Articles Posted in Commercial Leasing

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When people consider leasing commercial spaces for their office or business needs, sometimes they do not consider the potential complications that can occur during the negotiation process. While not all commercial leases are complicated and may only require one or two points of negotiation, some may have several points to be discussed. That is why it is critical to contact a real estate attorney to help you through the process. The following are a few examples of common issues associated with commercial leases and how they can potentially impact your business.

Subleasing

Many tenants want the opportunity to sublease their building in case there are big changes in their business. Sometimes financial changes may require that the business take a step back from the space in order to save money, or if the business is doing well, the company may need to move to a different location. However, many landlords see subleasing as a potential risk because the person who subleases the space may not be financially responsible and this could mean a monetary loss for the landlord. This is certainly a situation in which give and take must be considered so that both parties are accepting of the terms of the lease.

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A provision commonly utilized in commercial real estate contracts is a liquidated damages clause. This clause is utilized as an incentive so all parties involved in the transaction perform as stipulated under the contract. If they fail to do so, the harmed party can pursue restitution through the liquidated damages clause.

You must be careful when drafting the language of the clause because in California a liquidated damages provision is presumed to be enforceable, but could be voided if it is viewed as a penalty by a court.

In the 1970s, California adopted a policy of presumptive validity for liquidated damages clauses in commercial contracts, including real estate contracts. This means that a clause in a contract liquidating damages for a breach is valid unless the party challenging the provision can show that the provision was unreasonable under the circumstances when the contract was formed, or is so draconian that it is essentially a penalty.

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Commercial real estate lenders need to be ready for a myriad of new regulations set forth by the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). These new regulations impose more stringent capital requirements on “high volatility commercial real estate” (i.e. HVCRE) exposures.

The FDIC, OCC, and Federal Reserve approved these rules in an effort to comply with the Basel III Capital Accords, which are international banking standards, along with new risk-based and leverage capital requirements for financial institutions under Dodd-Frank.

What Exactly is an HVCRE Exposure?

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Choosing to rent a commercial space for a start-up business is usually the most economic decision during the early years of the company. It is critical to the future of the business that buyers understand the ins and outs of leasing commercial real estate as well as the best way to negotiate terms that could greatly impact profit and future success. Having the appropriate facts will not only reduce the normal stresses associated with taking the leap into a brand new business, but will also protect your business for years to come.

What is a Commercial Lease?

A commercial lease differs from a residential lease in many ways. A commercial lease is used for people who will be serving the public and not used as a residential dwelling. Because a commercial lease is used for something completely different, many of the familiar terms associated with residential leases do not apply. Such as:

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When you make a quid pro quo deal and you are in the real estate business, watch out. You may be violating the Real Estate Settlement Procedures Act (RESPA).

The Ninth Circuit Court of Appeals decided that a title insurer’s “equity investments” in title agencies in exchange for agreements that the agencies would refer customers to the insurer violated the anti-kickback provisions of the RESPA, according to an article published on Lexology.

The case, Edwards v. First Am. Corp., 2015 WL 4999329 (9th Cir. Aug. 24, 2015) featured borrowers who filed a putative class-action lawsuit against the title insurer alleging that the company violated Section eight of RESPA. This section prohibits payments for the referral of settlement service business.

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In the recent ruling of DKN Holdings, LLC v. Wade Faerber (decided on July 13, 2015) the California Supreme Court helped clarify the meaning of joint and several liability holding. Parties that are jointly and severally liable on the same obligation can be sued in separate actions which are not barred by the doctrines of claim preclusion or issue preclusion.

The cause of action for this case arose from Caputo, Faerber, and Neel, three individuals who each signed a ten-year lease to operate a gym in a shopping center. Caputo later sued DKN, the landlord, for damages and rescission of the lease based on fraud, breach of contract, and other claims. DKN cross-complained for rent and other monies due under the lease. DKN won at a bench trial and was awarded over $2.8 million in damages. DKN then sued Faerber and Neel for breach of the lease.

Faerber demurred, arguing that, because the landlord’s rights under the lease was adjudicated in the first action, suit against him was barred by the rule against splitting a cause of action. In opposition, the landlord argued that separate actions are permitted against parties who are jointly and severally liable. The trial court sustained the demurrer without leave to amend and entered judgment for Faerber.

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The California Court of Appeals recently decided a case that deals with the enforceability of cotenancy clauses in retail leases. This case was one of first impression in California, meaning that it was the first time that a California appellate court had dealt with these issues. This means that other California appellate courts may reach different conclusions and that ultimately the state supreme court may weigh in, but for now this decision is the only appellate guidance we have on these issues.

Grand Prospect Partners, LP v. Ross Dress for Less, Inc.

The case is called Grand Prospect Partners, LP v. Ross Dress for Less, Inc. The appeal dealt with whether cotenancy provisions in a retail lease in a shopping center are unconscionable or unreasonable penalties and, thus, not binding on a landlord. The Court did not decide that this question has a simple yes or no answer. Instead the Court determined that figuring out whether a cotenancy provision is unconscionable or an unreasonable penalty will depend heavily on the facts of each particular case. In this particular case, the Court decided that the provisions were not unconscionable and only the rent abatement provision was an unreasonable penalty. Here Grand Prospect Partners, the shopping center owner and operator, challenged the enforceability of the provisions in its commercial lease with Ross. These provisions conditions Ross’s obligation to open a store and pay rent on Mervyn’s operating a store in the shopping center and granted Ross the option to terminate the lease if Mervyn’s ceased operations and was not replaced by an acceptable retailer within 12 months. Mervyn’s went bankrupt, so it did not open a store. Ross took possession of the space, never opened a business, and terminated the lease after the 12-month cure period expired. Grand Prospect argued that Ross should have to pay the full 10-year term of the lease because either the terms were unconscionable or were an unreasonable penalty.

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The term exculpation clause is defined as a contract provision that relieves one party of liability if damages are caused during the execution of a contract. These clauses can be very important in real estate transactions, particularly those involving small businesses.

Recent Example

Just a few years ago, in Frittelli, Inc. v. 350 N. Cannon Drive LP, a California court held that in a commercial transaction, a general exculpation clause was enforceable because both sides had opportunity to read and understand the entirety of the agreement and the plaintiff failed to allege extreme conduct on the part of the defendant. In that lawsuit, Frittelli asserted multiple claims based on the theory that Cannon Drive’s renovation of a shopping center destroyed Frittelli’s business within the shopping center. The trial court ruled in favor of Cannon Drive at the summary judgment stage, and the appellate court affirmed that decision.

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Landlords and business tenants entering into commercial leases in California should be aware of the legal issues surrounding lease renewal options. One of the best ways to do this it to examine two cases that have dealt with California commercial leases with options to extend.

In Ginsberg v. Gamson, 205 CA4th 873 (2012), the tenant and landlord executed a commercial retail lease in April 1996, for a five-year term, with an option to renew for additional five-year periods. After the first five-year term, the tenant renewed for a second term. During that term, a dispute arose over repairs and the tenant sued, alleging breach of the lease and intentional interference with use of the premises.

The landlord filed a cross claim, seeking a declaration that the lease allowed only one renewal. The trial court ruled that the lease gave the tenant the right to unlimited five-year extensions for 99 years. The jury subsequently found in favor of the tenant and awarded the tenant compensatory and punitive damages. The trial court struck the punitive damages award and the landlord appealed the remaining judgment. The court of appeals reversed the trial court’s interpretation of the lease renewal option, concluding that the trial court erred in construing the lease to give the tenant unlimited extensions; however, the court affirmed the order striking down the punitive damages award.

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The Law Office of Kristina M. Reed has a strong reputation for providing results-driven client-focused legal services to individuals, property owners, investors, entrepreneurs, small to medium sized businesses, real estate agents and brokers, and property management firms. The law firm has been located in Downtown Sacramento since 2008, and has been an active part of the growth, revitalization, and redevelopment of that area. The firm provides small businesses and entrepreneurs with quality legal services at rates affordable to new businesses.

The Law Office of Kristina M. Reed is committed to small businesses and entrepreneurs, and a champion for the growth and revitalization of the Downtown Sacramento area. In keeping with these goals, the firm, along with other local businesses and organizations, recently sponsored the 2013 Calling All Dreamers Competition, an annual competition with the goal of fostering Sacramento’s entrepreneurial spirit and cultivate the next dreamers in Downtown Sacramento. Beginning in April, applicants submitted their businesses concepts for the competition. A panel of business experts selected eleven semi-finalists based on the following criteria: creativity, sustainability, and entrepreneurial passion. The panel then selected five finalists out of the eleven semi-finalists. The panel ultimately selected Andy’s Candy Apothecary as the winner. The candy store will carry packaged candies from around the world and well as locally-made handmade candies. Andy Paul, the founder of Andy’s Candy Apothecary, received a cash prize of $10,000 as well as free rent and business support services, including 10 hours of business and real estate related transactional legal services provided by the Law Office of Kristina M. Reed.

While starting and running a new business requires passion, it also requires confidence and a strong foundation. The Law Office of Kristina Reed provided Andy’s Candy Apothecary with a strong foundation, and we can help your small business as well. Many small businesses pay little attention to the legal side of their business, which can prove detrimental. An attorney experienced in assisting small businesses can help your business make key foundational decisions about the structure and organization of the business as well as developing strategies and making deals that will make your business successful. We can also help draft employment agreements and ensure that your business is in compliance with all relevant ordinances, such as zoning ordinances. Hiring an experienced lawyer up front to help your small business get off the ground can save you from headaches down the road. It can help protect you against expensive lawsuits brought by employees, customers, and suppliers.