Determining lease financeability factors.

It is rare in lease negotiations not to hear the attorneys claim that a proposed change may affect the "financeability" of the lease. The financeability of a lease is obviously determined primarily by the economics of the transaction, such as the tenant's credit-worthiness; the length and size of the rental stream; the lease security; and the value of the improvements.

However, there are other "legal" factors that also need to be considered. Set forth below is a list of such factors. Although the lease provisions addressing these items may often be dismissed by the principals, brokers and sometimes even attorneys as inconsequential boilerplate, they can affect a lender's willingness to provide financing.

Attornment 

The lease should require that if the mortgage forecloses or takes a deed in lieu, the tenant will "attorn" to the mortgagee or successor landlord at their election. This means that the tenant will keep the lease in effect, rather than exercising its right to terminate. Foreclosure is a double-edged sword; if a mortgagee forecloses, either it or the tenant can terminate an existing lease. Therefore, in the absence of attornment language, a mortgagee can lose a valuable tenant if it forecloses.

Post-Foreclosure Limitations

If a mortgagee or third party takes a deed in lieu, it should not be responsible for the acts of the prior landlord. Accordingly, the lease should provide that such mortgagee or third party should not be:

* Liable for any act or omission of a prior landlord or subject to any offsets or defenses which the tenant may have against a prior landlord;

* Bound by any payment of rental made more than 30 days prior to the date such payment was due;

* Bound by any obligation to perform or fund work or make other payments)other than future such obligations under the lease or repairs previously necessitated by casualty or condemnation to the extent of insurance or condemnation proceeds);

* Bound by any modification of the lease made without its consent; or

* Bound to return the tenant's security until such security comes into its possession.

Estoppel Certificates

If required by a mortgagee, a tenant should be required to certify in writing:

* That the lease is in full force and effect and has not been modified except as set forth in the certification;

* The date to which rent has been paid:

* Whether the landlord is in default and, if so, the nature of such default; and

* Any other matters reasonably requested by the mortgagee.

Such certificates are commonly called "estoppel certificates," since a tenant would be estopped, after delivering such a certificate, from contradicting such certificate if a dispute arose with the mortgagee or successor landlord.

Right to Cure and Modify

The lease should require the tenant to provide the mortgagee with notice of any default by the landlord and a reasonable opportunity to cure. Without this protection, a tenant could terminate its lease due to a default by the landlord, thereby depriving the mortgagee of its collateral. The lease should also permit reasonable modifications required by the mortgagee so long as the tenant's obligations are not increased or its rights reduced.

Insurance

The lease should require the tenant to carry acceptable amounts of liability, hazard and business interruption insurance. This reduces the risk that a mortgagee will lose its collateral due to a casualty or other event that may put a tenant out of business.

Improvements/Alterations/Maintenance/Permits

In order to preserve the mortgagee's collateral, it is important that the lease contain adequate control over the tenant's improvement and alterations. This includes landlord approval of plans, specifications and contractors and the provision by the tenant of adequate bonds or other surety for its work. The lease should also require the tenant to maintain its premises in good condition, and to obtain all required permits and licenses for its work and operations.

Restoration

Tenants should be required to surrender the premises upon expiration or termination of the lease in broom clean condition with all personal property and non-customary improvements removed and with the premises restored to its prior condition following such removal. Non-customary improvements would include internal stairways, raised floors, cafeterias, auditoriums, and vaults or other high security areas. Without this obligation, a substantial amount of additional capital might be required to re-market the premises.

Assignment/Subleasing

Although a tenant remains obligated under its lease following an assignment or sublease, mortgagees will be concerned with who will actually be in occupancy of the premises and, therefore, the lease should contain limitations on a tenant's sublease/assignment fights. It is important that prospective sublessees/assignees be required to use the premises in a manner consistent with the other tenancies in the building and which will not overload building services or systems.

It is also important that they have the financial wherewithal to meet their obligations; a mortgagee does not want vacant space in its building or eviction battles, even if the underlying tenant is paying its rent.

The landlord should also have the right to "recapture" space proposed for sublease or assignment. The right to "recapture" or take back space gives the landlord the flexibility to accommodate other tenants and also allows the landlord to achieve market rents from a below-market lease. A provision for the sharing of profits generated by a sublease or assignment should also be included in case the landlord decides not to exercise its recapture right. In addition, a tenant should not be permitted to compete with the landlord; accordingly, it should not have the right to list its space for a rent lower than the rent at which the landlord is offering similar space in the building or to sublease/assign to other building occupants if the landlord has comparable space available.

Renewal/Expansion Rights

Rights to renew or expand should be limited as much as possible. Such rights would restrict the ability of a successor owner following a foreclosure to market a building by limiting its flexibility.

Self-Help

The lease should contain a provision that permits the landlord to cure a default by the tenant and to seek reimbursement for the cost of such cure. This permits the landlord to preserve the value of the asset if the tenant is damaging or failing to maintain the premises, and also allows the landlord to avoid the cost and delay of having to resort to judicial proceedings in order to protect its rights.

The foregoing is a list of the basic items that should be included in a lease in order to preserve the mortgagee's collateral and limit its exposure. The absence of any of these items could have the effect of reducing the value of the lease or asset, and therefore its financeability. A problem with financeability could come back to haunt the parties to a lease, and therefore both parties should keep the foregoing items in mind.