CLIENT ALERT: 2019 California Law Changes Impacting Commercial Real Estate

Set forth below is a list of new laws that impact commercial real estate in 2019 with very brief summaries regarding each.  This article is based in large part on information developed by the California Association of Realtors.

  1. Building Permits: Expiration period extended:  A building permit remains valid despite changes in the building code as long as work is commenced within 12 months after issuance, unless the permittee has abandoned the work authorized by the permit. The law also authorizes a permittee to request and the building official to grant, in writing, one or more extensions of time for periods of not more than 180 days per extension.  (Health and Safety Code § 17958.12. Effective January 1, 2019.)
  2. C.A.R. Sponsored “Clean Up” Legislation.  The California Association of Realtors sponsored “clean-up” legislation to address a number of substantive issues in real estate law and have those laws “conform” more closely to current practice.  The most important provision of this legislation specifically reiterates that existing law permits salespersons and brokers to establish their relationship as one of either independent contractor or employment.  This change was in response to a recent case, Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018), which called into question the ability of real estate licensed salespersons and brokers to elect an independent contractor relationship.  Brokers should consult with their in-house counsel regarding the impact of the various provisions of this legislation, which in some cases modify the required disclosure forms.
  3. CC&R’s:  New Private Transfer Fees Outlawed:  Prohibits developers from creating new property covenants, conditions, or restrictions that force subsequent owners to pay specially designated fees every time the property is transferred, unless the fee provides a “direct benefit” to the property, as defined in federal law. (Civil Code § 1098.6. Effective January 1, 2019.)
  4. Civil Liability: Liability of real estate agents for sexual harassment expanded:  Even if a business, service, or professional “relationship” does not presently exist, a real estate agent (and “investor” among other persons) may be liable for sexual harassment when he or she holds himself or herself out as being able to help the plaintiff establish a business, service, or professional relationship with the defendant or a third party. This law eliminates the element that the plaintiff prove there is an inability by the plaintiff to easily terminate the relationship.  (Civil Code § 51.9, and Government Code §§ 12930 and 12948. Effective January 1, 2019.)
  5. Landlord Tenant: Commercial Property Abandonment:  Allows a commercial landlord to serve Notice of Belief of Abandonment after the rent is unpaid for three days (or any longer period required under the terms of the lease for a monetary default), as opposed to 14 days under prior law, and allows delivery of that notice by overnight courier. (Civil Code § 1951.35 and as an amendment to Civil Code §§ 1946 and 1951.3. Effective January 1, 2019.)
  6. Landlord Tenant: Commercial Property  – Disposal of Tenant’s Personal Property:  Increases the calculation of the total resale value of the personal property from $750 (or $1 per square foot, whichever is lesser) to either $2,500 or an amount equal to one month’s rent for the premises the tenant occupied, whichever is greater.  (Civil Code §§ 1993.04 and 1993.07. Effective January 1, 2019.)
  7. Landlord Tenant: Evictions – Three Days’ Notice Excludes Holidays and Weekends:  In counting a three days’ notice to pay rent or quit or a three days’ notice to perform covenant or quit, or in responding to a complaint for unlawful detainer, Saturdays, Sundays and judicial holidays are excluded.  (Code of Civil Procedure §§ 1161 and 1167.  Effective September 1, 2019.)
  8. Landlord Tenant: Inspection of Decks, Balconies, Stairways and Walkways:  This law requires that buildings with 3 or more multifamily dwelling units with decks, balconies, stairways and walkways must be inspected by a properly licensed person by 2025, and a subsequent inspection must be done every 6 years. The owner would have to make repairs if the inspector found that the decks or balconies were in need of repair.  (Civil Code § 1954 and Health and Safety Code §§ 17973 et seq. Effective January 1, 2019.)
  9. Landlord Tenant: Service Member Protections:  Existing law provides that a service member during the term of the lease who enters a period of military service, or while in a period of military service, executes the lease and then receives military orders for deployment for a period of not less than 90 days may terminate a lease. The termination of the lease under subdivision is effective 30 days after the first date on which the next rental payment is due and payable.  This applies to a lease of premises occupied, or intended to be occupied, by a service member or a service member’s dependents for a residential, professional, business, agricultural, or similar purpose.  The new law additionally requires “any person,” such as a landlord or even potentially a property manager, who receives a good faith request from a service member and who believes the request is incomplete, not legally sufficient or that the service member is not entitled to the relief requested, to, within 30 days of the request, provide the service member with a written response acknowledging the request and setting forth the objections. If the person fails to make such a response the person waives any objection to the request, and the service member shall be entitled to the relief requested.
  10. Licensing: Applicant for a Real Estate license cannot be required to disclose citizenship or immigration status:  This law prohibits a licensing board, including the DRE, from requiring an individual to disclose either citizenship status or immigration status for purposes of licensure, or from denying licensure to an otherwise qualified and eligible individual based solely on his or her citizenship status or immigration status.  (Business and Professions Code §§ 30 and 1247.6; Education Code §§ 44339.5; Family Code §§ 4014, 17506, and 17520; and Health and Safety Code §§ 1337.2, 1736.1, 1797.170, 1797.171, 1797.172, 106995 and 114870. Effective January 1, 2019.)
  11. Licensing: Criminal convictions:  This law institutes a seven year look back period for a board, including the DRE, to consider a criminal conviction in denying a license, and only if the crime is substantially related to the qualifications, functions, or duties of the business or profession for which the application is made. However, there are exceptions such as convictions for serious crimes and sex offenders, and a specific exception for the DRE, among other boards, in regard to financially related crimes. In any case, a board may not deny a license to a rehabilitated applicant or one whose criminal record has been expunged.  (Business and Professions Code §§ 7.5, 480, 480.2, 481, 482, 488, 493, and 11345.2. Effective July 1, 2020.)

Please review your form documents to make sure they reflect the above new laws.  The above list is a general summary and may not reflect all of the laws that impact a specific sector or sectors of your industry.  Specifically, there are a number of employment laws that take effect as of January 1, 2019 that are not all summarized above.

DISCLAIMER:  This article does not constitute legal advice.  Readers should consult with their own legal counsel for the most current information and to obtain professional advice before acting on any of the information presented.

BIOGRAPHY:  Winnie Ward is a named partner of Stewart Ward & Josephson LLP.  She specializes in office, retail and industrial commercial leasing, as well as real property acquisition and divestment.  wward@swjllp.com; 916-569-8161.

Commercial Real Estate Purchase And Sale Transactions: Some Best Practices For Brokers, Buyers, And Sellers

 

  1. INTRODUCTION
    1. Purpose of Presentation:
      1. Help Keep the Focus on What’s Important. Modern commercial real estate Purchase Agreements are lengthy and complex, but not all terms are critical. Our goal is to help the parties to focus on what’s important.
      2. Suggest Some Best Practices. To suggest some practices that a broker can employ to improve the client’s position, and to reduce the broker’s potential liability in connection with real estate transactions.
    2. Ground Rules: Interrupt and ask questions!
  2. SOME BEST PRACTICES…THAT ARE OFTEN IGNORED. I have had the privilege to represent sophisticated Buyers and Sellers in transactions involving many hundreds of millions of dollars of sales in the past few years. I’ve noticed that even some of the smartest principals, lawyers, and brokers often handle certain aspects of the transaction in a less-than-optimal manner. What follows is my opinion as to how we can all do a better job in future transactions:
    1. Include a Liquidated Damages Provision in the LOI. Most sophisticated principals and CRE brokers know these days that it’s prudent to include “nonbinding” language in a letter of intent, so as to avoid unintentionally creating a contractual relationship. The best practice is to go a step further, and to limit the parties’ liability should a judge find that the LOI in fact was a contract, by including a liquidated damages provision, such as the following:

“NOTWITHSTANDING THE PARTIES’ INTENT THAT THIS LETTER OF INTENT SHALL NOT CONSTITUTE A BINDING AGREEMENT, IF AS A RESULT OF ANY LEGAL ACTION IT IS DETERMINED THAT A PARTY HAS BREACHED ANY OBLIGATION IMPOSED BY THIS LETTER OF INTENT _ _[(INCLUDING/EXCLUDING ANY OBLIGATION TO NEGOTIATE IN GOOD FAITH, CONFIDENTIALITY, INDEMNIFICATION, INSURANCE, ETC.)]_ _, THEN THE PARTIES ACKNOWLEDGE THAT IT WOULD BE EXTREMELY DIFFICULT TO ASCERTAIN THE EXTENT OF ANY DAMAGES RESULTING FROM SUCH BREACH. ACCORDINGLY THE PARTIES AGREE THAT A PAYMENT IN THE AMOUNT OF _ _[dollar amount]_ _ BY THE BREACHING PARTY TO THE NONBREACHING PARTY SHALL BE THE SOLE DAMAGES AND REMEDY IN THE EVENT OF ANY SUCH BREACH. THIS PROVISION SHALL SURVIVE ANY TERMINATION OF THIS LETTER.

 

Initials _________                                       _________”

 

  1. Include a “Nonrefundable Consideration” Provision in the PSA. In Steiner v. Thexton the court found that a purchase agreement that grants the Buyer a “free-look” period—which is customary in California– is essentially an option (even after the Seller accepts) because the Buyer can terminate in its sole discretion during the due diligence period. In order to be irrevocable and enforceable by the Buyer, an option has to be supported by separate consideration, and often there’s no such separate consideration called for in the PSA. A sample provision is as follows:

“For good and valuable consideration, including the payment of _______________________ Dollars ($_____.00) by Buyer to Seller (the “Nonrefundable Consideration”), which is independent nonrefundable consideration to Seller with respect to the rights provided to Buyer under this Agreement, the receipt and adequacy of which are acknowledged, Buyer and Seller agree as follows:”

  1. Get the Parties to Agree on the Escrow Timeline/Checklist Promptly after the PSA Is Signed. It’s a good idea for the broker to create a comprehensive escrow timeline/checklist, and circulate it to both the Buyer and Seller for comment. It’s prudent for the drafter to include a liability disclaimer in the document, such as the following:

This Checklist is provided for informational purposes only.  Buyer and Seller acknowledge that they do not intend anything in this Checklist to be legally binding, and that neither party shall rely on this Checklist.  To the extent the information in this Checklist and the Purchase and Sale Agreement are inconsistent, the terms of the Purchase and Sale Agreement shall control.”

  1. Buyers Should Insist on Clean Estoppels as a Condition to Close. A surprising number of LOIs fail to address estoppel certificates at all, and often the PSA merely requires the Seller to seek the estoppels, but doesn’t necessarily condition the Buyer’s obligation to close on the receipt of those estoppels. The best practice is to require a provision such as the following:

“It shall be a condition of Closing that Seller shall have obtained an estoppel certificate in the form attached hereto as Exhibit __ (the “Tenant Estoppel Certificate”) from each Tenant and an estoppel certificate in the form attached hereto as Exhibit __ (the “Guarantor Estoppel Certificate”) from each Guarantor, and Seller shall use good faith efforts to obtain the same.”

Note that this provision requires the Seller to seek an estoppel from any Guarantors, which is rarely requested, in my experience. (And if the Guaranty document itself fails to require the Guarantor to sign an estoppel, the Guarantor will typically refuse to do so.)

  1. Some Other Provisions that Buyers Should Ask for include:
    1. Subordination, Non-disturbance Agreements (“SNDAs”). The Lender typically requires the existing Tenants to sign SNDAs, so it’s prudent to make the receipt of those SNDAs a condition to close.
    2. Buyer’s right to interview Tenants. Many clients have informed me that some of the best information they receive about a property comes from the Tenants. As such, we recommend that clients talk to existing Tenants and see what issues they may have with the property; the Seller may not allow that unless the PSA has the appropriate provision.
    3. Seller’s obligation to cooperate in the Buyer’s environmental due diligence (and to cause the Tenants to cooperate as well). The environmental consultant will ask the Seller and the Tenants to complete a questionnaire, so it’s a good idea to anticipate the issue in the PSA.
    4. Buyer’s right to assign, in order to facilitate a 1031 exchange, or the formation of a single-purpose entity.
    5. Meaningful Remedies for a Seller Breach. PSAs sometimes limit the Buyer’s remedies to termination and a return of the deposit, which hardly incentivizes the Seller to perform under the PSA. It’s prudent to insist (i) that the Seller pay for the Buyer’s due diligence expenses (often the Seller requires a cap in response), and (ii) that the Buyer retain the right of specific performance.
  2. Sellers Should Insist that Estoppels Run to the Seller’s Benefit—not Just to the Benefit of the Buyer and Lender. If the Seller can rely on the estoppel, it makes the likelihood of a post-closing claim from a Tenant less likely, and that benefits both the Buyer and the Seller.
  3. Sellers Should Include “Estoppel/No Defaults” Language in any PSA Amendment Benefitting the Buyer, and Use the Amendment as a Tool to Narrow the Outstanding Buyer Contingencies.
    1. Whenever a Seller agrees to extend a performance deadline (such as the expiration of the Due Diligence Period, or delay the Closing Date) or grant another concession, the Seller should insist that a provision such as the following (which is mutual, but it doesn’t have to be) be included in the Amendment to the PSA:

“__. No Defaults.  Each party hereby represents and warrants to the other that, to such party’s actual knowledge: (i) the other party is not in default under the Agreement, and (ii) it has no defense to the performance of its obligations under the Agreement, as amended by this Amendment, and (iii) it has no knowledge that any of the representations or warranties made by the other party under the Agreement are false or misleading in any material respect.  The terms of this Section are a material inducement for each party to enter into this Amendment.”

The Seller doesn’t want to find out after the Amendment is signed that the Buyer is claiming some breach by the Seller that actually preceded the signing of the Amendment (for example, that the Seller failed to provide the due diligence materials on a timely basis, which is a common claim).

  1. The Seller should also consider using the Amendment as a means to confirm key facts about the transaction (such as the fact that the Buyer has approved the title to the Property, or that the Buyer has waived certain other conditions to close). Use the Amendment as a means to narrow the contingencies that the Buyer can use to terminate the transaction. The language can be as simple as the following:

“Buyer has waived all of Buyer’s contingencies set forth in Article __ of the Agreement.”

  1. Buyers Need to Order Third-Party Reports in a Timely Manner. Many third-party reports, such as appraisals, ALTA Surveys, and environmental reports, have a surprisingly long lead time—in many cases those typical lead times are much longer than the 30-day or 45-day period that is now customary for a due-diligence period.  It is important that third-party reports be ordered early in the due diligence process to ensure that the reports, or at least a draft thereof, will be received prior to the expiration of the due diligence period.
  2. Buyers Should Be Advised to Obtain a Current ALTA Survey. ALTA surveys provide important information that is not disclosed in a mere title report, including the location of the subject property’s boundaries and easements, and improvements such as buildings, fences, trails, roads, rights of ways, and other features on the property that may affect ownership of the property and may require further investigation into the possibility of adverse rights.  An ALTA survey will also show means of access to the property, the zoning classification for the property, and the flood zone classification for the property.
  3. Brokers Shouldn’t Violate the Attorney-Client Privilege or the Duty of Confidentiality. In litigation, even seemingly innocent information can be subject to discovery. The best practice is to assume that any communications with your client and the clients’ attorney are either confidential or subject to the attorney-client privilege. In particular, never forward an email message from the client’s attorney without the attorney’s and client’s consent.
  4. Buyers Should Be Advised to Carefully Review All Leases. When purchasing improved property that is leased, you should advise the Buyer to have an experienced person review all leases and the rent roll.  In addition to the obvious economic analysis, the following items should be confirmed:
  • Tenants have not paid more than one month’s rent in advance.
  • Tenants have no options to purchase, rights of first refusal to purchase, or first offers to purchase.
  • Landlord does not have significant “executory” (that is to say, unperformed) obligations, such as to pay leasing commissions, tenant improvement allowances or refurbishing allowances.
  • Tenants do not have termination or offset rights.
  • The leases in a multi-tenant project do not state conflicting rights of expansion or rights of first refusal.
  • The leases contain a strong landlord exculpation provision.
  • Whether there are any caps on operating expenses.
  • Whether the tenants signing the leases are the parties actually in possession of the premises.
  • That the tenants are obligated to subordinate to any new financing that may be obtained for the property.
  • Whether tenants are obligated to sign estoppels.
  • Whether the landlord may be subject to a claim that it overcharged for operating expenses.

 

  1. Brokers Should Advise the Client to Retain a Lawyer–the Right Lawyer. Since PSAs are legal documents, it’s always prudent to remind the client that you are not a lawyer, and reiterate your recommendation that they retain experienced counsel—that is particularly important if you are placed in the position of having to draft or revise documents. Even if the client fails to follow your advice, such a recommendation may be helpful in avoiding a claim by the client based on a document you drafted. The overwhelming majority of practicing attorneys are not knowledgeable about commercial PSAs, and tend to focus on the aspects of the PSA that they do understand – those issues are often indemnity, liability, remedies, and insurance.  Some lawyers are just plain difficult, or slow in getting a deal done, but the issue here is often one of competence.  A good lawyer with specialized experience in real estate transactions can be a broker’s best friend in getting a deal done. Experience is the key – the least knowledgeable lawyer is often the most difficult to deal with and the one most likely to obstruct progress on the transaction by focusing on inappropriate issues.  Virtually everything that a lawyer needs to know in order to properly represent a party to a real estate transaction is learned after law school, “on the job.”  The benefits of a good lawyer’s involvement can include:
  • reduction in potential liability of the broker
  • keep the focus on what’s important
  • often (but not always) the best lawyers have more control over their clients — the clients tend to listen to these lawyers.
  • creative solutions to problems (such as inappropriate revisions requested by the other side).
    1. Brokers Should Make it Clear They Are Acting as Merely Conduits of Information. If you’re just conveying information that you haven’t independently verified, say so in the letter — make it clear you’re just a “conduit” (I doubt that the standard, preprinted disclaimer is sufficient to achieve this). You don’t want to make someone else’s statements your own.  For example, contrast the following two statements; the first statement may make the author liable for the Seller’s failure to disclose information that the Seller has in its possession but failed to share:
    2. i) “Enclosed is the Phase I Environmental Report dated August 30, 2014, prepared by XYZ Company on behalf of the Seller. The Seller has no further reports or information relating to the environmental condition of the Property.”
    3. ii) “Enclosed is the Phase I Environmental Report dated August 30, 2014, prepared by XYZ Company on behalf of the Seller. I have been advised by the Seller that the Seller has no further reports or information relating to the environmental condition of the Property.”
    4. Don’t Make Erroneous Assumptions About the Law. Common (and incorrect) assumptions include:
      1. Implied “Reasonableness” or “Fairness” Requirements. While there are a few circumstances in which the law will impose an obligation on a party to be reasonable (such as is the case in certain instances involving assignment, subletting, and change in use of the Premises under a Lease), there is no overriding principle that requires a party to a PSA to always act in a fair or reasonable way.
      2. Commonly Used Industry Terms Have Undisputed Meanings. Many such terms (including “rentable area,” “first class,” “cold shell,” “base building work,” and “NNN”) have been the subject of many disputes, and unfortunately, litigation.  Some common errors:

(i) Referring to “the BOMA Standard”—which is an inherently ambiguous standard, as BOMA has published its “Standard Method for Measuring Floor Area in Office Buildings” more than once (the most recent version is the 2010 version), and there are many kinds of ways of measuring buildings in the BOMA publication, including “gross building area,” “usable area,” “store area,” as well as “rentable area.” There are also now separate standards for retail and industrial buildings.

(ii) In a PSA, referring to a “gross” or “net” per-square-foot price, without clarifying what that means (does a “net” square footage calculation exclude, say, wetlands? public rights of way? areas subject to conservation easements?).

  1. Oral Agreements Outside the PSA Will Override the Written PSA, or Will “Fill in the Gaps” in the Written Document. While there are exceptions, the general rule is that the written terms will control over contrary oral terms.
  2. “Keep It Vague, and We’ll Interpret it in Our Favor Later.” A judge is guided by a number of rules when it comes to interpreting a PSA or other contract; one of them is that the party creating an ambiguity is not allowed to benefit from that ambiguity.
  • DEVELOPMENTS IN THE AREA OF ENERGY USAGE
    1. AB 1103 (the California Nonresidential Energy Use Disclosure Program) has been suspended. There is currently no statewide energy disclosure requirement for 2016. The California Energy Commission will be preparing the infrastructure for a new statewide benchmarking program, as mandated by AB 802, likely to be effective in 2017. That program will require the utility companies to provide energy-consumption data upon request, but unlike AB 1103, will apparently not put the onus on the building owner. If you want current information, visit http://www.energy.ca.gov/ab1103/.
    2. TITLE 24 2016 Non-Residential. California’s Building Energy Efficiency Standards are updated by the California Energy Commission on an approximately three-year cycle. The 2013 edition took many design professionals by surprise and disrupted entire sectors, particularly the lighting controls and retrofitters. The 2016 iteration of the Title 24 take effect on January 1, 2017. For the 2016 code, the CEC is focusing on moving toward a goal of zero net energy—by 2020 for all new residential buildings, and by 2030 for all new commercial buildings. For up to date information, see http://www.energy.ca.gov/title24/.

DISCLAIMER

The seminar presented today, as well as any written materials distributed to the participants, is being conducted to promote an open discussion of general legal issues of interest to the attendees.  This seminar is not intended to create an attorney-client relationship.

Neither the presentation nor any answers to specific questions nor any written materials shall be construed, in whole or in part, as legal advice to be relied upon by any person. 

For legal advice, please contact the attorney of your choice.

 

RESUME FOR TOM STEWART

Tom Stewart has experience in all aspects of commercial real estate, but has concentrated his practice in the areas of property sales and leasing, having represented clients in thousands of such transactions over the years. He is one of the most experienced office-leasing attorneys in the state, and has handled some of the largest office-lease transactions in California.

Developers, owners and investors rely on Tom to represent them in the acquisition, sale and leasing of commercial property.  For more than 30 years, Tom has provided astute counsel for some of the largest commercial property owners and users in the state.

Publications and Speaking Engagements

Tom has served for many years on the Board of Advisors for the Commercial Tenant’s Lease Insider, the Commercial Lease Law Insider, and the Commercial Property Management Insider, which are monthly publications of national circulation. Tom is also a contributing author to California Continuing Education of the Bar’s Office Leasing book, and The Insider’s Best Commercial Lease Clauses book.

A frequent lecturer on leasing and other real estate law topics, Tom has made presentations to numerous professional real estate organizations including the Institute of Real Estate Management, the Building Owners and Managers Association of Sacramento (BOMA), the International Council of Shopping Centers (ICSC), the Sacramento Commercial Realtors organization, the Sacramento County Bar Association, the organization of Commercial Real Estate Women (CREW), and numerous brokerage companies. He has written several articles on commercial real estate topics for the Sacramento Business Journal.

Tom has been an instructor for two courses sponsored by the California Continuing Education of the Bar: the Advanced Course-Office Leasing program, and the Drafting and Negotiating Office Leases course. He has also taught BOMA’s college-level Law for Property Managers and Marketing courses in their Real Property Administrator (RPA) certification program.

Professional, Community and Pro Bono Involvement

  • Former Board Member, Recon Bay Area (which is a real estate and construction networking organization based in San Francisco)
  • Member, Lambda Alpha Land Economics Society
  • Member and Former Board Member, Association of Commercial Real Estate
  • Member, International Council of Shopping Centers (ICSC)
  • Member, Building Owners and Managers Association (BOMA)
  • Board Member, River Oak Center for Children
  • Active in the Fregoso Outdoor Foundation (which supports veterans and their families)
  • Former Board Member Sacramento Make-A-Wish Foundation
  • Former Board Member, The Sacramento Tree Foundation
  • Former Advisor, Pi Kappa Phi Fraternity
  • Represented a number of local nonprofit organizations on a pro bono basis

Experience

  • Lead attorney for the tenant in the Health Net lease transaction that received the Summit Award for the “Most Significant Lease Transaction” in Los Angeles from the Los Angeles Commercial Realty Association/BOMA Los Angeles.
  • Lead attorney for the University of the Pacific in a transaction that was recognized by the San Francisco Business Times as the “Best Office Sale/San Francisco” in 2011, and also represented the seller in a San Francisco transaction that was featured as one of the Wall Street Journal’s “Deals of the Week” in 2013.
  • Represented parties to land-sale transactions involving thousands of acres in California, including mining properties, ranches and residential lots.
  • Clients include Health Net (handled hundreds of transactions), Hines, Berkeley Land Co., Kaplan Education, SureWest, Buzz Oates Enterprises, Mariani Packing Company, Inter-Cal Real Estate Corporation, numerous real estate investors, and even a number of law firms.

Personal

Tom is an investor in many commercial real estate projects, which gives him a practical, real-world perspective that is uncommon for lawyers.

 

Education
J.D., University of California, Hastings College of the Law, 1985
A.B., University of California at Berkeley, 1982

 

 

 

OPEN! OPEN! OPEN! Enforceability of Co-Tenancy Provisions in California Retail Leases

Co-tenancy provisions often appear in retail lease agreements with national and stronger regional tenants in California shopping centers. These provisions provide remedies for such tenants in the event that certain other tenants either fail to open for business or cease to operate and vacate the shopping center. In February 2015, a California Court of Appeal ruled on the enforceability of these provisions in Grand Partners, L.P. v. Ross Dress for Less, Inc. et al., that will have a significant impact on the future interpretation (and potentially, the negotiation) of such provisions. Specifically, landlords and tenants should pay close attention to the negotiated remedies for the violation of a co-tenancy provision, because under this holding, the enforceability of such remedies is highly fact-specific.

Facts and Trial Court Ruling

In April 2008, the parties entered into a 10-year lease, following a 2½-year negotiation. The lease conditioned Ross’s obligation to open for business and pay rent upon Mervyn’s (another tenant in the shopping center) remaining open for business. This co-tenancy provisions provided for rent abatement and an option to terminate the lease if Mervyn’s failed to remain open.
In July 2008, Mervyn’s declared bankruptcy and closed its store. In May 2010, Ross sent a 30-day notice terminating its lease. Ross never opened its store nor paid any of its monthly rent payments, claiming both its rent abatement rights and termination rights due to a failure of the Mervyn’s co-tenancy requirement. The landlord filed suit for recovery of rent under the full 10-year term of the lease, arguing that the co-tenancy provision was unenforceable.

The trial court found that the co-tenancy provisions were “unconscionable” and therefore unenforceable, and awarded the landlord damages for both the abated rent and the termination of the lease in the amount of almost $3.8 million. Ross appealed the ruling, and was supported in its appeal by “amicus” (“Friend of the Court”) briefs filed by the California Retailers Association, The Gap, Bed Bath & Beyond, Petco and VF Outdoor, Inc. (parent company of L.L. Bean and Patagonia).

Appellate Holding

With regard to the landlord’s argument that the co-tenancy provision was unconscionable, the appellate court overruled the trial court, holding that in this instance the co-tenancy provision was enforceable, given that both parties entered into the lease voluntarily and without coercion, even though it acknowledged that Ross did have greater bargaining strength.

The landlord further argued that (a) the lease termination clause amounted to a “forfeiture”, and that the landlord therefore should be entitled to damages, and (b) the rent abatement was an unenforceable penalty. As to the forfeiture argument, the Court found that because the lease termination clause has been negotiated between sophisticated parties, and that the landlord had no control over whether Mervyn’s vacated its premises, Ross’s termination of the lease did not amount to a “forfeiture”, and the landlord was not entitled to damages. With regard to the rent abatement provision, however, the Court held that Ross failed to prove that the amount of the rent abatement had any relationship to Ross’s actual “damages” due to Mervyn’s closing. In fact, Ross was unable to prove it had any such damages. Therefore, the landlord was entitled to damages equal to the 13-month rent abatement period at the beginning of the lease term, totaling $672,100, but not the $3.1 million in damages for termination of the lease that the lower court awarded.

The Importance of a Well-Drafted Document

The takeaway from this case is that the enforceability of co-tenancy provisions are fact-specific. In order to enforce a rent abatement remedy, a tenant should be prepared to prove that the rent abated had some relationship to the damages the tenant suffered due to the co-tenancy condition not being fulfilled. Also, whether or not a landlord has the ability to require the co-tenant to remain open might impact the enforceability of a tenant’s termination right, although the court was silent on what impact such control would have on the termination right. Landlords and tenants, and their counsel, should carefully consider the co-tenancy language in future leases in light of this decision.

Winnie Ward is a named partner of Stewart Ward & Josephson LLP. She specializes in office, retail and industrial commercial leasing, as well as real property acquisition and divestment. Ms. Ward currently serves as a Director at Large on the Board of Directors for the Association of Commercial Real Estate. wward@swjllp.com; 916-569-8161

The Landlord’s Perspective on Selected Key Lease Issues

INTRODUCTION

A. Purpose of Presentation: to Explain and Discuss the Purpose and Legal Effect of Selected Clauses Typically Appearing in a Landlord Lease Form.

B. This is a Landlord-Oriented Discussion. Most Leases are drafted by or for Landlords, and therefore, not surprisingly, most Lease provisions are intended to benefit only the Landlord. It is often the least understood, most Landlord-oriented provisions that generate the most debate, but a full understanding of the purpose of a given clause is critical to effectively negotiating a favorable resolution—you can’t make a cogent argument to change a clause you don’t understand.

C. Use of the AIR Lease Form. To assist in our discussion, I will make frequent references to one of the recent American Industrial Real Estate Association Lease forms (the Standard Industrial/Commercial Multi-Tenant Lease – Gross, 04/14 version). I chose this form because it is commonly used in commercial real estate—all over the country—and because it is well organized with descriptive headings so it lends itself to discussion of the types of clauses that you will find in any competent commercial Lease. The AIR form is also useful because it is a reasonably balanced form, as you would expect a broker-sponsored document to be, so the provisions are not as lopsided in favor of the Landlord as a typical manuscript Lease. Finally, the AIR form is useful because it has been the subject of a number of reported judicial decisions, so we have some guidance as to how courts are likely to interpret the document.

D. Ground Rules: Interrupt and ask questions!

KEY LEASE PROVISIONS

A. Basic Provisions (Section 1 of AIR).

1. Landlord’s Objective: Set forth all of the key deal terms in a single location in the Lease, rather than have blanks that need to be filled in interspersed throughout the document.

2. Discussion: Be wary of discrepancies between the Basic Provisions and the body of the Lease (ambiguities are likely to be interpreted against the Lease drafter), and make sure that all the blanks are filled in. For example, one case held that the failure to insert the base year in the standard Lease form resulted in a holding that the parties did not intend the Tenant to pay property tax increases at all.

B. Premises (Sections 1.2(a) and 2 of AIR).

  1. Landlord’s Objective: To clearly (and usually narrowly) define the space as to which the Tenant has the right of exclusive occupancy, and prevent future disagreements about the square footage of the Premises and the parties’ respective obligations with regard to the Premises.
  2. Discussion:
    a. Control and Construction Obligations: A Lease is, by definition, the right to exclusively occupy certain Premises for a term so it’s important to have a clear demarcation between what constitutes the “Premises” and the rest of the building or property (such as the “common area” or “base building”). This has implications as to the parties’ respective construction obligations, too.
    b. Compliance-With-Laws Obligations: The definition of the “Premises” also has significant implications as to the parties’ respective compliance-with-laws obligations (see Sections 2.2 and 2.3 of AIR). The AIR provisions reflect the results of the two cases decided by the California Supreme Court in 1994, Brown v. Green, 8 Cal. 4th 812 (1994), and Hadian v. Schwartz, 8 Cal. 4th 836 (1994), both of which interpreted an earlier version of the AIR Lease. In those cases, the court essentially ignored the plain language of the Leases and invented a six-part test to determine which party, Landlord or Tenant, is liable for compliance-with-laws costs. It’s notable that even though the language in the two Leases was nearly identical, the results in the two cases are completely different. Note that the terms of Section 2.3 of the AIR limits the Tenant’s remedies to causing the Landlord to rectify the noncompliance at Landlord’s expense (as opposed to being able to terminate the Lease, or sue for damages).
    c. Space-Measurement Issues: The AIR Lease (see Sections 2.1 and 2.4(a)) and many other modern Leases use a “stipulated” or “deemed” approach to square footage, which is to say that the rent is fixed, and is not subject to adjustment if it turns out that the actual square footage of the Premises differs from that recited in the Lease. Tenants often ask for the right to measure the space, which raises many issues:
    (i) Which Standard? Tenants often ask to use “the BOMA Standard” to measure the Premises. However, this is an inherently ambiguous reference, as BOMA has published its office buildings standard more than once (the most recent version is the 2010 version), and there are many kinds of ways of measuring buildings in the BOMA publication, including “gross building area,” “usable area,” “store area,” as well as “rentable area.” And to complicate things further, there are now two methods, Method A (the Legacy Method) and Method B (the Single Load Factor Method), for measuring rentable area under the 2010 standard. There are also now separate standards for retail, industrial, and multi-unit residential buildings.
    (ii) Threshold for Adjustment to Rent? It’s not uncommon for a field measurement of space to differ from the measurement made using building plans, nor is it uncommon to have one architect’s field measurement vary from that of another architect. It’s also common for Landlords to “inherit” measurements of the building and individual Premises from prior Landlords. For these reasons, the 2010 BOMA office standard states a 2% threshold—any variance of 2% or less is to be ignored—and it’s reasonable for a Landlord to insist on such a threshold if the Tenant is granted a remeasurement right.
    (iii) Overstatement of RSF Can Constitute Fraud. In the case of McClain v. Octagon Plaza, LLC,159 Cal. App. 4th 784 (2d Dist. 2008), the California Court of Appeal held that a commercial tenant adequately pled a claim for fraud in the inducement in a circumstance in which the Lease (which was an AIR form) overstated the rentable square footage of the Premises by 7.6%, overstated the Tenant’s share of common expenses by 4%, and that the Landlord knew or had reason to know that the statements of rentable square footage were materially inaccurate. This was in spite of the Lease’s disclaimers about square footage. The McClain court held that these disclaimers were subject to Section 1668 of the California Civil Code (which deems contracts that exempt one from responsibility for fraud or willful injury unenforceable as being contrary to public policy) and therefore they did not bar the Tenant’s fraud claim or establish as a matter of law that the Tenant’s reliance on the lease’s statements of size was unjustifiable. In addition, the court noted that the disclaimer providing that rent was not subject to revision regardless of actual size was similar to an “AS IS” clause of the sort that California courts have routinely rejected as ineffective in insulating a contracting party from a fraud claim regarding a nonobvious defect.
    (iv) Outside Date for Measurement?
    (v) Arbitration or Other Methodology for Resolving a Square Footage Dispute?
  3. CASp Inspection (Section 49 of AIR):
    (i) California Civil Code Section 1938 states as follows:
    “A commercial property owner or lessor shall state on every lease form or rental agreement executed on or after July 1, 2013, whether the property being leased or rented has undergone inspection by a Certified Access Specialist (CASp), and if so, whether the property has or has not been determined to meet all applicable construction-related accessibility standards pursuant to Section 55.53.”
    A “CASp” is an accessibility specialist who has been certified by the State of California to inspect properties for compliance with construction-related accessibility standards and authorized to issue a certificate of compliance which may be displayed at the property. Civil Code Section 55.53 is the statute that sets forth the technical requirements for that certificate.
    (ii) Scope of Application. The AIR provision follows the language of the statute fairly closely. However, as with any new legislation, there are ambiguities in its language that have yet to be interpreted and complications in its application that commercial property owners should consider when formulating a compliance strategy. These ambiguities and complications include questions regarding what is considered to be “commercial property,” “property being leased” and a “lease form.” A conservative response would be to assume that the courts will interpret these terms broadly and in favor of the Tenant, and accordingly, a prudent owner should consider including the disclosure requirement not only in Leases, but also in subleases, assignments, and amendments that extend the lease term or expand the Premises for any property being used for commercial purposes.
    (iii) Whose Knowledge? The statute does not address the possibility that there could be an existing CASp inspection of the property that is not known to the property owner (for example, a tenant, lender, or prior property owner might have obtained a CASp inspection that hasn’t been shared with the current owner). In order to protect the property owner, a Landlord should limit the statement to what is actually known to the Landlord at the time the statement is made. The Landlord should also consider adding to the Lease a requirement that the tenant not conduct a CASp inspection without the prior approval of the Landlord and/or that the Tenant is required to deliver to the Landlord a copy of any CASp inspection conducted by the Tnant.
    (iv) Lack of Express Penalty: Although there is no penalty or other consequence specified under the new law for not including the required disclosure information in a commercial Lease, failure to comply could nonetheless result in potentially serious negative legal consequences for a property owner. Noncompliance could result in claims or cross-complaints by a Tenant against its Landlord should the Tenant be sued for failing to comply with disability-access laws, or in extreme case, a Tenant may use the noncompliance as a grounds to seek to terminate the Lease (that would typically be a difficult remedy for a Tenant to obtain, though).
    (v) To CASp Inspect or Not? This new requirement places even greater emphasis on the need to clearly designate in commercial Leases how responsibility for compliance with disability-access laws is allocated between the Landlord and Tenant. It also serves to focus the attention of commercial property owners on the question of whether or not they should undertake a CASp inspection of their property. This is not a simple decision. There is nothing under prior law or SB 1186 that requires a commercial property owner to hire a CASp to inspect its property—in fact, Civil Code Section 55.53 specifically negates any such obligation and states that a Landlord or Tenant’s election not to hire a CASp is not admissible to prove that person’s lack of intent to comply with the law. So, this remains a voluntary program, and there are a lot of considerations that should go into making this decision, particularly with older properties. Prudent commercial property owners should use the imposition of this new disclosure requirement as a opportunity to assess and update how they address disability access in their Leases and property-management practices.

C. Use (Sections 1.8 and 6 of AIR).

  1. Landlord’s Objective: To control how the Landlord’s property is used. The Landlord’s position is that they do not want other people to determine the appropriate use of the Landlord’s real estate.
  2. Discussion: Most standard form Leases contain a provision, such as that set forth in Section 6.1 of the AIR Lease, which states that the use of the Premises is limited to that set forth in the basic Lease provisions, as in Section 1.8 of the AIR Lease. Tenants will frequently ask that the Landlord add words to the end of that clause such as “without the prior written consent of Landlord, not to be unreasonably withheld.” The addition of this consent language can undermine the purposes set forth above, and if possible, Landlord should preserve the right to make a subjective decision as to what use the property is to be put. There are lots uses that may be permitted by applicable zoning but nonetheless are (i) undesirable, or (ii) have a potentially negative impact on the project or other Tenants, or (iii) could result in the Landlord breaching an obligation (such as a exclusive-use or use restriction granted to another Tenant in the project). If the Lease does not restrict the use of the Premises, the Tenant generally has the right to use the Premises for any lawful purpose, and any ambiguity will be construed in favor of unrestricted use.

D. Operating Expense Issues (Sections 4.2, 8.1(a), and 10.1 of AIR).

  1. Landlord’s Objective: To allocate among the users of the project 100% of the cost of maintaining, repairing, replacing, operating and managing the project (or in the case of a base-year Lease, 100% of the increases in those costs), and thereby preserve the return on its investment from the base rent. The “Gross” version of the AIR form is deceptively named—it has a base year only for real property taxes and insurance costs, and all other expenses are passed through on a net basis—so you should never assume that a Lease’s title accurately describes what the document actually says.
  2. Discussion:
    a. Absence of a Developed Body of Law on Operating Expenses There is not a lot of law in this area, and the customs and practices vary greatly by jurisdiction. Through careful drafting and review, this is an area where sophisticated attorneys and brokers can add a lot of value. If what you draft is clear, it is likely to be enforceable.
    b. The Landlord’s and Tenant’s Conflicting Perspectives on Base Year Issues:
    (i) The Balanced Approach: The legitimate purpose of a base-year arrangement is to permit the Landlord to pass through inflationary increases in operating expense, perhaps with some flexibility to add new expenses. There should be mechanisms in place to ensure an “apples to apples” comparison between the base year and comparison year expenses.
    (ii) The Tenant’s Perspective: Pump up the base year, deflate the comparison years. The best mechanisms to achieve these results is to gross up the base year expenses, and to carve out limitations on what can be passed through in the comparison years.
    (iii) The Landlord’s Perspective: Deflate the base year, and pump up the comparison years. The best mechanisms to achieve these results is to gross up the comparison years, and to carve out exclusions from what will be included in the base year.
    c. The Gross Up Concept (No AIR Provision)
    (i) The Rationale: To neutralize the effect of changes in building occupancy levels on expenses that vary with occupancy. In other words, to calculate the operating expenses based on the assumption that the building’s occupancy rate is constant (95% is typically used) throughout the Lease term, to ensure that rent increases associated with variable costs reflect true increases in costs rather than merely increases in occupancy levels.
    (ii) “Variable Expenses” are those that fluctuate with the building’s occupancy rate. Examples include utilities, janitorial service, and property management fees. Some expenses are fixed—such as security and insurance costs, and perhaps real estate taxes. Some expenses have both fixed and variable components, such as elevator costs for which routine maintenance is fixed but heavy use requires more frequent repairs.
    (iii) Who Benefits from the Gross Up? To the uninitiated, the gross up appears patently unfair to the Tenant, like a nefarious Landlord plot to inflate expenses that the Tenant has to pay. In reality, a gross up can benefit both the Landlord and the Tenant, and the concept is fair to both parties, so long as it is appropriately and consistently applied. If the occupancy level is below the agreed-upon percentage (e.g., 95%) in the base year, a gross up of base year expenses benefits the Tenant. If occupancy falls below 95% in comparison years, the gross up of operating expenses benefits the Landlord.
    (iv) Example of a simple gross up provision:
    “For any year (including the Base Year) during which the Building is not 95% occupied during the full calendar year with all occupants paying full rent, Landlord shall adjust the Operating Expenses to what the Operating Expenses would have been had the Building been 95% occupied during the entire calendar year and had all occupants been paying full rent (as opposed to free rent, half rent, etc.).”
    Note that the “all occupants paying full rent” provision is critical, because management fees (generally one of the largest line items) and gross receipt taxes are typically based on rental income.
    (v) The gross up of the base year for a tenant is critical, particularly in a new building. Some crafty Landlord Leases make the gross up optional at the Landlord’s discretion, or only required if the Landlord grosses up a comparison year.
    (vi) Query: should a NNN office lease be grossed up? Such a gross up only benefits the Landlord, as there is no base year to gross up.
    (vii) Buy the BOMA publication: The Escalation Handbook for Office Buildings: A Guide to Understanding, Preparing & Grossing Up Expense Escalations (BOMA International, 1998) by William H. Brownfield, CCIM, CPM. This is the leading publication on the gross up process, and it includes a good explanation as to how grossing up can benefit both Landlords and Tenants.
    d. Adjustments to Base Year to Protect the Landlord:
    (i) The sophisticated Landlord will want the right to exclude from the base year certain expenses that it believes would artificially inflate the base year but are not likely to occur in subsequent comparison years. Examples include: (1) increases caused by market-wide labor-rate increases resulting from extraordinary circumstances (such as boycotts and strikes), and (2) utility rate increases arising from extraordinary circumstances (such as conservation surcharges, embargoes, surcharges, or other shortages).
    (ii) Some aggressive Landlords try to establish a “floor” on certain categories of expenses, such that the Tenant does not get any benefit from a subsequent decrease in that particular expense. Common examples are electricity and real estate taxes, with the result that any decrease in those expenses in a comparison year cannot be netted against increases in other expenses.
    (iii) Some Landlords use separate “pools” of expenses, one for “operating expenses”, and one for “real estate taxes”, and perhaps a third for “utilities,” such that a decrease in one pool cannot be netted against an increase in the others.
    e. Reasonable Exclusions from Operating Expenses for Comparison Years to Protect the Tenant. The Tenant’s critical list of exclusions:
    (i) No increase in management fees (expressed as a percentage of the building’s gross rent) over the management fees charged in the base year.
    (ii) Self-insurance, large deductibles and other costs to restore the building following casualty.
    (iii) Capital expenditures, with perhaps an exception for those expenditures that (a) are intended as a labor-saving device or to effect other economies in services to the building, or (b) are required under any government law or regulation not in effect as of the Commencement Date. A common compromise is to permit the pass through of those, and perhaps other capital expenditures, subject to an overall per annum cap (say, of $.10 per rsf, per year). (Note: Landlords should always request the right to replace existing building systems and components (as opposed to new improvements). Tenant should in all events insist on amortization over useful life of the improvement.)
    (iv) No discrimination against the Tenant, or “free riding” by other Tenants (i.e., charging the Tenant for services that other Tenants get for free, e.g. overtime HVAC).
    (v) New types or categories of expenses not included in base year.
    f. Tenant’s Audit Rights:
    (i) Not only is a contractual audit right of obvious benefit to the Tenant, but it should also be welcomed by the Landlord, in order to contractually limit a right that probably is implied (but ill-defined) under California law. I am not aware of a reported California decision addressing a Tenant’s right to audit operating expenses, but one almost certainly exists, given the covenant of good faith and fair dealing that is implied in all California leases (see Kendall v. Ernest Pestana, Inc. 40 Cal.3d 488, 506 (1985)), coupled with the right to an action for accounting where a fiduciary relationship exists between the parties and the facts are peculiarly within the knowledge of one of them (see Keeble v. Brown, 123 Cal.App.2d 126, 133 (1954)). P.V. Properties, Inc. v. Rock Creek Village Assoc. Ltd., Partnership, 549 A.2d 403 (Md. Ct. Spec. App. 1988) held that a Landlord of a shopping mall was required to provide Tenant an itemization of costs to enable tenant to verify charges assessed against it under a Lease provision requiring Tenant to reimburse Landlord for its pro rata share of total actual cost of maintenance. The Maryland court based its decision on an implied covenant of good faith and fair dealing, and the fact that a fiduciary relationship existed between the parties where the facts and records upon which the obligation is based are known and kept exclusively by the party to whom the obligation is owed. P.V. Properties has been cited repeatedly by Maryland courts, and once each by the Federal District Court in Maryland, and the Federal District Court for the District of Columbia.
    (ii) Reasonable Landlord contractual limitations on Tenant’s audit rights include:
    (a) time period—how far back can the Tenant go? (Smart Tenants always bargain for the right to audit the base year.)
    (b) what qualifications does the auditor have to have? (CPA may not be the best choice for Tenant).
    (c) scope of audit? Discourage “fishing expeditions”.
    (d) confidentiality?
    (e) Tenant’s remedy if a discrepancy is found?
    (f) must Tenant pay the disputed amount pending final resolution of the dispute?
    (g) limit Landlord’s “hassle factor”?
    (iii) Stipulated-Sum Operating Expense Increases? Some regional mall Landlords are avoiding the inherent complexity and potential controversy of calculating common area maintenance charges (“CAM”) by charging fixed CAM amounts, subject to periodic increases.
    (iv) Addressing Operating Expense Exclusions in the Letter of Intent. It is becoming common for savvy Tenants to insist that the Landlord agree to a list of operating expense exclusions (particularly Proposition 13 increases) at the letter of intent stage, in order to avoid protracted negotiation later.

E. Tenant’s Liability Insurance (Section 8.2 of AIR).

  • Landlord’s Objective: To ensure that the Tenant has sufficient financial resources to respond to any lawsuits arising from the Tenant’s use of the Premises, and to support the Tenant’s obligation to indemnify the Landlord against losses.
  • Discussion: Operation of any business is risky, and the cost of litigation can be staggering. Requiring the Tenant to carry a level of insurance commensurate with those risks is a good way of assuring that a lawsuit against the Tenant won’t put them out of business and deprive the Landlord of a rent-paying Tenant. Also, an indemnification obligation is only as good as the Tenant’s ability to pay: in the absence of insurance, most Tenants cannot satisfy the costs of indemnification.

F. Tenant’s Property Insurance (Section 8.4 of AIR).

  1. Landlord’s Objective: To ensure that the Tenant has the financial ability to restore its business in the event of a casualty and to require the Tenant to look to its insurer, rather than to the Landlord, for compensation for any losses or damage to its property in the Premises.
  2. Discussion: The typical insurance provision is intended to require the Tenant to turn to its insurance company, to whom it has paid premiums; handling claims is what insurance companies get paid to do. There is no reason to look to the Landlord for recovery, even if the Landlord was negligent. (This is consistent with the rationale of the “waiver of subrogation” and “exemption of Landlord from liability” provisions, which are discussed below.)

G. Waiver of Subrogation (Section 8.6 of AIR).

  1. Landlord’s Objective: To prevent the Tenant’s insurer from suing the Landlord following the insurer’s payment on claims to the Tenant.
  2. Discussion: The waiver of subrogation clause is one of the few provisions in a typical Landlord-oriented Lease that is of significant potential benefit to the Tenant. The provision is invariably drafted to be reciprocal, with the result that if either party causes damage to the property of the other, the injured party’s insurance company will not have the right to sue the party at fault. In the parlance of insurance, the insurer is said to be “subrogated” to the rights its insured has against a party causing a loss to the insured; in the absence of the insurer’s waiver of its subrogation rights, for example, a Tenant who negligently burns down the Landlord’s building could be sued by the Landlord’s insurer.

H. Indemnity (Section 8.7 of AIR):

  1. Landlord’s Objective: To immunize the Landlord from costs (including attorneys’ fees) and liabilities arising from the acts or omissions of Tenant, or Tenant’s use of the Premises.
  2. Discussion: The AIR Lease indemnity provision is one-sided, running only in favor of the Landlord. By far the most common Tenant request with regard to an indemnity clause is that it be made reciprocal, often based on the argument that the Tenant is participating in the cost (through operating expense payments) for Landlord’s liability insurance to fund that indemnity obligation. It is preferable to limit the Landlord’s indemnity obligations to the common areas, since the Landlord presumably has more control over those areas than the Tenant-occupied spaces. Landlords typically limit their indemnity obligations to “the extent of insurance proceeds”.

I. Exemption of Landlord from Liability (Section 8.8 of AIR):

  1. Landlord’s Objective: That the Landlord have no liability for any claims for damage to the Tenant’s property.
  2. Discussion: This principle follows from the justification for the waiver of subrogation discussed above. The Tenant is obligated to insure its personal property, and if suffers a loss, it should therefore look to its insurance company, not to the Landlord, for recovery, even if the Landlord was negligent. In other words, it’s a “no-fault” arrangement, whereby the risk of loss is assigned to the party that agreed to carry insurance against that loss.

J. Waiver of California Statutes (Section 24 of AIR):

  1. Landlord’s Objective: To ensure that the provisions of the Lease (i.e., the parties’ contractual, negotiated agreement), rather than statutes, govern their rights and obligations.
  2. Discussion: Typically, the waiver of the statute avoids an inconsistency between the Lease and what the result that the law would otherwise imply. For example, the only circumstance under which the Tenant is permitted to cancel the AIR Lease is pursuant to Section 9.6(b) (when the Landlord fails to commence restoration within 90 days), whereas Civil Code sections 1932(1) and 1933(4) would otherwise permit the Tenant to terminate the Lease in the event of a casualty. Note that the AIR form, being a national form, does not waive specific California statutes (see Section 24 of AIR).

K. Notices (Section 23 of AIR).

  1. Landlord’s Objective: Avoid allegations by the Tenant that they failed to receive a given notice, or that the Tenant provided a notice that the Landlord never received.
  2. Discussion: Beware “Deemed Delivery”. The AIR Lease, like many forms, states that notices are “deemed given” if they are “addressed as required herein and mailed with postage prepaid.” The result is that if the Tenant can establish that they mailed the letter, there is no requirement under California law that they prove that the Landlord actually received it. The leading case for this proposition is Jenkins v. Tuneup Masters, 190 Cal.App.3d 1 (1987). For this reason, I advocate adding the following to the “Notices” provision:
    “Notwithstanding any provision of this Lease to the contrary, if this Lease (or any rider, addendum or subsequent amendment hereto) grants Tenant any option to extend or renew the Term, or to expand the Premises, the exercise of such option shall be valid only if Landlord actually receives written notice thereof from Tenant by the date that such option expires.”

DISCLAIMER

The seminar presented today, as well as any written materials distributed to the participants, is being conducted to promote an open discussion of general legal issues of interest to the attendees. This seminar is not intended to create an attorney-client relationship.

Neither the presentation nor any answers to specific questions nor any written materials shall be construed, in whole or in part, as legal advice to be relied upon by any person.

For legal advice, please contact the attorney of your choice.

A Setback for Transaction Privacy in California

The New Documentary Transfer Tax Law Eliminates Separate Unrecorded Statements

California law (Revenue and Taxation Code Section 11932) has long required that the amount of the documentary transfer tax be displayed on the face of the recorded instrument. Since the documentary transfer tax is calculated based on the amount of the consideration, the general public can calculate the consideration if they know the amount of the documentary transfer tax actually paid (the State’s rate for that tax is $1.10 per $1,000.00 of value, exclusive of liens at the time of transfer, but a number of counties and cities have imposed higher rates). To avoid disclosure of the consideration paid, and thus keep the price private, it has become a common practice for parties to real property transactions in California to request that the tax amount be shown on a separate document that is not recorded.

As a result of AB1888, which become law on June 4, 2014, that “separate unrecorded document” practice will no longer be allowed. This change in law takes effect on January 1, 2015, so any document recorded on or after that date will be required to display the documentary transfer tax due on the face of the document.

A copy of AB 1888 can be found at:

http://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml

For more information, please contact Tom Stewart.

Prominent Real Estate and Corporate Partners From Downey Brand Form Stewart Ward & Josephson LLP

Sacramento, Calif. – April 7, 2014 – A prominent group of partners from Sacramento-based law firm Downey Brand is forming a new firm, Stewart Ward & Josephson LLP, effective April 7, 2014. The firm immediately becomes one of the most experienced real estate and business law transactional firms in Sacramento, with three seasoned attorneys delivering sophisticated legal services to a diverse base of local, state and national clients.

The team is composed of Tom Stewart, Winnie Ward and Gregg Josephson, Sacramento’s leading experts in real estate and transaction lending and banking. The law firm is a full-service transactional practice representing real estate developers, landlords, tenants, lenders, corporations, partnerships and individuals.

“The formation of our new firm comes at an optimal time, enabling us to even more effectively meet our clients’ needs, as well as seize new opportunities in this very dynamic and resurging market for real estate and business legal services,” said Tom Stewart, a founding partner and commercial real estate veteran. “Feedback from clients, the vast majority of whom will be joining us at the new firm, has been extremely positive. We remain deeply committed to serving as their trusted advisors, embracing our ‘Clients First’ principle.”

“It is our absolute commitment to provide the highest quality legal service in an efficient and cost-effective manner,” said Winnie Ward, a founding partner who specializes in real estate leasing. “A boutique law firm platform is clearly the way for us to personalize our services to meet the specialized needs and requirements of our clients, be it a Fortune 500 company or a business start-up.”

“I am deeply proud and excited to be partners with Tom and Winnie, highly talented, accomplished attorneys,” said Josephson, the firm’s managing partner. “The three of us are combining strength, experience and a proven successful track record in real estate, business, corporate and banking law. This makes us very well rounded to serve the needs of our clients in the types of transactions they pursue.”

In addition to their legal practice, the partners remain deeply committed to the Sacramento region, holding leadership position in a wide range of civic and professional organizations.

The partners are

Thomas F. Stewart. 
Stewart is one of the most experienced real estate and office-leasing attorneys in California, and has handled some of the largest office-lease transactions in California. Developers, owners and investors have relied on Tom to represent them in the acquisition, sale and leasing of commercial property for nearly, 28 years. In addition to active roles with the Association of Commercial Real Estate and RECON, he serves on the Boards of River Oak Center for Children and Fregoso Outdoor Foundation.

Winnie Ward. 
For more than 20 years, Ward has been a trusted adviser to landlords and tenants in handling some of the most complex leasing transactions regionally and nationally. Winnie is a Director at Large in the Association of Commercial Real Estate, was previously Chair of ACRE’s Broker of the Year Awards and a member of the Board of Directors of The Friendship Club.

Gregg D. Josephson
. Josephson is a seasoned corporate and banking lawyer, with more than 15 years experience. Before moving to the Sacramento area in 2008 to join Downey Brand, Josephson practiced with two of the largest international firms based in New York and Los Angeles. Immediately prior to coming to Sacramento, Gregg was General Counsel for a $9 billion publicly-traded bank based in Southern California. He is a member of the board of the B Street Theatre, the Sutter Children’s Hospital Advisory Board and the Corporations Committee of the State Bar of California, and he serves on committees for the Crocker Art Museum and the Sutter Club.

About Stewart Ward & Josephson LLP.
 Stewart Ward & Josephson is a boutique law firm based in Sacramento, Calif., providing high quality legal services to clients located throughout California and the U.S., in sophisticated real estate, corporate, lending and banking matters.