Sternfield Law

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How a good lease saves time and money

It is amazing what a good lease form can do. It reduces review time and cuts legal fees. It is a pleasure to read (at least when you are a lease geek like me), and ultimately it will make enforcement and interpretation of the lease much easier – also reducing future legal fees.

I was recently asked to review a 90-page retail shopping center lease on behalf of a tenant. I thought “90-pages, that is ridiculous!” I have read many commercial leases since I first started practicing real estate law in 2000, but this was one of the longest, particularly given that the property to be leased was less than 2,000 rentable square feet.

I grabbed my coffee and comfortable sweater and settled in for the long-haul.

Excerpt from an especially well-written retail shopping lease.

I began reading this lease, and to my surprise, the writing was beautiful. Seriously. No typos, the internal section references were correct and the business terms reflected the letter of intent. And the best part – the basic lease comments that all tenants’ lawyers make (at least I hope they do), were already included. No need to spend time drafting lengthy paragraphs explaining things like why at the end of a lease year, the tenant should receive a credit for its over-payment of operating expenses, or that the tenant should receive rent abatement if utilities fail for more than 3 days.

In a landlord-friendly, and might I add, typical, lease these provisions are not givens. However, in this atypical 90-page lease, the basic comments I normally spend a lot of time inserting, were already included. What a brilliant idea. Let’s just cut to the chase and actually spend time commenting on and discussing provisions that require negotiation.

Sure, I do not sound pro-lawyer (sorry to all you billable-hour fiends), but at the end of the day, when faced with an inordinately long document to review, I would much rather read something well-drafted, that assumes basic lease intelligence, eliminates the stupid “gotchas” and is just reasonable. Not only is this better for my client in terms of reduced legal fees, but it shows good faith on the landlord’s part and demonstrates the landlord’s interest in building a positive future relationship. It also sets the tone for negotiations, causing discussions to begin with both sides acting more reasonably.

If more landlords prepared lease documents this way, the world would be a better place.

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Can your home double as a vacation rental? A legal guide

I recently spoke with a friend about my family’s plans for taking a vacation. I lamented the difficulty of traveling with small children. It can be so daunting, sometimes we end up not going anywhere. So she suggested I search online for a condo or a house to rent where we could have a kitchen and separate bedrooms. Great idea.

Of course, being a real estate lawyer, searching for a vacation rental got me thinking – how many people who have posted their homes for rent have done their due diligence? What if renting their home for the weekend is against the law?

Websites such as airbnb.com and vrbo.com are increasingly popular. The idea that you can travel anywhere and be at (a) home is appealing, as is the potential rental income if you own a home that can be leased at a nightly or weekly rate. However, aspiring landlords should proceed with caution.

VRBO and Airbnb are the dominant vacation rental sites today.

Before listing your property for short-term rental, you should consider the following:

Zoning: Is your home zoned for short-term rentals? You should review your property’s zoning designation and confirm that short-term or vacation rentals are permitted uses. In addition, some uses, if not prohibited, may be allowed after you obtain consent from the governing municipality, but you have to follow the necessary procedures for obtaining this approval.

Covenants: Is your property part of a homeowners association or subject to any restrictive covenants? If so, you should review any applicable covenants, conditions and restrictions governing the use of your home. It is very common for condominium community covenants to include requirements and restrictions for rental arrangements.

Taxes: Call your certified public accountant! Engaging in the property rental business will likely have tax implications. In addition to income tax, you could also become subject to sales, hotel, lodging or other taxes depending upon the municipality in which the property is located.

Mortgage Terms: If you have a mortgage (or deed of trust) on your property, confirm that your lender allows short-term rentals and that doing so does not cause you to be in default under your mortgage. Also consider that if you use your property in violation of applicable zoning laws or covenants (as discussed above), this probably constitutes a breach of your mortgage.

Insurance: Confirm you have sufficient property and liability insurance policies to cover potential liability and damages. For example, what if your renter slips and falls on the property and sues you for damages? Or sets the house on fire? Are these situations covered?

Rental Agreement: Do you have a good form? It is critical to have a written agreement with each renter setting out all the terms, conditions, restrictions and obligations. You should also consider whether a “lease” is the proper form. In many jurisdictions, a lease is a real property interest, entitling the tenant to certain rights in the property. Instead, it may be preferable to have a “use” agreement, which is a license or right to use the property which does not carry a real property interest.

The above is by no means an exhaustive list. There may be other considerations specific to your vacation rental situation. It is advisable to obtain competent counsel in determining whether short-term rentals are appropriate for you and to assist you in having the right agreements, insurance and other protections in place.

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5 reasons why a wind farm development can be a complex transaction

1. It’s usually on someone else’s land. Whether the wind farm development will be located on agricultural land, mining property, government land or any other type of real property, a developer needs the right to use the land to house wind turbines, transmission lines and related wind energy facilities.

The developer also needs the right to travel across the land to access the equipment for maintenance, repair, replacement and removal. As such, developers must obtain written leases, easements, licenses or other agreements which provide for the right to use the land, as well as the right to prevent the property owner from interfering with the developer’s project, equipment or wind flow. For instance, it would not be acceptable for the property owner to place a structure in close proximity to a turbine, which could deflect the wind.

2. The land must be zoned for wind energy development. It is not sufficient to have a written agreement with the landowner permitting use of the land for wind energy facilities. The developer must insure that the land is zoned for this use or the applicable municipality may prevent the development. The developer must review the relevant zoning ordinances for the property and determine whether a wind farm is a “use by right” in the particular zone district, meaning that it requires no further municipal approval. Otherwise, operating a wind energy facility may require special approval of the municipality, which could include a plan review process and even public hearings.

3. The developer needs legal access to the property. Wind farms tend to be located in rural areas. Adjacent roadways may not be for public use or may require special permits. They may be private roads owned by neighboring landowners or railroad companies. It is critical for wind energy developers to review access rights. It is also helpful to obtain an ALTA survey of the wind farm property which depicts roadway access, and to obtain title insurance covering access to the property.

Several years ago, I represented a major energy company in the development of a wind farm in central Utah. Before I became involved in the project, the company obtained rights to use the land. They engaged me after the fact to help them get a survey and title policy for their files. Upon reviewing the title documents and survey it became evident that there was no legal access to the property. The road used by the landowner to access the property, it turned out, was actually owned by a railroad company. This railroad company would only give my client a license to use the road which was revocable at any time upon 30 days prior notice, which is not ideal. At the end of the day, we obtained alternate access across the neighbor’s property to be used in case the railroad license was ever revoked. It certainly would have been a better negotiating position for my client to have approached the neighbor and the railroad company before installing its wind energy facilities. I’m fairly certain the access rights would have been less costly.

4. The energy must be transmitted across roads and other real property. Transmission lines traverse the land in order to transmit energy from wind turbines to the energy grid, crossing over public and private lands. The energy developer must have agreements with all landowners in the path of the transmission line to cross over and use the airspace above each strip of land. Absent such agreements, the developer is trespassing.

5. The developer might need funding. Some energy companies and wind energy developers self-fund wind farms. As such, they are less concerned with issues that a lender would raise, such as requiring title insurance policies with access and zoning endorsements. I believe this is a mistake. If the developer ever wishes to sell or finance the wind energy project in the future, the purchaser or lender will likely require resolution of material real estate law issues. If, for instance, there is a title defect such as lack of legal access to the property, the sale or financing may be thwarted and the value of the wind farm greatly diminished.

Wind energy developers should take the time to properly ascertain the real property law implications of their development and solve title, zoning or other real estate issues to avoid a bad investment. Note that the five items listed above are not the only real estate law issues to be considered while undertaking a wind energy project. We recommend obtaining competent legal counsel to help navigate these and any other matters which may arise.

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Downtown Denver commercial real estate rebounding from recession

The Mile High City has received recognition from Forbes Magazine as one of 15 U.S. cities with “emerging” or “booming” downtowns, in large part due to the rebounding Denver commercial real estate market.

Location Matters

A critical factor for businesses determining where to relocate or expand is the availability of workers with college educations. Young, educated professionals tend to migrate to urban centers where they can work, shop and have entertainment in one convenient area.

Denver’s Lower Downtown, or LoDo, fits the bill with over 100 restored warehouses and buildings filled with art galleries, shops, restaurants and nightclubs in close proximity to office and residential buildings, Forbes points out.

While the article did not rank the cities, others noted were Birmingham, Philadelphia and Louisville.

As further evidence of the downtown Denver boom, CBRE recently reported that Denver office vacancies decreased in Q1 2013 by the greatest percentage of any of the twelve largest U.S. metropolitan markets.  Pent-up demand coupled with limited new supply, as well as the redevelopment of Union Station and other projects in LoDo have resulted in a renewed interest in commercial real estate in downtown Denver

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What is an SNDA and should you sign it?

SNDA is the acronym for Subordination, Non-Disturbance and Attornment Agreement. It generally arises in the context of a lease agreement for commercial property.

Most commercial leases provide that the lease is automatically subordinate to all liens and encumbrances placed on the leased premises by the landlord or landlord’s lender, such as mortgages and deeds of trusts. Regardless, when a landlord obtains financing and uses the leased premises as collateral, the landlord’s lender may require the tenant to sign an SNDA. It is also common for commercial leases to require tenants to sign documents necessary to effect subordination. As such, tenants may have little choice regarding whether to sign a standard SNDA, but it is helpful to understand their significance in reviewing them.

As its name implies, an SNDA contains three primary components:

(1) Subordination, meaning the tenant agrees that its leasehold interest, despite the lease effective date, is junior in priority to the lender’s lien. Therefore, the lender has greater freedom to exercise its remedies (such as foreclosure) in the event the landlord defaults under its loan agreement without much concern for tenant’s rights, except as provided in the SNDA or related agreements and as otherwise required by law.

(2) Non-disturbance, which provides that if the lender must foreclose upon its lien or otherwise take possession of the leased premises after the landlord defaults under its loan agreement, the tenant’s leasehold interest will survive the foreclosure or other action and the landlord will continue to recognize the tenant’s rights and interests under the lease.

(3) Attornment, which means that if the lender takes ownership or possession of the leased premises following an event of default by the landlord under the loan agreement, tenant agrees to look to (or “attorn to”) the lender as the landlord under the lease and the lender/landlord will, in turn, perform certain duties of the landlord under the lease, with limitations.

Generally, financial institutions have standard forms of SNDA and a tenant’s ability to modify the form will depend on the particular tenant’s bargaining power. In this economic climate, many tenants request SNDAs upon entering into commercial leases to obtain the benefits of the non-disturbance language in the event the landlord defaults under its loan. While SNDAs do contain numerous lender-friendly provisions, the non-disturbance clauses are likely reason enough for tenants to sign them. It is advisable to seek review of an SNDA by competent legal counsel to help navigate the potential pitfalls.

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Buying a vacation home or rental property? Do your research

In the current economy there are opportunities to sublease office space at favorable rates and terms.

When it comes to commercial leasing, the challenge for potential subtenants is to avoid the dangers of subleasing from a distressed tenant by asking specific questions, and also strengthening the language in subleases and related documentation to protect the subtenant’s interests.

Imagine a scenario in which there is a primary lease of office space between a landlord and a tenant. The tenant has been affected by the economic downturn and has undergone lay-offs, leaving approximately half of its office space vacant. The tenant decides to sublease the vacant office space. Before signing a sublease with the tenant, the potential subtenant should consider the following.

Landlord Agreement

While it is a common requirement that a landlord must consent to a sublease, in this market, the consent document has even greater importance and should be carefully prepared. The landlord’s consent should be contained within a broader agreement between the landlord and the subtenant in which the landlord not only consents to the sublease but agrees with the subtenant as to certain issues which may arise if the primary lease were to terminate or the tenant were to be in default under the primary lease. Since today’s subleases commonly have below-market rent rates, the landlord will likely insist that the agreement provide for the rent to escalate or the term of the sublease to be shortened if the primary lease were to terminate and the sublease were to remain in effect. There will likely also be the opportunity, if not the requirement, that in such case the subtenant ultimately enter into a direct lease with the landlord at market rates. The terms of this agreement should factor heavily into the subtenant’s decision about whether to sublease a particular space.

Lease Termination

What will happen to the sublease if the tenant fails to pay rent or ceases business operations and abandons the premises? These actions will likely be defaults under the primary lease for which the landlord will have the right to seek remedies against the tenant, including lease termination. Absent an agreement to the contrary, if the primary lease is terminated, the sublease automatically terminates. Even if the subtenant has been performing its obligations under the sublease, the primary lease between the landlord and the tenant will alone govern the landlord’s remedies when the tenant defaults under the primary lease. Therefore, the subtenant should insist its agreement with the landlord provides that if the primary lease is terminated as a result of the tenant’s default, the sublease will continue in effect as an agreement between the landlord and the subtenant, with the landlord stepping into the shoes of the tenant as sublandlord. As discussed above, this will likely result in the landlord requiring certain conditions such as increased rent or a shortened sublease term.

Right to Cure

If the tenant defaults under the primary lease, will the subtenant have the right to cure the default and avoid the landlord exercising its remedies under the primary lease? Whether the subtenant has such a right depends upon the terms of the primary lease, the sublease and any separate agreement between the subtenant and the landlord. The sublease should provide that the tenant will promptly give the subtenant copies of all default notices it receives from the landlord together with assurances that the default will be cured. If the tenant is unable to provide assurances that it will cure the default, the subtenant should be permitted to cure the default during the tenant’s cure period under the primary lease. The sublease should further provide for the subtenant to receive from the tenant reimbursement for its expenditures in curing the default, with interest. The subtenant should also seek to include in its agreement with the landlord, the right of the subtenant to cure a tenant default within a certain number of days after the expiration of the tenant’s cure period, though the landlord may resist such a provision. Without some agreement regarding curing defaults, the subtenant will not have the automatic right to cure the tenant’s defaults under the primary lease and will be forced to rely on the tenant to take remedial actions.

Representations and Warranties

The sublease should include adequate representations and warranties by the tenant, particularly that there is no default under the primary lease and that the primary lease remains in full force and effect.

Security Deposit

If the tenant requires the subtenant to pay a security deposit, the subtenant should carefully consider the type (cash versus an alternative such as a letter of credit) and amount of the deposit and conditions for its return. If the tenant were to go out of business and abandon the premises, taking the subtenant’s cash security deposit with it, subtenant would likely lose the money. Typical sublease documents are silent regarding whether, in this situation, the landlord would require an additional deposit from the subtenant if the landlord assumed the sublease or entered into a new lease with the subtenant. A provision on this subject should be included in the separate agreement between the landlord and the subtenant, as well as in the sublease.

Ancillary Documents

There may be outstanding documents such as default notices, settlement agreements or side letter agreements which change the terms of the primary lease. Before signing the sublease, the subtenant should request and thoroughly review all such documents in addition to reviewing a complete copy of the primary lease and its formal amendments.

Liens

The subtenant should evaluate whether any outstanding liens, such as mechanics liens, mortgages, purchase-money security interests and landlord’s liens established in the primary lease, may be detrimental to the subleased property.

While commercial leasing and subleasing in today’s market presents numerous challenges, careful preparation and documentation will help subtenants avoid many of the risks.

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What is an ALTA Survey?

An ALTA real estate survey (or ACSM Survey) is a land survey prepared in accordance with the standards adopted by the American Land Title Association and the National Society of Professional Surveyors (a member organization of the American Congress on Surveying and Mapping). The most recent version of these standards was adopted in 2005.

An ALTA real estate survey is generally more detailed than any other type of drawing or survey of real property, and as such, typically costs more than other types of land surveys or depictions. It is typically prepared with respect to commercial or complex residential properties during the due diligence phase of a real estate transaction to meet the requirements of title companies, lenders and purchasers in determining whether to insure title to, finance or purchase the subject property. Survey review by qualified real estate counsel is critical for most real property acquisitions. Depending on the size of the property and various other issues which may be involved, an ALTA survey could take two or more weeks to prepare and should, therefore, be ordered as soon as possible during the due diligence period.

The following is a link to the current ALTA/ACSM survey standards and the Table A list of optional survey responsibilities and specifications:

http://www.alta.org/industry/ALTA2005_Standards.pdf