Norris, McLaughlin & Marcus

Posts Tagged ‘commercial lease’

How A Letter of Credit Can Facilitate Commercial Lease Deals

A Letter of Credit (“LOC”) is simply an agreement from a bank guaranteeing that Party A’s payment to Party B will be received on time and for the correct amount.  LOC’s are used primarily in sizeable international trade transactions, i.e., a supplier in one country and a customer in another.  LOC’s, however, can also be useful, and are regularly employed, in long-term commercial lease situations.  For a tenant, an LOC may help it secure a particular lease it might otherwise have been unable to secure.  An LOC could also free up cash the tenant can use to run its business, instead of parking it in the landlord’s account as a security deposit.  LOC’s are attractive to landlords, because they allow a landlord to get its money notwithstanding the tenant’s insolvency or that it might dispute the landlord’s claim of default.  Not even a bankruptcy filing by the tenant will prevent the landlord from drawing on a properly drafted LOC (although this may reduce the tenant-debtor’s obligations to the landlord under the Bankruptcy Code – more about that in a later post).

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The Need for Exit Strategies in Your Commercial Lease

In good times and in not so good times, a well drafted and negotiated commercial lease will contain various exit strategies available to the landlord and tenant. These strategies will come in handy in situations where a tenant’s business is booming causing it to grow out of its current space (good times) or where the space is too big or expensive for the tenant to continue because business has dropped off considerably (not so good times).

Exit strategies can include the following:

  • Assignment
  • Subletting
  • Contraction rights
  • Right to go dark
  • Right to expand

Below is a very brief overview of how each of the foregoing strategies operates.

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Beware of the Ordinary Wear & Tear Clause in a Commercial Lease

Many landlords and tenants, when negotiating a commercial lease, fail to appreciate the implications of incorporating certain “standard” provisions into the lease. Many unfortunately take comfort in boilerplate language that either of the parties (usually the landlord) used in prior leases. While such an approach may make for an uncomplicated lease drafting process (assuming the tenant is of the same mind), it could prove ultimately to be a rather expensive approach to managing the leasing process once the term ends and disputes arise over the condition in which the tenant has left the premises.

One very good example can be found in the usual wear and tear provision contained in most off-the-shelf commercial leases. These clauses usually provide that the tenant will return the premises in good repair, excepting normal wear and tear. While that is all well and good, the language does not come close to articulating either party’s respective rights or responsibilities as they relate to the wear and tear of the leased premises. Because of the lack of detail contained in many “wear and tear” clauses, the landlord and tenant may very well end up investing a lot of time and money to address issues that could have been more efficiently (i.e. cheaply) addressed at the lease negotiation stage.

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