Safe Drinking Water Act, 42 U.S.C. § 300f et seq.; the Clean Water Act, 33 U.S.C. § 1251 et seq.; the Clean Air Act, 42 U.S.C. § 7401 et seq.; the Occupational Safety and Health Act, 29 U.S.C. § 651 et seq.; the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. § 136 et seq.; the Pollution Prevention Act, 42 U.S.C. § 13101 et seq.; all regulations or guidelines adopted pursuant to any of the foregoing; and common law doctrines relating to the subject matter of the foregoing-listed laws.  “Hazardous Substance” means any substance, matter, material, waste or pollutant, the generation, storage, disposal, handling, release (or threatened release), treatment, discharge or emission of which is regulated under any Environmental Law.

 

            Except for cleaning and office supplies used in the ordinary operation of the Premises for the Permitted Use, Tenant may not cause or permit any Hazardous Substance to be brought upon, kept or used in or about the Premises, without Landlord’s prior written consent, which may be granted or withheld in Landlord’s sole and absolute discretion.  Tenant shall cause all Hazardous Substances that are brought onto the Premises to be used and handled in strict compliance with all Environmental Laws and with Landlord’s requirements in connection therewith.  Tenant’s breach of this Section     will constitute an Event of Default, without any notice, grace or cure periods.  If Tenant breaches its obligations under this Section    (in addition to being an Event of Default), or if the presence of a Hazardous Substance on the Premises otherwise occurs, then Tenant will indemnify, defend (with counsel reasonably acceptable to Tenant) and hold harmless Landlord and the Landlord Parties from and against any and all liabilities, claims, losses, causes of action, charges, penalties, damages, costs or expenses that arise during or after the term of this Lease as a result of such contamination, EVEN IF SUCH  LOSSES AND LIABILITIES ARISE IN WHOLE OR IN PART DUE TO THE NEGLIGENCE OR STRICT LIABILITY OF LANDLORD OR ANY LANDLORD PARTYexcept to the extent such liabilities, claims, losses, causes of action, charges, penalties, damages, costs or expenses arise from the negligence or intentional acts or omissions of Landlord or Landlord’s agents, contractors or employees.  Tenant’s obligations under this Section      will survive the expiration or earlier termination of this Lease.

 

            Landlord hereby represents and warrants to Tenant that to the best of Landlord's knowledge: (i) the Premises are free from any Hazardous Substances and do not constitute an environmental hazard of any type under local, state or federal law; (ii) there are no buried, partially buried, above-ground or other tanks, storage vessels, drums or containers located in, on or about the Premises; and (iii) Landlord has received no warning, notice, notice of violation, administrative complaint, judicial complaint or formal or informal notice alleging that conditions on or about the Premises are in violation of any environmental laws, regulations, ordinances or rules.  Landlord shall indemnify, defend (by counsel reasonably acceptable to Tenant), and hold harmless Tenant and Tenant’s agents, contractors and employees from and against any and all claims, damages, fines, judgments, penalties, costs, liabilities or losses (including, without limitation, a decrease in the value of Tenant's interest in and to the Premises, damages caused by loss or restriction of rentable or usable space, or any damages caused by adverse impact on Tenant's use as provided in this Lease at the Premises, and any and all sums paid for settlements of claims, attorneys' fees, and consultant and expert fees) arising during or after the Term and arising as a result of: (a) the breach by Landlord of the representation made in the preceding sentence; (b) the leakage, spillage, discharge, or release of any Hazardous Substance as a result of Landlord's or any Landlord Party’s acts or omissions; (c) Landlord's violations of any environmental laws, regulations, ordinances or rules; or (d) any Hazardous Substance existing on or about the Premises prior to the Delivery Date.  This indemnification includes, without limitation, any and all costs incurred because of any investigation of the Premises, any clean-up, removal or restoration mandated by a federal, state, local agency, or political subdivision.

 

b)    Real Estate Taxes

 

Tenant agrees to pay Tenant's Share of the real property taxes and assessments assessed against the Shopping Center and attributable on a consistently-applied basis to any period during the Term of this Lease.  Said taxes shall include real property taxes and special assessments, whether federal, state, county or municipal, including any quasi-governmental division or district thereof, levied or assessed against the Premises, the real estate, Shopping Center, and buildings of the Shopping Center and all other taxes and assessments attributable to the entire Shopping Center and all buildings thereon (collectively, "Real Estate Taxes"); provided, however, that for purposes of computing Tenant's Share of Real Estate Taxes payable by Tenant, the Real Estate Taxes for any pad sites which contain a fairly allocable portion of the Common Areas and are separately owned and separately assessed shall not be included in the Real Estate Taxes for which Tenant contributes.  Notwithstanding anything to the contrary contained herein, the following shall be excluded from the definition of “Real Estate Taxes” and Tenant shall not otherwise be obligated to pay or reimburse Landlord for:  (i) any local, state or federal income tax imposed on Landlord; (ii) any tax or assessment applicable to a class that includes others than real property or commercial real property owners, including any local, state or federal gross receipts tax of general applicability to all businesses and which is imposed on the receiver of such gross receipts without regard to the nature of the receipts (as opposed to a gross receipts tax imposed wholly or partially on rents received from real estate or Tenant’s Work thereon); (iii) any estate or death tax imposed on Landlord or with respect to the Shopping Center as a result of the death of Landlord or its partners; (iv) any special assessments levied for improvements made by or at the request of Landlord regardless when levied or any special assessments levied for improvements benefiting the Shopping Center that were levied before completion thereof; (v) any taxes or assessments attributable to any undeveloped portion of the Shopping Center (or any land adjacent to the Shopping Center); (vi) any charges in the nature of impact fees attributable to Landlord’s development of the Shopping Center (or of a project which is adjacent to the Shopping Center); or (vii) the amount by which any tax or assessment exceeds the amount Landlord would pay if the Shopping Center were Landlord’s sole asset and the rents therefrom its sole income. With respect to any special assessment or charge which would otherwise be included in Taxes and which may be paid in installments, Tenant shall be responsible to pay only those installments, or parts of installments, which would have become due and payable during the term of this Lease had the payments been made in installments over the maximum permitted time period.

 

Tenant shall pay to Landlord on the first day of every month, in advance, a sum estimated to be equal to one-twelfth (1/12) of Tenant's Share of Real Estate Taxes for the calendar year in question, such payments to represent payments on account of Tenant's obligations hereunder.  Within one hundred twenty (120) days following the close of each calendar year Landlord shall provide Tenant a statement of the Taxes due for such period.  If Tenant's Share of Real Estate Taxes for such period shall exceed the aggregate of Tenant's prior payments, Tenant shall remit such additional amount to Landlord within thirty (30) days following receipt of such statement.  If Tenant's Share of Real Estate Taxes for such period shall be less than the aggregate of Tenant's prior payments, such excess shall be credited to the installments of Real Estate Taxes next coming due from Tenant (except that in the final year of the term, any excess sums shall be paid to Tenant within thirty (30) days following the expiration date).  Any Real Estate Taxes due and payable for those fiscal tax years (of the appropriate governmental authority or authorities) during which the first and last Lease Years of the Term occur will be prorated between Landlord and Tenant.  Tenant’s share of those Real Estate Taxes will be calculated by multiplying Tenant’s Share of those Real Estate Taxes by a fraction, the numerator of which is the number of days of the Term occurring during the applicable fiscal tax year and the denominator of which is the total number of days in the fiscal tax year.  Landlord will be responsible for the balance of such Real Estate Taxes

 

III. Commercial Leasing/Real Estate

      Brokers

 

            The below-listed topics are addressed more fully in the selected statutory and regulatory provisions contained in Appendix A.

     

A.    Real estate brokerage act

1.      What activities constitute “real estate broker” activities?

2.      Who may act as a real estate broker?

B.      Nature of broker-client relationship

C.    Listing agreements

 

Important issues to be addressed in a listing agreement include: 

 

§            a definition of the term of the agreement;

§            the conditions that must be satisfied prior to the broker earning any commission;

§            provisions for a register of broker contacts (especially at the end of the term of the agreement) and for compensation if a lease is later entered into by the client with a registered contact (or no compensation if the broker fails to list a contact in the register);

§            a provision for no compensation for listed excluded tenants (such as those with whom the client or an existing broker is already dealing);

§            owner approval of co-broker agreements;

§            specific additional duties beyond those that are legally imposed (see below);

§            duties of confidentiality;

§            indemnity agreements for broker’s negligent or unauthorized activities;

§            a precise definition of what space is to be leased;

§            a description and/or list of what prospects may and may not be pursued;

§            warranties from the broker that it possesses all licenses required to carry out the agreement and a covenant to comply with all applicable laws in connection with all of broker’s activities;

§            the client being satisfied in its sole and absolute discretion with any prospects procured by the broker, with no duty to enter into a lease or to agree to any terms that the client finds unacceptable;

§            provisions for early termination and other remedies in the event of a broker default;

§            identification of the specific individual at the broker who will be primarily responsible for carrying out the agreement and the ability of the client to demand replacement of such individual; and

§            a prohibition on assignment or delegation of the contract by the broker.

 

D.    Right of broker to future compensation on lease renewals and expansions

     

These matters will be governed by the terms of the agreement between the broker and the client.

 

 

IV. Ethical Issues Arising In Commercial

      Leasing

 

            The below-listed topics are addressed more fully in the selected statutory and regulatory provisions contained in Appendix A.

 

      A.  Conflicts of interest

      B.   Dealings with represented and unrepresented persons

      C.  Honesty—Fraud, misrepresentation and bad faith

 

            Notwithstanding the specific duties imposed by contract, statutes and regulations, both lawyers and brokers may be civilly liable for dishonesty in their dealings pursuant to common law claims for fraud, misrepresentation or breach of the implied covenant of good faith.  The elements of a common law fraud claim in Nevada are:

 

(1) a false representation made by the defendant;

(2) defendant's knowledge or belief that the representation is false (or insufficient basis for making the representation);

(3) defendant's intention to induce the plaintiff to act or to refrain from acting in reliance upon the misrepresentation;

(4) plaintiff's justifiable reliance upon the misrepresentation; and

(5) damage to the plaintiff resulting from such reliance.

 

See Wohlers v. Bartgis, 114 Nev. 1249, 1260-1 (1998) (quoting Bulbman, Inc. v. Nevada Bell, 108 Nev. 105, 111 (1992)).

 

            Also, in a commercial transaction, a claim for negligent misrepresentation may exist.  The Nevada Supreme Court has “adopted the Restatement (Second) of Torts § 552 definition of the tort of negligent misrepresentation:

 

[] One who, in the course of his business, profession or employment, or in any other action in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.”

 

Barmettler v. Reno Air, Inc., 114 Nev. 441,449 (1998).

 

            Under Nevada law, a covenant of good faith and fair dealing is implied in all contracts in both the performance and the enforcement of such contracts.  See A.C. Shaw Construction, Inc. v. Washoe County, 105 Nev. 913, 914 (1989).

 

      D.  Compensation of unlicensed individuals and “finders”

      E.   Duties of brokers and lawyers to their clients:

            1.   Contractual

 

            In general, Nevada law does not permit brokers to waive the duties set forth in NRS Ch. 645 and NAC Ch. 645.  See, e.g., NRS 645.255.  However, additional or more specific duties may be imposed upon a broker pursuant to an agreement between the broker and his client.  Following is a list of additional duties that a client might consider adding to any listing agreement:

 

Broker must do the following, at its own cost and expense:

 

a.     within five (5) business days after the Effective Date, provide a comprehensive proposed marketing strategy, describe in detail the proposed methods of marketing, provide a summary of competitive listings and transactions completed and of how the Premises will be strategically positioned in competition with other lease space for comparable sites.  Broker must lease and market the Premises in accordance with the marketing plan, budget and leasing plan prepared and/or approved by Owner, all as revised from time to time by Owner in its sole and absolute discretion;

b.     actively pursue all prospective tenants and inquiries for the Premises;

c.     exert diligent efforts to develop offers to lease the Premises;

d.     use diligent efforts to obtain references (including at least one bank reference), financial statements and completed tenant questionnaires and applications, all in forms acceptable to Owner, from each prospective tenant for the Premises;

e.     comply fully with all federal, state and local laws, ordinances, regulations and orders governing or applicable to the leasing of the Premises;

f.        report on a bi-weekly basis to Owner, including the following information:

                                                               i.      Prospect Activity—including details of all tours such as name of prospect, nature of prospect’s business, date of tour, status (tour, information provided, reviewing options, proposal, negotiations, internal approval status, etc.);

                                                             ii.      Marketing Activity—including  communication to cooperating brokers, direct potential tenant contacts, distribution of marketing material, etc.;

                                                            iii.      General status of the file—including such additional information as Owner reasonably requires;

g.     provide ongoing advice and suggestions as to potential marketing strategies (including, without limitation, bonus programs, perquisites to brokers, and potential repositioning of posted asking rates);

h.     prepare and present all information on prospective tenants.  Maintain and keep current a register of prospective tenants (Broker hereby acknowledges that Owner may rely upon such register in dealing with others, including other brokers or representatives.  Accordingly, Broker agrees that such register will be conclusive and binding on Broker and may be relied upon by Owner for any purpose and at any time);

i.         provide its best advice and counsel as well as financial analysis and evaluation of options;

j.         attend all presentations and tours for prospective tenants recruited by Broker;

k.      use its best efforts to negotiate and expedite the negotiation and execution of lease agreements for the Premises on terms and conditions that are satisfactory to Owner in its sole and absolute discretion;

l.        generally provide such other services from time to time as may be reasonably required by Owner and which are consistent with Broker’s duties set forth herein and such services as are customary within Broker’s industry; and

m.   carry out its duties under this Agreement as a fiduciary and agent of Owner.

 

            2.   Statutory/Common Law—basic agency law

 

            Common law principles of agency as applied to real estate brokers have been abrogated by NRS 645.251.  Those common law principles have been replaced by the duties set forth in NRS Ch. 645 and in NAC Ch. 645.  Relevant provisions from those chapters are excerpted in Appendix A to these materials.

 

            3.   Ethical

 

            In addition to the minimum standards set by applicable law, many private associations have their own codes of conduct.  For example, members of the Nevada Association of Realtors are also bound (as between them and the Association) by a Code of Ethics that can be viewed on-line at http://www.realtor.org/mempolweb.nsf/pages/printable2008Code .   


 


APPENDIX A

 

Selected Statutes and Other Relevant Provisions

Related To the Duties of Brokers and Lawyers

 

 

I.          Definition of Real Estate Broker; License Requirement.

 

      NRS 645.0045  “Agency” defined.

      1.  “Agency” means a relationship between a principal and an agent arising out of a brokerage agreement whereby the agent is engaged to do certain acts on behalf of the principal in dealings with a third party.

      2.  The term does not include a relationship arising solely from negotiations or communications with a client of another broker with the written permission of the broker in accordance with the provisions of subsection 2 of NRS 645.635.

      (Added to NRS by 2007, 1787)

      NRS 645.005  “Brokerage agreement” defined.  “Brokerage agreement” means an oral or written contract between a client and a broker in which the broker agrees to accept valuable consideration from the client or another person for assisting, soliciting or negotiating the sale, purchase, option, rental or lease of real property, or the sale, exchange, option or purchase of a business. The term does not include a property management agreement.

      (Added to NRS by 1995, 2072; A 2003, 932; 2005, 648)

* * *

      NRS 645.009  “Client” defined.  “Client” means a person who has entered into a brokerage agreement with a broker or a property management agreement with a broker.

      (Added to NRS by 1995, 2072; A 2003, 932)

 

* * *

 

      NRS 645.020  “Real estate” defined.  As used in this chapter, “real estate” means every interest or estate in real property including but not limited to freeholds, leaseholds and interests in condominiums, town houses or planned unit developments, whether corporeal or incorporeal, and whether the real property is situated in this State or elsewhere.

      [Part 2:150:1947; 1943 NCL § 6396.02]—(NRS A 1973, 1097; 1975, 1541)

      NRS 645.030  “Real estate broker” defined.

      1.  “Real estate broker” means a person who, for another and for compensation or with the intention or expectation of receiving compensation:

      (a) Sells, exchanges, options, purchases, rents or leases, or negotiates or offers, attempts or agrees to negotiate the sale, exchange, option, purchase, rental or lease of, or lists or solicits prospective purchasers, lessees or renters of, any real estate or the improvements thereon or any modular homes, used manufactured homes, used mobile homes or other housing offered or conveyed with any interest in real estate;

      (b) Engages in or offers to engage in the business of claiming, demanding, charging, receiving, collecting or contracting for the collection of an advance fee in connection with any employment undertaken to promote the sale or lease of business opportunities or real estate by advance fee listing advertising or other offerings to sell, lease, exchange or rent property;

      (c) Engages in or offers to engage in the business of property management; or

      (d) Engages in or offers to engage in the business of business brokerage.

      2.  Any person who, for another and for compensation, aids, assists, solicits or negotiates the procurement, sale, purchase, rental or lease of public lands is a real estate broker within the meaning of this chapter.

      3.  The term does not include a person who is employed by a licensed real estate broker to accept reservations on behalf of a person engaged in the business of the rental of lodging for 31 days or less, if the employee does not perform any tasks related to the sale or other transfer of an interest in real estate.

      [Part 2:150:1947; 1943 NCL § 6396.02] + [2.5:150:1947; added 1955, 615]—(NRS A 1957, 337; 1959, 393; 1963, 330; 1973, 1097; 1975, 1383; 1977, 928; 1979, 1535; 1981, 1327; 1985, 312, 1261; 1997, 505, 956; 2005, 648, 665)

* * *

 

     NRS 645.230  Unlawful to engage in certain conduct without license or permit or without complying with certain provisions of chapter; power of Division to file complaint with court and assist in prosecution of violation; prosecution by district attorney or Attorney General.

      1.  It is unlawful for any person, limited-liability company, partnership, association or corporation to engage in the business of, act in the capacity of, advertise or assume to act as, a:

      (a) Real estate broker, real estate broker-salesman or real estate salesman within the State of Nevada without first obtaining the appropriate license from the Real Estate Division as provided for in this chapter;

      (b) Property manager within the State of Nevada without first obtaining from the Real Estate Division as provided for in this chapter a license as a real estate broker, real estate broker-salesman or real estate salesman and a permit to engage in property management;

      (c) Designated property manager within the State of Nevada without complying with the provisions of NRS 645.6055;

      (d) Business broker within the State of Nevada without first obtaining from the Real Estate Division as provided for in this chapter a license as a real estate broker, real estate broker-salesman or real estate salesman and a permit to engage in business as a business broker issued pursuant to the provisions of NRS 645.863; or

      (e) Designated business broker within the State of Nevada without complying with the provisions of NRS 645.867.

      2.  The Real Estate Division may prefer a complaint for a violation of this section before any court of competent jurisdiction and may assist in presenting the law or facts upon any trial for a violation of this section.

      3.  The district attorney of each county shall prosecute all violations of this section in their respective counties in which violations occur, unless prosecuted by the Attorney General. Upon the request of the Administrator, the Attorney General shall prosecute any violation of this section in lieu of the district attorney.

      [1:150:1947; 1943 NCL § 6396.01]—(NRS A 1963, 666; 1973, 1100; 1981, 514; 1985, 1262; 1997, 166, 957; 2003, 1290; 2005, 649)

      NRS 645.235  Administrative fine for engaging in certain conduct without license, permit, certificate, registration or authorization; procedure for imposition of fine; judicial review; exceptions.

      1.  In addition to any other remedy or penalty, the Commission may impose an administrative fine against any person who knowingly:

      (a) Engages or offers to engage in any activity for which a license, permit, certificate or registration or any type of authorization is required pursuant to this chapter, or any regulation adopted pursuant thereto, if the person does not hold the required license, permit, certificate or registration or has not been given the required authorization; or

      (b) Assists or offers to assist another person to commit a violation described in paragraph (a).

      2.  If the Commission imposes an administrative fine against a person pursuant to this section, the amount of the administrative fine may not exceed the amount of any gain or economic benefit that the person derived from the violation or $5,000, whichever amount is greater.

      3.  In determining the appropriate amount of the administrative fine, the Commission shall consider:

      (a) The severity of the violation and the degree of any harm that the violation caused to other persons;

      (b) The nature and amount of any gain or economic benefit that the person derived from the violation;

      (c) The person’s history or record of other violations; and

      (d) Any other facts or circumstances that the Commission deems to be relevant.

      4.  Before the Commission may impose the administrative fine, the Commission must provide the person with notice and an opportunity to be heard.

      5.  The person is entitled to judicial review of the decision of the Commission in the manner provided by chapter 233B of NRS.

      6.  The provisions of this section do not apply to a person who engages or offers to engage in activities within the purview of this chapter if:

      (a) A specific statute exempts the person from complying with the provisions of this chapter with regard to those activities; and

      (b) The person is acting in accordance with the exemption while engaging or offering to engage in those activities.

      (Added to NRS by 2003, 1289)

      NRS 645.240  Persons to whom chapter does not apply. [Effective through December 31, 2007.]  The provisions of this chapter do not apply to, and the terms “real estate broker” and “real estate salesman” do not include, any:

      1.  Owner or lessor of property, or any regular employee of such a person, who performs any of the acts mentioned in NRS 645.030, 645.040, 645.230 and 645.260, with respect to the property in the regular course of or as an incident to the management of or investment in the property. For the purposes of this subsection, “management” means activities which tend to preserve or increase the income from the property by preserving the physical desirability of the property or maintaining high standards of service to tenants. The term does not include sales activities.

      2.  Employee of a real estate broker while engaged in the collection of rent for or on behalf of the broker.

      3.  Person while performing the duties of a property manager for a property, if the person maintains an office on the property and does not engage in property management with regard to any other property.

      4.  Person while performing the duties of a property manager for a common-interest community governed by the provisions of chapter 116 of NRS, a condominium project governed by the provisions of chapter 117 of NRS, a time share governed by the provisions of chapter 119A of NRS, or a planned unit development governed by the provisions of chapter 278A of NRS, if the person is a member in good standing of, and, if applicable, holds a current certificate, registration or other similar form of recognition from, a nationally recognized organization or association for persons managing such properties that has been approved by the Real Estate Division by regulation.

      5.  Person while performing the duties of a property manager for property used for residential housing that is subsidized either directly or indirectly by this State, an agency or political subdivision of this State, or the Federal Government or an agency of the Federal Government.

      [5:150:1947; A 1955, 457]—(NRS A 1973, 1100; 1979, 1538; 1981, 1328; 1983, 151; 1985, 1262, 1507; 1987, 517; 1993, 2021; 1997, 957; 1999, 938; 2007, 3114)

      NRS 645.240  Persons to whom chapter does not apply. [Effective January 1, 2008.]  The provisions of this chapter do not apply to, and the terms “real estate broker” and “real estate salesman” do not include, any:

      1.  Owner or lessor of property, or any regular employee of such a person, who performs any of the acts mentioned in NRS 645.030, 645.040, 645.230 and 645.260, with respect to the property in the regular course of or as an incident to the management of or investment in the property. For the purposes of this subsection, “management” means activities which tend to preserve or increase the income from the property by preserving the physical desirability of the property or maintaining high standards of service to tenants. The term does not include sales activities.

      2.  Employee of a real estate broker while engaged in the collection of rent for or on behalf of the broker.

      3.  Person while performing the duties of a property manager for a property, if the person maintains an office on the property and does not engage in property management with regard to any other property.

      4.  Person while performing the duties of a property manager for a common-interest community governed by the provisions of chapter 116 of NRS, an association of a condominium hotel governed by the provisions of chapter 116B of NRS, a condominium project governed by the provisions of chapter 117 of NRS, a time share governed by the provisions of chapter 119A of NRS, or a planned unit development governed by the provisions of chapter 278A of NRS, if the person is a member in good standing of, and, if applicable, holds a current certificate, registration or other similar form of recognition from, a nationally recognized organization or association for persons managing such properties that has been approved by the Real Estate Division by regulation.

      5.  Person while performing the duties of a property manager for property used for residential housing that is subsidized either directly or indirectly by this State, an agency or political subdivision of this State, or the Federal Government or an agency of the Federal Government.

      [5:150:1947; A 1955, 457]—(NRS A 1973, 1100; 1979, 1538; 1981, 1328; 1983, 151; 1985, 1262, 1507; 1987, 517; 1993, 2021; 1997, 957; 1999, 938; 2007, 2292, 3114, effective January 1, 2008)

NRS 645.240  Persons to whom chapter does not apply. [Effective May 4, 2009]

      1.  The provisions of this chapter do not apply to, and the terms “real estate broker” and “real estate salesperson” do not include, any:

      (a) Owner or lessor of property, or any regular employee of such a person, who performs any of the acts mentioned in NRS 645.030, 645.040, 645.230 and 645.260, with respect to the property in the regular course of or as an incident to the management of or investment in the property. For the purposes of this subsection, “management” means activities which tend to preserve or increase the income from the property by preserving the physical desirability of the property or maintaining high standards of service to tenants. The term does not include sales activities.

      (b) Employee of a real estate broker while engaged in the collection of rent for or on behalf of the broker.

      (c) Person while performing the duties of a property manager for a property, if the person maintains an office on the property and does not engage in property management with regard to any other property.

      (d) Person while performing the duties of a property manager for a common-interest community governed by the provisions of chapter 116 of NRS, an association of a condominium hotel governed by the provisions of chapter 116B of NRS, a condominium project governed by the provisions of chapter 117 of NRS, a time share governed by the provisions of chapter 119A of NRS, or a planned unit development governed by the provisions of chapter 278A of NRS, if the person is a member in good standing of, and, if applicable, holds a current certificate, registration or other similar form of recognition from, a nationally recognized organization or association for persons managing such properties that has been approved by the Real Estate Division by regulation.

      (e) Person while performing the duties of a property manager for property used for residential housing that is subsidized either directly or indirectly by this State, an agency or political subdivision of this State, or the Federal Government or an agency of the Federal Government.

      2.  The provisions of this chapter do not apply to:

      (a) Any bank, thrift company, credit union, trust company, savings and loan association or any mortgage or farm loan association licensed under the laws of this State or of the United States, with reference to property it has acquired for development, for the convenient transaction of its business, or as a result of foreclosure of property encumbered in good faith as security for a loan or other obligation it has originated or holds.

      (b) A corporation which, through its regular officers who receive no special compensation for it, performs any of those acts with reference to the property of the corporation.

      (c) The services rendered by an attorney at law in the performance of his or her duties as an attorney at law.

      (d) A receiver, trustee in bankruptcy, administrator or executor, or any other person doing any of the acts specified in NRS 645.030 under the jurisdiction of any court.

      (e) A trustee acting under a trust agreement, deed of trust or will, or the regular salaried employees thereof.

      (f) The purchase, sale or locating of mining claims or options thereon or interests therein.

      (g) The State of Nevada or a political subdivision thereof.

      [5:150:1947; A 1955, 457]—(NRS A 1973, 1100; 1979, 1538; 1981, 1328; 1983, 151; 1985, 1262, 1507; 1987, 517; 1993, 2021; 1997, 957; 1999, 938; 2007, 2292, 3114; 2009, 35)

 

      NRS 645.250  Power of cities and towns to license and regulate brokers and salesmen not affected.  Nothing contained in this chapter shall affect the power of cities and towns to tax, license and regulate real estate brokers or real estate salesmen. The requirements of this chapter shall be in addition to the requirements of any existing or future ordinance of any city or town so taxing, licensing or regulating real estate brokers or real estate salesmen.

      [32:150:1947; 1943 NCL § 6396.32]

 

* * *

 

      NRS 645.260  One act constitutes action in capacity of broker or salesman.  Any person, limited-liability company, partnership, association or corporation who, for another, in consideration of compensation by fee, commission, salary or otherwise, or with the intention or expectation of receiving compensation, does, offers or attempts or agrees to do, engages in, or offers or attempts or agrees to engage in, either directly or indirectly, any single act or transaction contained in the definition of a real estate broker in NRS 645.030, whether the act is an incidental part of a transaction, or the entire transaction, is acting in the capacity of a real estate broker or real estate salesman within the meaning of this chapter.

      [4:150:1947; 1943 NCL § 6396.04]—(NRS A 1985, 1263; 1997, 166)

      NRS 645.270  Allegation and proof of licensed status in action for compensation.  A person, limited-liability company, partnership, association or corporation engaged in the business or acting in the capacity of a real estate broker or a real estate salesman within this State may not commence or maintain any action in the courts of this State for the collection of compensation for the performance of any of the acts mentioned in NRS 645.030 without alleging and proving that the person, limited-liability company, partnership, association or corporation was a licensed real estate broker or real estate salesman at the time the alleged cause of action arose.

      [30:150:1947; 1943 NCL § 6396.30]—(NRS A 1985, 1263; 1997, 166)

 

[Note special licensing requirements apply to business brokers, property managers, certain qualified intermediaries, and owner-developers.  Special drafting requirements apply to advance fee agreements and in order to perfect a special broker’s lien pursuant to the Real Estate Broker’s Act.  Also, Clark County and other counties may impose licensing and other requirements on real estate brokers (such as the Clark County Ordinance dealing with “Unit Brokers”—see Clark County Ord. Ch. 6.80; see also §§ 6.12.843, 849).  Those topics are all beyond the scope of this seminar.]

 

II.         Statutorily Imposed Standards of Conduct for Brokers.

 

      NRS 645.251  Licensee not required to comply with certain principles of common law.  A licensee is not required to comply with any principles of common law that may otherwise apply to any of the duties of the licensee as set forth in NRS 645.252, 645.253 and 645.254 and the regulations adopted to carry out those sections.

      (Added to NRS by 1995, 2072)

      NRS 645.252  Duties of licensee acting as agent in real estate transaction.  A licensee who acts as an agent in a real estate transaction:

      1.  Shall disclose to each party to the real estate transaction as soon as is practicable:

      (a) Any material and relevant facts, data or information which he knows, or which by the exercise of reasonable care and diligence he should have known, relating to the property which is the subject of the transaction.

      (b) Each source from which he will receive compensation as a result of the transaction.

      (c) That he is a principal to the transaction or has an interest in a principal to the transaction.

      (d) Except as otherwise provided in NRS 645.253, that he is acting for more than one party to the transaction. If a licensee makes such a disclosure, he must obtain the written consent of each party to the transaction for whom he is acting before he may continue to act in his capacity as an agent. The written consent must include:

             (1) A description of the real estate transaction.

             (2) A statement that the licensee is acting for two or more parties to the transaction who have adverse interests and that in acting for these parties, the licensee has a conflict of interest.

             (3) A statement that the licensee will not disclose any confidential information for 1 year after the revocation or termination of any brokerage agreement entered into with a party to the transaction, unless he is required to do so by a court of competent jurisdiction or he is given written permission to do so by that party.

             (4) A statement that a party is not required to consent to the licensee acting on his behalf.

             (5) A statement that the party is giving his consent without coercion and understands the terms of the consent given.

      (e) Any changes in his relationship to a party to the transaction.

      2.  Shall exercise reasonable skill and care with respect to all parties to the real estate transaction.

      3.  Shall provide the appropriate form prepared by the Division pursuant to NRS 645.193 to:

      (a) Each party for whom the licensee is acting as an agent in the real estate transaction; and

      (b) Each unrepresented party to the real estate transaction, if any.

      4.  Unless otherwise agreed upon in writing, owes no duty to:

      (a) Independently verify the accuracy of a statement made by an inspector certified pursuant to chapter 645D of NRS or another appropriate licensed or certified expert.

      (b) Conduct an independent inspection of the financial condition of a party to the real estate transaction.

      (c) Conduct an investigation of the condition of the property which is the subject of the real estate transaction.

      (Added to NRS by 1995, 2072; A 2001, 2892; 2005, 649; 2007, 1788)

      NRS 645.253  Licensees affiliated with same brokerage: Additional duties when assigned to separate parties to real estate transaction.  If a real estate broker assigns different licensees affiliated with his brokerage to separate parties to a real estate transaction, the licensees are not required to obtain the written consent required pursuant to paragraph (d) of subsection 1 of NRS 645.252. Each licensee shall not disclose, except to the real estate broker, confidential information relating to a client in violation of NRS 645.254.

      (Added to NRS by 1995, 2073)

      NRS 645.254  Additional duties of licensee entering into brokerage agreement to represent client in real estate transaction.  A licensee who has entered into a brokerage agreement to represent a client in a real estate transaction:

      1.  Shall exercise reasonable skill and care to carry out the terms of the brokerage agreement and to carry out his duties pursuant to the terms of the brokerage agreement;

      2.  Shall not disclose confidential information relating to a client for 1 year after the revocation or termination of the brokerage agreement, unless he is required to do so pursuant to an order of a court of competent jurisdiction or he is given written permission to do so by the client;

      3.  Shall seek a sale, purchase, option, rental or lease of real property at the price and terms stated in the brokerage agreement or at a price acceptable to the client;

      4.  Shall present all offers made to or by the client as soon as is practicable, unless the client chooses to waive the duty of the licensee to present all offers and signs a waiver of the duty on a form prescribed by the Division;

      5.  Shall disclose to the client material facts of which the licensee has knowledge concerning the transaction;

      6.  Shall advise the client to obtain advice from an expert relating to matters which are beyond the expertise of the licensee; and

      7.  Shall account for all money and property he receives in which the client may have an interest as soon as is practicable.

      (Added to NRS by 1995, 2073; A 2007, 1788)

      NRS 645.255  Waiver of duties of licensee prohibited.  Except as otherwise provided in subsection 4 of NRS 645.254, no duty of a licensee set forth in NRS 645.252 or 645.254 may be waived.

      (Added to NRS by 2007, 1787)

      NRS 645.257  Action to recover damages suffered as result of licensee’s failure to perform certain duties; standard of care.

      1.  A person who has suffered damages as the proximate result of a licensee’s failure to perform any duties required by NRS 645.252, 645.253 or 645.254 or the regulations adopted to carry out those sections may bring an action against the licensee for the recovery of his actual damages.

      2.  In such an action, any knowledge of the client of the licensee of material facts, data or information relating to the real property which is the subject of the real estate transaction may not be imputed to the licensee.

      3.  In an action brought by a person against a licensee pursuant to subsection 1, the standard of care owed by a licensee is the degree of care that a reasonably prudent real estate licensee would exercise and is measured by the degree of knowledge required to be obtained by a real estate licensee pursuant to NRS 645.343 and 645.345.

      (Added to NRS by 1995, 2073; A 2001, 2893)

 

* * *

 

      NRS 645.259  Liability of licensee for misrepresentation made by client; failure of seller to make required disclosures is public record.  A licensee may not be held liable for:

      1.  A misrepresentation made by his client unless the licensee:

      (a) Knew his client made the misrepresentation; and

      (b) Failed to inform the person to whom the client made the misrepresentation that the statement was false.

      2.  Except as otherwise provided in this subsection, the failure of the seller to make the disclosures required by NRS 113.130 and 113.135 if the information that would have been disclosed pursuant to NRS 113.130 and 113.135 is a public record which is readily available to the client. Notwithstanding the provisions of this subsection, a licensee is not relieved of the duties imposed by paragraph (a) of subsection 1 of NRS 645.252.

      (Added to NRS by 1995, 2074; A 2001, 2893)

 

* * *

 

      NRS 645.280  Association with or compensation of unlicensed broker, broker-salesman or salesman unlawful; payment of commission other than through broker or owner-developer unlawful.

      1.  It is unlawful for any licensed real estate broker, or broker-salesman or salesman to offer, promise, allow, give or pay, directly or indirectly, any part or share of his commission, compensation or finder’s fee arising or accruing from any real estate transaction to any person who is not a licensed real estate broker, broker-salesman or salesman, in consideration of services performed or to be performed by the unlicensed person. A licensed real estate broker may pay a commission to a licensed broker of another state.

      2.  A real estate broker-salesman or salesman shall not be associated with or accept compensation from any person other than the broker or owner-developer under whom he is licensed at the time of the real estate transaction.

      3.  It is unlawful for any licensed real estate broker-salesman or salesman to pay a commission to any person except through the broker or owner-developer under whom he is licensed at the time of the real estate transaction.

      [26:150:1947; 1943 NCL § 6396.26]—(NRS A 1959, 394; 1975, 1542; 1979, 1538; 1985, 1263; 2005, 1286)

 

* * *

 

      NRS 645.300  Delivery of copy of written brokerage agreement; receipt.  When a licensee prepares or has prepared a written brokerage agreement authorizing or employing him to purchase or sell real estate for compensation or commission, he shall deliver a copy of the written brokerage agreement to the client signing it at the time the signature is obtained, if possible, or otherwise within a reasonable time thereafter. Receipt for the copy may be made on the face of the written brokerage agreement.

      [28:150:1947; 1943 NCL § 6396.28]—(NRS A 1979, 1539; 1995, 2074)

      NRS 645.310  Deposits and trust accounts: Accounting; commingling; records; inspection and audit.

      1.  All deposits accepted by every real estate broker or person registered as an owner-developer pursuant to this chapter, which are retained by him pending consummation or termination of the transaction involved, must be accounted for in the full amount at the time of the consummation or termination.

      2.  Every real estate salesman or broker-salesman who receives any money on behalf of a broker or owner-developer shall pay over the money promptly to the real estate broker or owner-developer.

      3.  A real estate broker shall not commingle the money or other property of his client with his own.

      4.  If a real estate broker receives money, as a broker, which belongs to others, he shall promptly deposit the money in a separate checking account located in a bank or credit union in this State which must be designated a trust account. All down payments, earnest money deposits, rents, or other money which he receives, on behalf of his client or any other person, must be deposited in the account unless all persons who have any interest in the money have agreed otherwise in writing. A real estate broker may pay to any seller or the seller’s authorized agent the whole or any portion of such special deposit. The real estate broker is personally responsible and liable for such deposit at all times. A real estate broker shall not permit any advance payment of money belonging to others to be deposited in the real estate broker’s business or personal account or to be commingled with any money he may have on deposit.

      5.  Every real estate broker required to maintain a separate trust account shall keep records of all money deposited therein. The records must clearly indicate the date and from whom he received money, the date deposited, the dates of withdrawals, and other pertinent information concerning the transaction, and must show clearly for whose account the money is deposited and to whom the money belongs. The real estate broker shall balance each separate trust account at least monthly. The real estate broker shall provide to the Division, on a form provided by the Division, an annual accounting which shows an annual reconciliation of each separate trust account. All such records and money are subject to inspection and audit by the Division and its authorized representatives. All such separate trust accounts must designate the real estate broker as trustee and provide for withdrawal of money without previous notice.

      6.  Each real estate broker shall notify the Division of the names of the banks and credit unions in which he maintains trust accounts and specify the names of the accounts on forms provided by the Division.

      7.  If a real estate broker who has money in a trust account dies or becomes mentally disabled, the Division, upon application to the district court, may have a trustee appointed to administer and distribute the money in the account with the approval of the court. The trustee may serve without posting a bond.

      [27.5:150:1947; added 1955, 76]—(NRS A 1963, 1073; 1975, 1543; 1979, 1539; 1981, 1606; 1983, 152; 1995, 2074; 1997, 958; 1999, 1538)

 

* * *

 

NRS 645.315  Conditions and limitations on certain advertisements; required disclosures; prohibited acts.

      1.  In any advertisement through which a licensee offers to perform services for which a license is required pursuant to this chapter, the licensee shall:

      (a) If the licensee is a real estate broker, disclose the name of any brokerage under which the licensee does business; or

      (b) If the licensee is a real estate broker-salesman or real estate salesman, disclose the name of the brokerage with whom the licensee is associated.

      2.  If a licensee is a real estate broker-salesman or real estate salesman, the licensee shall not advertise solely under the licensee’s own name when acting in the capacity as a broker-salesman or salesman. All such advertising must be done under the direct supervision of and in the name of the brokerage with whom the licensee is associated.

      (Added to NRS by 1999, 92; A 2003, 932)

      NRS 645.320  Requirements for exclusive agency representation.  Every brokerage agreement which includes a provision for an exclusive agency representation must:

      1.  Be in writing.

      2.  Have set forth in its terms a definite, specified and complete termination.

      3.  Contain no provision which requires the client who signs the brokerage agreement to notify the real estate broker of his intention to cancel the exclusive features of the brokerage agreement after the termination of the brokerage agreement.

      4.  Be signed by both the client or his authorized representative and the broker or his authorized representative in order to be enforceable.

      [28.5:150:1947; added 1955, 18]—(NRS A 1995, 2075; 2003, 932)

      NRS 645.3205  Dealing with party to real estate transaction in manner which is deceitful, fraudulent or dishonest prohibited.  A licensee shall not deal with any party to a real estate transaction in a manner which is deceitful, fraudulent or dishonest.

      (Added to NRS by 1995, 2074)

      NRS 645.321  Discriminatory practices unlawful; penalty.

      1.  It is unlawful, on account of race, religious creed, color, national origin, disability, ancestry, familial status or sex, to:

      (a) Discriminate against any person:

             (1) By denying the person access to or membership or participation in any multiple-listing service, real estate brokers’ organization or other service or facility relating to the sale or rental of dwellings; or

             (2) In the terms or conditions of such access, membership or participation.

      (b) Discriminate against any person:

             (1) By denying the person access to any opportunity to engage in a transaction regarding residential real estate; or

             (2) In the terms or conditions of such a transaction.

      2.  Any person violating the provisions of subsection 1 shall be punished by a fine of $500 for the first offense and for the second offense shall show cause why his license should not be revoked by the Commission.

      3.  As used in this section:

      (a) “Disability” means, with respect to a person:

             (1) A physical or mental impairment that substantially limits one or more of the major life activities of the person;

             (2) A record of such an impairment; or

             (3) Being regarded as having such an impairment.

      (b) “Familial status” means the fact that a person:

             (1) Lives with a child under the age of 18 and has:

                   (I) Lawful custody of the child; or

                   (II) Written permission to live with the child from the person who has lawful custody of the child;

             (2) Is pregnant; or

             (3) Has begun a proceeding to adopt or otherwise obtain lawful custody of a child.

      (Added to NRS by 1971, 733; A 1991, 1983; 1995, 1994)

ADVANCE FEES

      NRS 645.322  Accounting of use of advance fee charged or collected; Division may demand accounting.  Any person or entity who charges or collects an advance fee shall, within 3 months after the charge or collection, furnish to his client an accounting of the use of that money. The Real Estate Division may also demand an accounting by such person or entity of advance fees so collected.

      (Added to NRS by 1957, 211; A 1963, 667; 1995, 2075)

      NRS 645.323  License required for acceptance of advance fee listing.  A person shall not accept an advance fee listing unless he is licensed as a real estate broker, broker-salesman or salesman pursuant to this chapter.

      (Added to NRS by 1985, 1260)

      NRS 645.324  Forms of brokerage agreements; reports and forms of accounting; regulations; maintenance of agreements for review and audit; grounds for disciplinary action.

      1.  The Commission may require such forms of brokerage agreements which include provisions for the payment of advance fees to be used, and such reports and forms of accounting to be kept, made and submitted, and may adopt such rules and regulations as the Commission may determine to be necessary to carry out the purposes and intent of NRS 645.322.

      2.  A licensee shall maintain, for review and audit by the Division, each brokerage agreement that is entered into by the licensee.

      3.  Any violation of the rules, regulations, orders or requirements of the Commission constitutes grounds for disciplinary action against a licensee.

      (Added to NRS by 1957, 211; A 1995, 2075; 1997, 959)

 

* * *

 

NRS 645.630  Authorized disciplinary action; grounds for disciplinary action; orders imposing discipline deemed public records.

      1.  The Commission may require a licensee, property manager or owner-developer to pay an administrative fine of not more than $10,000 for each violation he commits or suspend, revoke, deny the renewal of or place conditions upon his license, permit or registration, or impose any combination of those actions, at any time if the licensee, property manager or owner-developer has, by false or fraudulent representation, obtained a license, permit or registration, or the licensee, property manager or owner-developer, whether or not acting as such, is found guilty of:

      (a) Making any material misrepresentation.

      (b) Making any false promises of a character likely to influence, persuade or induce.

      (c) Accepting a commission or valuable consideration as a real estate broker-salesman or salesman for the performance of any of the acts specified in this chapter or chapter 119 or 119A of NRS from any person except the licensed real estate broker with whom he is associated or the owner-developer by whom he is employed.

      (d) Representing or attempting to represent a real estate broker other than the broker with whom he is associated, without the express knowledge and consent of the broker with whom he is associated.

      (e) Failing to maintain, for review and audit by the Division, each brokerage agreement and property management agreement governed by the provisions of this chapter and entered into by the licensee.

      (f) Failing, within a reasonable time, to account for or to remit any money which comes into his possession and which belongs to others.

      (g) If he is required to maintain a trust account:

             (1) Failing to balance the trust account at least monthly; and

             (2) Failing to submit to the Division an annual accounting of the trust account as required in NRS 645.310.

      (h) Commingling the money or other property of his clients with his own or converting the money of others to his own use.

      (i) In the case of a broker-salesman or salesman, failing to place in the custody of his licensed broker or owner-developer, as soon as possible, any deposit or other money or consideration entrusted to him by any person dealing with him as the representative of his licensed broker.

      (j) Accepting other than cash as earnest money unless that fact is communicated to the owner before his acceptance of the offer to purchase and that fact is shown in the receipt for the earnest money.

      (k) Upon acceptance of an agreement, in the case of a broker, failing to deposit any check or cash received as earnest money before the end of the next banking day unless otherwise provided in the purchase agreement.

      (l) Inducing any party to a brokerage agreement, property management agreement, agreement of sale or lease to break it in order to substitute a new brokerage agreement, property management agreement, agreement of sale or lease with the same or another party if the inducement to make the substitution is offered to secure personal gain to the licensee or owner-developer.

      2.  An order that imposes discipline and the findings of fact and conclusions of law supporting that order are public records.

      [Part 20:150:1947; 1943 NCL § 6396.20]—(NRS A 1957, 338; 1963, 332; 1965, 1407; 1971, 248; 1975, 1551; 1979, 1549; 1981, 1612; 1983, 222; 1985, 1268; 1993, 890; 1995, 2076; 1997, 959; 2001, 522; 2003, 933, 3464, 3482; 2007, 1543)

      NRS 645.633  Additional grounds for disciplinary action: Improper trade practices; violations of certain orders, agreements, laws and regulations; criminal offenses; other unprofessional and improper conduct; reciprocal discipline; violations relating to property management; log of complaints; reports.

      1.  The Commission may take action pursuant to NRS 645.630 against any person subject to that section who is guilty of any of the following acts:

      (a) Willfully using any trade name, service mark or insigne of membership in any real estate organization of which the licensee is not a member, without the legal right to do so.

      (b) Violating any order of the Commission, any agreement with the Division, any of the provisions of this chapter, chapter 116, 119, 119A, 119B, 645A or 645C of NRS or any regulation adopted pursuant thereto.

      (c) Paying a commission, compensation or a finder’s fee to any person for performing the services of a broker, broker-salesman or salesman who has not secured his license pursuant to this chapter. This subsection does not apply to payments to a broker who is licensed in his state of residence.

      (d) A conviction of, or the entry of a plea of guilty, guilty but mentally ill or nolo contendere to:

             (1) A felony relating to the practice of the licensee, property manager or owner-developer; or

             (2) Any crime involving fraud, deceit, misrepresentation or moral turpitude.

      (e) Guaranteeing, or having authorized or permitted any person to guarantee, future profits which may result from the resale of real property.

      (f) Failure to include a fixed date of expiration in any written brokerage agreement or failure to leave a copy of such a brokerage agreement or any property management agreement with the client.

      (g) Accepting, giving or charging any undisclosed commission, rebate or direct profit on expenditures made for a client.

      (h) Gross negligence or incompetence in performing any act for which he is required to hold a license pursuant to this chapter, chapter 119, 119A or 119B of NRS.

      (i) Any other conduct which constitutes deceitful, fraudulent or dishonest dealing.

      (j) Any conduct which took place before he became licensed which was in fact unknown to the Division and which would have been grounds for denial of a license had the Division been aware of the conduct.

      (k) Knowingly permitting any person whose license has been revoked or suspended to act as a real estate broker, broker-salesman or salesman, with or on behalf of the licensee.

      (l) Recording or causing to be recorded a claim pursuant to the provisions of NRS 645.8701 to 645.8811, inclusive, that is determined by a district court to be frivolous and made without reasonable cause pursuant to NRS 645.8791.

      2.  The Commission may take action pursuant to NRS 645.630 against a person who is subject to that section for the suspension or revocation of a real estate broker’s, broker-salesman’s or salesman’s license issued to him by any other jurisdiction.

      3.  The Commission may take action pursuant to NRS 645.630 against any person who:

      (a) Holds a permit to engage in property management issued pursuant to NRS 645.6052; and

      (b) In connection with any property for which the person has obtained a property management agreement pursuant to NRS 645.6056:

             (1) Is convicted of violating any of the provisions of NRS 202.470;

             (2) Has been notified in writing by the appropriate governmental agency of a potential violation of NRS 244.360, 244.3603 or 268.4124, and has failed to inform the owner of the property of such notification; or

             (3) Has been directed in writing by the owner of the property to correct a potential violation of NRS 244.360, 244.3603 or 268.4124, and has failed to correct the potential violation, if such corrective action is within the scope of the person’s duties pursuant to the property management agreement.

      4.  The Division shall maintain a log of any complaints that it receives relating to activities for which the Commission may take action against a person holding a permit to engage in property management pursuant to subsection 3.

      5.  On or before February 1 of each odd-numbered year, the Division shall submit to the Director of the Legislative Counsel Bureau a written report setting forth, for the previous biennium:

      (a) Any complaints included in the log maintained by the Division pursuant to subsection 4; and

      (b) Any disciplinary actions taken by the Commission pursuant to subsection 3.

      (Added to NRS by 1979, 1533; A 1985, 1269, 1672; 1989, 1612; 1995, 2077, 2479; 1997, 591, 960; 1999, 1180; 2001, 1354; 2001 Special Session, 156; 2003, 934, 1502, 2718; 2007, 1475)

      NRS 645.635  Additional grounds for disciplinary action: Unprofessional and improper conduct relating to real estate transactions.  The Commission may take action pursuant to NRS 645.630 against any person subject to that section who is guilty of:

      1.  Offering real estate for sale or lease without the knowledge and consent of the owner or his authorized agent or on terms other than those authorized by the owner or his authorized agent.

      2.  Negotiating a sale, exchange or lease of real estate, or communicating after such negotiations but before closing, directly with a client if he knows that the client has a brokerage agreement in force in connection with the property granting an exclusive agency, including, without limitation, an exclusive right to sell to another broker, unless permission in writing has been obtained from the other broker.

      3.  Failure to deliver within a reasonable time a completed copy of any purchase agreement or offer to buy or sell real estate to the purchaser or to the seller, except as otherwise provided in subsection 4 of NRS 645.254.

      4.  Failure to deliver to the seller in each real estate transaction, within 10 business days after the transaction is closed, a complete, detailed closing statement showing all of the receipts and disbursements handled by him for the seller, failure to deliver to the buyer a complete statement showing all money received in the transaction from the buyer and how and for what it was disbursed, or failure to retain true copies of those statements in his files. The furnishing of those statements by an escrow holder relieves the broker’s, broker-salesman’s or salesman’s responsibility and must be deemed to be in compliance with this provision.

      5.  Representing to any lender, guaranteeing agency or any other interested party, verbally or through the preparation of false documents, an amount in excess of the actual sale price of the real estate or terms differing from those actually agreed upon.

      6.  Failure to produce any document, book or record in his possession or under his control, concerning any real estate transaction under investigation by the Division.

      7.  Failure to reduce a bona fide offer to writing where a proposed purchaser requests that it be submitted in writing, except as otherwise provided in subsection 4 of NRS 645.254.

      8.  Failure to submit all written bona fide offers to a seller when the offers are received before the seller accepts an offer in writing and until the broker has knowledge of that acceptance, except as otherwise provided in subsection 4 of NRS 645.254.

      9.  Refusing because of race, color, national origin, sex or ethnic group to show, sell or rent any real estate for sale or rent to qualified purchasers or renters.

      10.  Knowingly submitting any false or fraudulent appraisal to any financial institution or other interested person.

      (Added to NRS by 1979, 1533; A 1985, 1270; 1995, 2077; 2001, 2895; 2007, 1789)

 

NRS 645.635  Additional grounds for disciplinary action: Unprofessional and improper conduct relating to real estate transactions.  [Effective July 1, 2009]

The Commission may take action pursuant to NRS 645.630 against any person subject to that section who is guilty of:

      1.  Offering real estate for sale or lease without the knowledge and consent of the owner or the owner’s authorized agent or on terms other than those authorized by the owner or the owner’s authorized agent.

      2.  Negotiating a sale, exchange or lease of real estate, or communicating after such negotiations but before closing, directly with a client if the person knows that the client has a brokerage agreement in force in connection with the property granting an exclusive agency, including, without limitation, an exclusive right to sell to another broker, unless permission in writing has been obtained from the other broker.

      3.  Failure to deliver within a reasonable time a completed copy of any purchase agreement or offer to buy or sell real estate to the purchaser or to the seller, except as otherwise provided in subsection 4 of NRS 645.254.

      4.  Failure to deliver to the seller in each real estate transaction, within 10 business days after the transaction is closed, a complete, detailed closing statement showing all of the receipts and disbursements handled by him or her for the seller, failure to deliver to the buyer a complete statement showing all money received in the transaction from the buyer and how and for what it was disbursed, or failure to retain true copies of those statements in his or her files. The furnishing of those statements by an escrow holder relieves the broker’s, broker-salesperson’s or salesperson’s responsibility and must be deemed to be in compliance with this provision.

      5.  Representing to any lender, guaranteeing agency or any other interested party, verbally or through the preparation of false documents, an amount in excess of the actual sale price of the real estate or terms differing from those actually agreed upon.

      6.  Failure to produce any document, book or record in his or her possession or under his or her control, concerning any real estate transaction under investigation by the Division.

      7.  Failure to reduce a bona fide offer to writing where a proposed purchaser requests that it be submitted in writing, except as otherwise provided in subsection 4 of NRS 645.254.

      8.  Failure to submit all written bona fide offers to a seller when the offers are received before the seller accepts an offer in writing and until the broker has knowledge of that acceptance, except as otherwise provided in subsection 4 of NRS 645.254.

      9.  Refusing because of race, color, national origin, sex or ethnic group to show, sell or rent any real estate for sale or rent to qualified purchasers or renters.

      10.  Knowingly submitting any false or fraudulent appraisal to any financial institution or other interested person.

      11.  Any violation of NRS 645C.557.

      (Added to NRS by 1979, 1533; A 1985, 1270; 1995, 2077; 2001, 2895; 2007, 1789; 2009, 1509)

 

 

III.        Commission-Promulgated Standards of Conduct.

 

STANDARDS OF PRACTICE

      NAC 645.525  Naming of false consideration in document. (NRS 645.050, 645.190)  Regardless of disclosure or any agreement on the part of the seller, a licensee shall not participate in the naming of a false consideration in any document, unless it is an obviously nominal consideration.

     [Real Estate Adv. Comm’n, § VII Code of Ethics Part I subsec. 4, eff. 10-31-75]—(NAC A by Real Estate Comm’n by R031-04, 11-30-2004)

      NAC 645.535  Exclusive agency agreements; placement of signs. (NRS 645.050, 645.190)

     1.  A licensee cooperating with a broker who holds an exclusive listing or other exclusive agency agreement shall not invite the cooperation of another licensee without the consent of the listing broker or the agent.

     2.  Signs giving notice of property for sale, rent, lease, or exchange must not be placed on any property by more than one licensee unless authorized by the owner in writing.

     3.  A person must obtain the consent of the broker who holds an exclusive listing or other exclusive agency agreement before negotiating a lease or sale with the owner of that property or the principal.

     4.  A broker who holds an exclusive listing or other exclusive agency agreement shall cooperate with other brokers whenever it is in the interest of his client and may share commissions on a previously agreed basis.

     [Real Estate Adv. Comm’n, § VII Code of Ethics Part II subsecs. 7 & 10-12, eff. 10-31-75]—(NAC A by Real Estate Comm’n, 12-27-91; A by Real Estate Div., 3-1-96)

      NAC 645.600  Responsibilities of broker regarding associated licensees, employees and operation of business; agreement to retain licensee as independent contractor. (NRS 645.050, 645.190)

     1.  Every real estate broker shall teach the licensees associated with him the fundamentals of real estate or time-share practice, or both, and the ethics of the profession. The broker shall supervise the activities of those licensees, the activities of his employees and the operation of his business.

     2.  The supervision described in subsection 1 includes, without limitation, the establishment of policies, rules, procedures and systems that allow the real estate broker to review, oversee and manage:

     (a) The real estate transactions performed by a licensee who is associated with him;

     (b) Documents that may have a material effect upon the rights or obligations of a party to such a real estate transaction;

     (c) The filing, storage and maintenance of such documents;

     (d) The handling of money received on behalf of a real estate broker;

     (e) The advertising of any service for which a real estate license is required; and

     (f) The familiarization by the licensee of the requirements of federal and state law governing real estate transactions, including, without limitation, prohibitions against discrimination.

     3.  In establishing such policies, rules, procedures and systems, the real estate broker shall consider the number of licensees associated with the real estate broker, the number of employees employed by the real estate broker and the number and location of branch offices operated by the real estate broker.

     4.  A real estate broker shall establish a system for monitoring compliance with such policies, rules, procedures and systems. The real estate broker may use a real estate broker-salesman to assist in administering the provisions of this section so long as the real estate broker does not relinquish overall responsibility for the supervision of the acts of the licensees associated with the real estate broker.

     5.  A real estate broker may enter into a written agreement with each licensee associated with the real estate broker to retain the licensee as an independent contractor. If such an agreement is entered into, it must:

     (a) Be signed and dated by the real estate broker and the licensee; and

     (b) Include the material aspects of the relationship between the real estate broker and the licensee, including, without limitation, the supervision by the real estate broker of the activities of the licensee for which a real estate license is required.

     [Real Estate Adv. Comm’n, § VII subsec. 1, eff. 10-31-75]—(NAC A by Real Estate Comm’n, 4-27-84; R111-01, 12-17-2001; R031-04, 11-30-2004)

      NAC 645.605  Considerations in determining certain misconduct by licensee. (NRS 645.050, 645.190, 645.633)  In determining whether a licensee has been guilty of gross negligence or incompetence under paragraph (h) of subsection 1 of NRS 645.633 or conduct which constitutes deceitful, fraudulent or dishonest dealing under paragraph (i) of that subsection, the Commission will consider, among other things, whether the licensee:

     1.  Has done his utmost to protect the public against fraud, misrepresentation or unethical practices related to real estate or time shares.

     2.  Has ascertained all pertinent facts concerning any time share or property for which he accepts an agency.

     3.  Has attempted to provide specialized professional services concerning a type of property or service that is outside his field of experience or competence without the assistance of a qualified authority unless the facts of such lack of experience or competence are fully disclosed to his client.

     4.  Has disclosed, in writing, his interest or contemplated interest in any property or time share with which he is dealing. The disclosure must include, but is not limited to, a statement of:

     (a) Whether he expects to receive any direct or indirect compensation, dividend or profit from any person or company that will perform services related to the property and, if so, the identity of the person or company;

     (b) His affiliation with or financial interest in any person or company that furnishes services related to the property;

     (c) If he is managing the property, his interest in or financial arrangement with any person or company that provides maintenance or other services to the property;

     (d) If he refers one of his clients or customers to another person or company, such as a contractor, title company, attorney, engineer or mortgage banker, his expectation of a referral fee from that person or company; and

     (e) If he receives compensation from more than one party in a real estate transaction, full disclosure to and consent from each party to the real estate transaction. A licensee shall not accept compensation from more than one party in a real estate transaction, even if otherwise permitted by law, without full disclosure to all parties.

     5.  Has kept informed of current statutes and regulations governing real estate, time shares and related fields in which he attempts to provide guidance.

     6.  Has breached his obligation of absolute fidelity to his principal’s interest or his obligation to deal fairly with all parties to a real estate transaction.

     7.  Has ensured that each agreement for the sale, lease or management of property or time shares is contained in a written agreement that has been signed by all parties and that his real estate broker and each party to the real estate transaction has a copy of the written agreement.

     8.  Has obtained all changes of contractual terms in writing and whether such changes are signed or initialed by the parties concerned.

     9.  Understands and properly applies federal and state statutes relating to the protection of consumers.

     10.  Has acquired knowledge of all material facts that are reasonably ascertainable and are of customary or express concern and has conveyed that knowledge to the parties to the real estate transaction.

     11.  Has impeded or attempted to impede any investigation of the Division by:

     (a) Failing to comply or delaying his compliance with a request by the Division to provide documents;

     (b) Failing to supply a written response, including supporting documentation, if available;

     (c) Supplying false information to an investigator, auditor or any other officer of the Division;

     (d) Providing false, forged or altered documents; or

     (e) Attempting to conceal any documents or facts relating to a real estate transaction.

     (Added to NAC by Real Estate Comm’n, eff. 8-21-81; A 8-26-83; 4-27-84; 6-3-86; A by Real Estate Div., 3-31-94; 3-1-96; A by Real Estate Comm’n by R111-01, 12-17-2001; R031-04, 11-30-2004)

     NAC645.610  Restrictions on advertising; use of name under which licensee is licensed. (NRS 645.050, 645.190)

     1.  In addition to satisfying the requirements set forth in NRS 645.315:

     (a)An advertisement of the services of a licensee for which a license is required under chapter 645 of NRS must not be false or misleading.

     (b)Except as otherwise provided in this paragraph, a licensee shall not use his or her name or telephone number or the name or telephone number of another licensee of the brokerage firm with which the licensee is associated in any advertisement which contains the words “for sale by owner,” “for lease by owner” or similar words. A licensee may use his or her name or telephone number in an advertisement for property if the licensee has an ownership interest in the advertised property and the advertisement contains:

          (1)If the licensee is a real estate broker, the words “for sale by owner-broker,” “for lease by owner-broker” or substantially similar words; or

          (2)If the licensee is an agent, the words “for sale by owner-agent,” “for lease by owner-agent” or substantially similar words.

     (c)The name of a brokerage firm under which a real estate broker does business or with which a real estate broker-salesperson or salesperson is associated must be clearly identified with prominence in any advertisement. In determining whether the name of the brokerage firm is identified with prominence, the Division shall consider, without limitation, the style, size and color of the type or font used and the location of the name of the brokerage firm as it appears in the advertisement.

     (d)A licensee shall not publish or cause to be published any advertisement or place any sign that makes any reference to the availability of a specific property which is exclusively listed for sale by another broker unless the licensee obtains the prior written consent of the broker with whom the property is listed. Such consent must not be given or withheld by the listing broker without the knowledge of the owner of the property.

     (e)A licensee shall not advertise or otherwise conduct business under a name, including a nickname, other than the name under which he or she is licensed to engage in business.

     2.  If advertising under the name of a franchise, a broker shall incorporate in a conspicuous way in the advertisement the real, fictitious or corporate name under which the broker is licensed to engage in business and an acknowledgment that each office is independently owned and operated.

     3.  In addition to the provisions of paragraph (a) of subsection 1, a licensee who represents a seller or lessor under an exclusive agency listing agreement or an exclusive right to sell or lease listing agreement shall not advertise any property that is subject to the agreement as “for sale by owner” or otherwise mislead a person into believing that the licensee does not represent the seller or lessor.

     4.  As used in this section, “advertisement” includes, without limitation:

     (a)Any unsolicited printed material and any broadcast made by radio, television or electronic means, including, without limitation, by unsolicited electronic mail and the Internet, billboards and signs; and

     (b)Business cards, stationery, forms and other documents used in a real estate transaction.

     [Real Estate Adv. Comm’n, § VII subsecs. 2 & 3, eff. 10-31-75]—(NAC A by Real Estate Comm’n, 8-21-81; 12-16-82; 4-27-84; 12-27-91; A by Real Estate Div., 3-1-96; A by Real Estate Comm’n by R186-99, 1-21-2000; R111-01, 12-17-2001; R031-04, 11-30-2004; R165-07, 4-17-2008)

      NAC 645.611  Advertisement of services: Use of terms “team” and “group.” (NRS 645.050, 645.190)  A licensee may use the term “team” or “group” to advertise the services provided by the licensee if:

     1.  The use of the term does not constitute the unlawful use of a trade name and is not deceptively similar to a name under which any other person is lawfully doing business;

     2.  The team or group is composed of more than one licensee;

     3.  The members of the team or group are employed by the same broker;

     4.  The name of the team or group contains the last name of at least one of the members of the team or group; and

     5.  The advertising complies with all other applicable provisions of this chapter and chapter 645 of NRS.

     (Added to NAC by Real Estate Comm’n by R031-04, eff. 11-30-2004)

      NAC 645.613  Dissemination of certain unsolicited information through Internet or electronic mail. (NRS 645.050, 645.190)  A licensee disseminating unsolicited information concerning real property or marketing real property through the Internet or electronic mail:

     1.  Shall be deemed to be engaged in advertising and shall comply with the applicable provisions of this chapter and chapter 645 of NRS relating to advertising.

     2.  Shall make all disclosures, obtain appropriate signatures and follow all requirements set forth in this chapter and chapter 645 of NRS before entering into a relationship as the agent of a client. The clicking of an acceptance box on the Internet or in an electronic mail is insufficient to create such a relationship between the licensee and the client. As used in this subsection, “appropriate signature” means the legal signature of the client.

     (Added to NAC by Real Estate Comm’n by R031-04, eff. 11-30-2004)

      NAC 645.615  Use of sign to identify business. (NRS 645.050, 645.190, 645.560)

     1.  The sign which NRS 645.560 requires each broker to erect and maintain in a conspicuous place upon the premises of his place of business must be readable from the nearest public sidewalk, street or highway.

     2.  If the broker’s place of business is located in an office building, hotel or apartment house, the broker’s sign must be posted on the building directory or on the exterior of the entrance to the business.

     3.  Upon request by the Division, the broker shall furnish a photograph of his sign as proof of his compliance with NRS 645.560 and this section.

     [Real Estate Adv. Comm’n, § VI subsecs. 5-7, eff. 10-31-75]—(NAC A by Real Estate Comm’n, 8-21-81; 12-16-82; 4-27-84; A by Real Estate Div., 11-30-87; A by Real Estate Comm’n by R092-00, 8-29-2000)

      NAC 645.620  Use of fictitious name. (NRS 645.050, 645.190)

     1.  A broker shall not operate under a fictitious name unless he complies with chapter 602 of NRS and files with the Division a certified copy of the certificate issued by the county clerk. The Division shall not issue more than one license nor register more than one owner-developer under the same name.

     2.  If a broker changes or assumes a fictitious name under which business is conducted, he shall file a certified copy of the certificate issued by the county clerk to the Division within 10 days after the certificate is issued.

     3.  A broker may not use more than one name for each license under which he operates.

     [Real Estate Adv. Comm’n, § VI subsec. 3, eff. 10-31-75]—(NAC A by Real Estate Comm’n, 8-21-81; A by Real Estate Div., 3-1-96; A by Real Estate Comm’n by R186-99, 1-21-2000)

      NAC 645.627  Location of office. (NRS 645.050, 645.190)

     1.  A broker shall establish an office in a location which is easily accessible to the public. If he chooses to establish an office in a private home or in conjunction with another business, he shall set aside a separate room or rooms for conducting his real estate business. His office must comply with local zoning requirements.

     2.  A broker who is licensed in Nevada but who maintains an active license in another state shall maintain and operate a Nevada office.

     (Added to NAC by Real Estate Comm’n, eff. 8-21-81)

      NAC 645.630  Prompt tender of offers. (NRS 645.050, 645.190)  A licensee shall promptly deliver:

     1.  To the seller, every bona fide offer, complete with all terms and conditions of purchase, which he obtains.

     2.  To the purchaser and seller, copies of each acceptance of an offer or counteroffer.

     [Real Estate Adv. Comm’n, § VII, subsecs. 4 & 6, eff. 10-31-75]

      NAC 645.632  Notification of rejection of offer or counteroffer. (NRS 645.050, 645.190)

     1.  If a licensee represents a seller in a transaction, and if the seller does not accept an offer within a reasonable time after an offer has been presented to the seller, the licensee shall provide to the buyer or the representative of the buyer written notice signed by the seller which informs the buyer that the offer has not been accepted by the seller.

     2.  If a licensee represents a buyer in a transaction, and if the buyer does not accept a counteroffer within a reasonable time after a counteroffer has been presented to the buyer, the licensee shall provide to the seller or the representative of the seller written notice signed by the buyer which informs the seller that the counteroffer has not been accepted by the buyer.

     (Added to NAC by Real Estate Adv. Comm’n, eff. 8-21-81; A by Real Estate Comm’n by R186-99, 1-21-2000)

      NAC 645.635  Disclosure of unmerchantable title. (NRS 645.050, 645.190, 645.252)  A licensee may not attempt to sell, or offer to sell, any real property or any time share with knowledge that the title is unmerchantable unless he notifies the prospective purchaser of that fact before the payment of any part of the purchase price.

     [Real Estate Adv. Comm’n, § VII subsec. 9, eff. 10-31-75]—(NAC A by Real Estate Comm’n, 4-27-84)

      NAC 645.637  Disclosure of relationship as agent or status as principal. (NRS 645.050, 645.190, 645.252)  In each real estate transaction involving a licensee, as agent or principal, the licensee shall clearly disclose, in writing, to his client and to any party not represented by a licensee, his relationship as the agent of his client or his status as a principal. The disclosure must be made as soon as practicable, but not later than the date and time on which any written document is signed by the client or any party not represented by a licensee, or both. The prior disclosure must then be confirmed in a separate provision incorporated in or attached to that document and must be maintained by the real estate broker in his files relating to that transaction.

     (Added to NAC by Real Estate Div., 11-8-88, eff. 7-1-89; A by Real Estate Comm’n, 12-27-89; R186-99, 1-21-2000; R111-01, 12-17-2001; R123-06, 6-1-2006)

      NAC 645.640  Disclosure of interest of licensee in certain transactions. (NRS 645.050, 645.190, 645.252)

     1.  A licensee shall not acquire, lease or dispose of any time share, real property or interest in any time share or real property for himself, any member of his immediate family, his firm, or any member thereof, or any entity in which he has an interest as owner unless he first discloses in writing that:

     (a) He is acquiring, leasing or disposing of the time share or property for himself or for a member, firm, or entity with which he has such a relationship; and

     (b) He is a licensed real estate broker, licensed real estate broker-salesman or licensed real estate salesman, whether his license is active or inactive. This disclosure may be accomplished with a reference to himself as an agent, licensee, salesman, broker or broker-salesman, whichever is appropriate.

     2.  If a licensee advertises any time share or real property or his wish to enter into a transaction which is subject to the provisions of subsection 1, he shall include in the advertisement the disclosure required by that subsection.

     [Real Estate Adv. Comm’n, § VII subsec. 8, eff. 10-31-75]—(NAC A by Real Estate Comm’n, 12-16-82; 4-27-84; A by Real Estate Div., 11-30-87; A by Real Estate Comm’n by R186-99, 1-21-2000; R031-04, 11-30-2004)

      NAC 645.645  Inspections and audits by Division: Cooperation by broker; form for permission. (NRS 645.190, 645.195, 645.310, 645.313)  A broker shall, upon demand, provide the Division with the documents and the permission necessary for the Division to complete fully an inspection and audit, including an inspection and audit of any money accounts as provided in NRS 645.310 and 645.313. Permission may be given on a form provided by the Division. The form must provide a bank, depositor or other holder of information with release from liability which might result from disclosure of the information required by the Division.

     [Real Estate Adv. Comm’n, § VII subsec. 15, eff. 10-31-75]—(NAC A by Real Estate Comm’n by R031-04, 11-30-2004)

      NAC 645.650  Periods for maintenance of certain records by broker and for provision of certain paperwork to broker. (NRS 645.050, 645.190)

      1.  A broker shall keep complete real estate transaction and property management records for at least 5 years after the date of the closing or the last activity involving the property, including, without limitation, offers that were not accepted and transactions that were not completed, unless otherwise directed by the Division.

     2.  A salesman or broker-salesman must provide any paperwork to the broker with whom he is associated within 5 calendar days after that paperwork is executed by all the parties.

     [Real Estate Adv. Comm’n, § VII subsecs. 7 & 10 par. c, eff. 10-31-75]—(NAC A by Real Estate Comm’n, 8-21-81; A by Real Estate Div., 3-1-96; A by Real Estate Comm’n by R186-99, 1-21-2000; R031-04, 11-30-2004)

      NAC 645.655  Records of transactions; trust accounts. (NRS 645.050, 645.190, 645.195, 645.310, 645.633)

     1.  Each real estate transaction of a brokerage must be numbered consecutively or indexed to permit audit by a representative of the Division.

     2.  A complete record of each real estate transaction, together with records required to be maintained pursuant to NRS 645.310, must be:

     (a) Kept in this State; and

     (b) Open to inspection and audit by the Division upon its request during its usual business hours, as well as other hours during which the licensee regularly conducts his business.

     3.  If any records the Division requests to inspect or audit pursuant to subsection 2 are stored electronically, access to a computer or other equipment used to store the information must be made available to the Division for use in its inspection or audit.

     4.  The real estate broker shall give written notice to the Division of the exact location of his records and shall not remove them until he has delivered a notice which informs the Division of the new location.

     5.  A licensee shall not maintain a custodial or trust account from which money may be withdrawn without the signature of a licensee. A signature applied by use of a rubber stamp does not constitute the signature of a licensee for the purposes of this subsection.

     6.  A real estate salesman may not be the only required signatory on a custodial or trust fund account. A real estate salesman may be a cosigner of an account with his real estate broker.

     7.  A real estate broker who files for relief under the bankruptcy laws of the United States shall immediately terminate each trust account established pursuant to NRS 645.310 and deposit all money from each trust account into escrow with executed instructions to the escrow agent or officer to disburse the money pursuant to the agreement under which it was originally deposited.

     8.  A real estate broker who is engaged in property management for one or more clients shall maintain two separate property management trust accounts distinct from any trust account that the real estate broker may have for other real estate transactions. One trust account must be used solely for activities relating to rental operations, and the other trust account must be used solely for security deposits. A real estate broker shall maintain a ledger account for each unit of property he manages regardless of whether the client owns more than one unit under the real estate broker’s management. All rents and deposits for each unit must be deposited into and credited to each property’s management trust account, and all authorized repairs and expenses must be paid out of the corresponding ledger account. For the purposes of this subsection, “unit” means one single-family dwelling unit.

     9.  Property management and real estate transaction trust accounts must be reconciled monthly by the real estate broker or his designee within 30 days after receipt of the bank statement. A real estate broker who permits any trust account, including any ledger account, to fall into deficit and remain in deficit for more than 45 consecutive days in 1 year is subject to discipline pursuant to paragraph (h) of subsection 1 of NRS 645.633 or other applicable charges, or both.

     [Real Estate Adv. Comm’n, § VII subsec. 10 pars. a, b, d & e, eff. 10-31-75]—(NAC A by Real Estate Comm’n, 6-3-86; A by Real Estate Div., 3-1-96; A by Real Estate Comm’n by R111-01, 12-17-2001; R031-04, 11-30-2004, eff. 7-1-2005)

      NAC 645.657  Payment of deposits. (NRS 645.050, 645.190, 645.310)  A licensee who receives a deposit on any transaction in which he is engaged on behalf of a broker or owner-developer shall pay over the deposit to that broker or owner-developer, or to the escrow business or company designated in the contract, within 1 business day after receiving a fully executed contract.

     (Added to NAC by Real Estate Comm’n, eff. 8-21-81; A 12-16-82; R031-04, 11-30-2004; R123-06, 6-1-2006)

      NAC 645.660  Disclosure of certain interests required before deposit of money. (NRS 645.050, 645.190)  A licensee shall not deposit money received by him in any escrow business or company in which he or anyone associated with him in the real estate or time-share business has an interest without disclosing this association to all parties to the transaction.

     [Real Estate Adv. Comm’n, § VII subsec. 11, eff. 10-31-75]—(NAC A by Real Estate Comm’n, 8-21-81; 4-27-84; R031-04, 11-30-2004)

      NAC 645.665  Absence of broker from business for prolonged period. (NRS 645.050, 645.190)  A broker shall not be absent from his business for 30 days or more if he is the only broker in his office unless he inactivates his license or otherwise notifies the Division in advance. Failure to observe this requirement is a ground for suspension. If a broker will be absent from his business for 30 days or more, he must designate an office manager in accordance with NAC 645.178 or make other arrangements approved by the Division in advance.

     [Real Estate Adv. Comm’n, § VII subsec. 12, eff. 10-31-75]—(NAC A by Real Estate Comm’n, 4-27-84; R031-04, 11-30-2004)

IV.        Selected Rules of Professional Conduct for Lawyers.

 

      Rule 1.6.  Confidentiality of Information.

      (a) A lawyer shall not reveal information relating to representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation, or the disclosure is permitted by paragraphs (b) and (c).

      (b) A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary:

             (1) To prevent reasonably certain death or substantial bodily harm;

             (2) To prevent the client from committing a criminal or fraudulent act in furtherance of which the client has used or is using the lawyer’s services, but the lawyer shall, where practicable, first make reasonable effort to persuade the client to take suitable action;

             (3) To prevent, mitigate, or rectify the consequences of a client’s criminal or fraudulent act in the commission of which the lawyer’s services have been or are being used, but the lawyer shall, where practicable, first make reasonable effort to persuade the client to take corrective action;

             (4) To secure legal advice about the lawyer’s compliance with these Rules;

             (5) To establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client, to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, or to respond to allegations in any proceeding concerning the lawyer’s representation of the client; or

             (6) To comply with other law or a court order.

      (c) A lawyer shall reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary to prevent a criminal act that the lawyer believes is likely to result in reasonably certain death or substantial bodily harm.

      [Added; effective May 1, 2006.]

Model Rule Comparison—2006

 

   Rule 1.6 (formerly Supreme Court Rule 156) is the same as ABA Model Rule 1.6 with three exceptions. First, paragraph (b)(2) addresses the same subject matter as paragraph (b)(2) of the Model Rule, but the language is Nevada specific and is based on former Supreme Court Rule 156(3)(a). Second, paragraph (b)(3) addresses the same subject matter as paragraph (b)(3) of the Model Rule, but the language is Nevada specific and is the same as former Supreme Court Rule 156(3)(a), with the addition of the word “mitigate.” Third, paragraph (c) is Nevada specific and mandates disclosure under circumstances covered by paragraph (b)(1) when a criminal act is involved.

 

      Rule 1.7.  Conflict of Interest: Current Clients.

      (a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:

             (1) The representation of one client will be directly adverse to another client; or

             (2) There is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.

      (b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:

             (1) The lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;

             (2) The representation is not prohibited by law;

             (3) The representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and

             (4) Each affected client gives informed consent, confirmed in writing.

      [Added; effective May 1, 2006.]

Model Rule Comparison—2006

 

   Rule 1.7 (formerly Supreme Court Rule 157) is the same as ABA Model Rule 1.7.

 

      Rule 1.8.  Conflict of Interest: Current Clients: Specific Rules.

      (a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:

             (1) The transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;

             (2) The client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and

             (3) The client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.

      (b) A lawyer shall not use information relating to representation of a client to the disadvantage of the client unless the client gives informed consent, except as permitted or required by these Rules.

      (c) A lawyer shall not solicit any substantial gift from a client, including a testamentary gift, or prepare on behalf of a client an instrument giving the lawyer or a person related to the lawyer any substantial gift unless the lawyer or other recipient of the gift is related to the client. For purposes of this paragraph, related persons include a spouse, child, grandchild, parent, grandparent or other relative or individual with whom the lawyer or the client maintains a close, familial relationship.

      (d) Prior to the conclusion of representation of a client, a lawyer shall not make or negotiate an agreement giving the lawyer literary or media rights to a portrayal or account based in substantial part on information relating to the representation.

      (e) A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:

             (1) A lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter; and

             (2) A lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.

      (f) A lawyer shall not accept compensation for representing a client from one other than the client unless:

             (1) The client gives informed consent;

             (2) There is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and

             (3) Information relating to representation of a client is protected as required by Rule 1.6.

      (g) A lawyer who represents two or more clients shall not participate in making an aggregate settlement of the claims of or against the clients, or in a criminal case an aggregated agreement as to guilty or nolo contendere pleas, unless each client gives informed consent, in a writing signed by the client. The lawyer’s disclosure shall include the existence and nature of all the claims or pleas involved and of the participation of each person in the settlement.

      (h) A lawyer shall not:

             (1) Make an agreement prospectively limiting the lawyer’s liability to a client for malpractice unless the client is independently represented in making the agreement; or

             (2) Settle a claim or potential claim for such liability with an unrepresented client or former client unless that person is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel in connection therewith.

      (i) A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, except that the lawyer may:

             (1) Acquire a lien authorized by law to secure the lawyer’s fee or expenses; and

             (2) Contract with a client for a reasonable contingent fee in a civil case.

      (j) A lawyer shall not have sexual relations with a client unless a consensual sexual relationship existed between them when the client-lawyer relationship commenced. This paragraph does not apply when the client is an organization.

      (k) A lawyer related to another lawyer as parent, child, sibling or spouse shall not represent a client in a representation directly adverse to a person whom the lawyer knows is represented by the other lawyer except upon informed consent by the client after consultation regarding the relationship.

      (l) A lawyer shall not stand as security for costs or as surety on any appearance, appeal, or other bond or surety in any case in which the lawyer is counsel.

      (m) While lawyers are associated in a firm, a prohibition in the foregoing paragraphs, with the exception of paragraph (j), that applies to any one of them shall apply to all of them.

      [Added; effective May 1, 2006.]

Model Rule Comparison—2006

 

   Rule 1.8 (formerly Supreme Court Rule 158) is the same as ABA Model Rule 1.8 with three exceptions. First, paragraph (j) is the same as the Model Rule except that its prohibition does not apply when the client is an organization. Second, paragraph (k) is specific to the Nevada Rule, retained from former Supreme Court Rule 158(9), and has no counterpart in the ABA Model Rule. Third, paragraph (l) is specific to the Nevada Rule, retained from former Supreme Court Rule 158(11), and has no counterpart in the ABA Model Rule. Like the ABA Model Rule, the Nevada Rule specifies that the prohibitions in the Rule, except for the prohibition on sexual relationships, also apply to all lawyers associated in a firm with the personally prohibited lawyer. This provision appears in paragraph (m) of the Nevada Rule and paragraph (k) of the Model Rule.

 

      Rule 1.9.  Duties to Former Clients.

      (a) A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing.

      (b) A lawyer shall not knowingly represent a person in the same or a substantially related matter in which a firm with which the lawyer formerly was associated had previously represented a client:

             (1) Whose interests are materially adverse to that person; and

             (2) About whom the lawyer had acquired information protected by Rules 1.6 and 1.9(c) that is material to the matter;

             (3) Unless the former client gives informed consent, confirmed in writing.

      (c) A lawyer who has formerly represented a client in a matter or whose present or former firm has formerly represented a client in a matter shall not thereafter:

             (1) Use information relating to the representation to the disadvantage of the former client except as these Rules would permit or require with respect to a client, or when the information has become generally known; or

             (2) Reveal information relating to the representation except as these Rules would permit or require with respect to a client.

      [Added; effective May 1, 2006.]

Model Rule Comparison—2006

 

   Rule 1.9 (formerly Supreme Court Rule 159) is the same as ABA Model Rule 1.9.

 

      Rule 1.10.  Imputation of Conflicts of Interest.

      (a) While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by Rules 1.7, 1.9, or 2.2, unless the prohibition is based on a personal interest of the prohibited lawyer and does not present a significant risk of materially limiting the representation of the client by the remaining lawyers in the firm.

      (b) When a lawyer has terminated an association with a firm, the firm is not prohibited from thereafter representing a person with interests materially adverse to those of a client represented by the formerly associated lawyer and not currently represented by the firm unless:

             (1) The matter is the same or substantially related to that in which the formerly associated lawyer represented the client; and

             (2) Any lawyer remaining in the firm has information protected by Rules 1.6 and 1.9(c) that is material to the matter.

      (c) A disqualification prescribed by this Rule may be waived by the affected client under the conditions stated in Rule 1.7.

      (d) Reserved.

      (e) When a lawyer becomes associated with a firm, no lawyer associated in the firm shall knowingly represent a person in a matter in which that lawyer is disqualified under Rule 1.9 unless:

             (1) The personally disqualified lawyer did not have a substantial role in or primary responsibility for the matter that causes the disqualification under Rule 1.9;

             (2) The personally disqualified lawyer is timely screened from any participation in the matter and is apportioned no part of the fee therefrom; and

             (3) Written notice is promptly given to any affected former client to enable it to ascertain compliance with the provisions of this Rule.

      [Added; effective May 1, 2006.]

Model Rule Comparison—2006

 

   Rule 1.10 (formerly Supreme Court Rule 160) is the same as ABA Model Rule 1.10 with two exceptions. First, the Rule does not include paragraph (d) of the Model Rule. That paragraph is reserved to maintain consistency with the format of the Model Rule. Second, paragraph (e) of the Rule permits screening of lateral attorney hires to avoid imputed disqualification. The Model Rule does not permit screening in that situation.

 

 

* * *

 

TRANSACTIONS WITH PERSONS OTHER THAN CLIENTS

      Rule 4.1.  Truthfulness in Statements to Others.  In the course of representing a client a lawyer shall not knowingly:

      (a) Make a false statement of material fact or law to a third person; or

      (b) Fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6.

      [Added; effective May 1, 2006.]

Model Rule Comparison—2006

 

   Rule 4.1 (formerly Supreme Court Rule 181) is the same as ABA Model Rule 4.1.

 

      Rule 4.2.  Communication With Person Represented by Counsel.  In representing a client, a lawyer shall not communicate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized to do so by law or a court order.

      [Added; effective May 1, 2006.]

Model Rule Comparison—2006

 

   Rule 4.2 (formerly Supreme Court Rule 182) is the same as ABA Model Rule 4.2. While the text of the two rules is identical, the rules are applied differently in two respects. First, Nevada has adopted the managing-speaking agent test to determine which constituents of an organization are covered by the no-contact rule. Palmer v. Pioneer Inn Assocs., Ltd., 118 Nev. 943, 59 P.3d 1237 (2002). The comments to the Model Rule adopt a different test. Model Rules of Prof’l Conduct R. 4.2 cmt. 7 (2004). Second, Nevada has interpreted the Rule to prohibit a lawyer who is representing himself from contacting a represented person in the matter. In re Discipline of Schaefer, 117 Nev. 496, 25 P.3d 191, as modified, 31 P.3d 365 (2001). The comments to the Model Rule suggest that it may not prohibit contact when the lawyer represents himself. See Model Rules of Prof’l Conduct R. 4.2 cmt. 4 (2004) (“Parties to a matter may communicate directly with each other . . . .”); Pinsky v. Statewide Grievance Committee, 578 A.2d 1075 (Conn. 1990) (holding that Connecticut rule based on Model Rule 4.2 does not prohibit contact when lawyer represents himself). But see Runsvold v. Idaho State Bar, 925 P.2d 1118 (Idaho 1996) (holding that Idaho rule based on Model Rule 4.2 applies when lawyer represents himself).

 

      Rule 4.3.  Dealing With Unrepresented Person.  In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer’s role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding. The lawyer shall not give legal advice to an unrepresented person, other than the advice to secure counsel, if the lawyer knows or reasonably should know that the interests of such a person are or have a reasonable possibility of being in conflict with the interests of the client.

      [Added; effective May 1, 2006.]