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1 auses a Landlord Should Refuse Five Deadly Sins: Lease Cl to Negotiate Under Any Circumstances ugust 2003 A By Ira Fierstein and J. Kelly Bufton the tenant wil l simply When a landlord or its attorney prepares an initial draft of a le ase on the landlord's form, it is expected that if the with handwritten comments, or, ge whatsoever), return the lease sign the lease (but only if the tenant believes it has no levera tenant's comments are extensive a t has nd it has taken control of the dr afting process, return a black-lined copy of the lease that i iation, where each side asserts it f revised. What then begins is the long exercise of lease negot s best positions with the hope o ns the landlord and its attorney should not n live. There are, however, five provisio ending up with a lease with which each side ca on is tantamount to the commission of a deadly leasing sin. Here are the subject matters and agree to modify. Such modificati sample lease provisions that should not be touched: 1. Hazardous Materials: Neither tenant, nor any of tenant's agents, vitees shall at any time handle, use, contractors, employees, licensees or in about the Premises or the Shopping Center any flammabl manufacture, store or dispose of in or es, explosives, radioactive substances, petroleum products or derivat xic wastes or materials, or other similar materials, hazardous wastes or materials, to ives or any substance (collectively "Hazardous Materials") subject to regulation by or under any federal, state and local laws and the environment or the keeping, use or di sposition of environm entally hazardous materi als, ordinances relating to the protection of substances, or wastes, presently in effect or hereafter adopt ed, all amendments to any of them, and all rules and regulations ively "Environmental Laws"). Tenan and issued pursuant to any of such laws or ordinances (collect t shall protect, defend, indemnify d against any and all loss, claims, liability or co sts (including court co sts and attorney's fees ) hold landlord harmless from an to fully comply with all applic able Environmental Laws, or the incurred by reason of any actual or asserted failure of tenant presence, handling, use or disposition in or from the Premises of any Hazardous Materials, or by reason of any actual or assert ed failure of tenant to keep, observe, or perf orm any provision of this paragraph. The length and depth of the hazardous mate rials clause arises because growing body of law that of the complex and constantly ponsibility for hazardous materials on the property ow s created, used, disposed , now places ultimate res ner where the material wa forced numerous otherwise solvent ugh no fault of their own. It is not spilled, etc. This liability has landlords into bankruptcy thro tered, but also that the person responsible for the lease determine what kind of busi ness only imperative that this clause not be al the tenant is engaged in and what its past record has been with regard clause will receive signifi cant to hazardous materials. This should not be altered without consulting professionals. interest from any prospective purchaser or lender and ies of Hazardous Materials, the following language could be add ed: If a tenant insists that it be permitted to handle small quantit onsent, tenant may handle, store, Notwithstanding the foregoing, and subject to landlord's prior c use or dispose of products containing small quantities of Hazardous Materials (such as aero sol cans containing insecticides , toner for copiers, paints, pa int remover and the like) to the extent custom ary and necessary for the use of the Premis es for general office purposes; provided t hat tenant shall always handle, store, use, and dispose of any such Hazardous Materials in a safe and lawful manner and never allow , Building and appurtenant land or the environment. such Hazardous Materials to contaminate the Premises al lease, the use of "general office pu rpose" is appropriate so that the type of Even though a lease may be a retail or industri as possible. Allowing materials custom permitted Hazardous Materials is as limited ple, ary for general industrial purposes, for exam could open the door for virtually any ty pe or amount of hazardous materials. 2. Indemnification: Landlord shall not be liable and tenant here by waives all claims against landlord for any damage to any property or any injury to any person in or about the Premises or the Shopping Center by or ept to the extent caused by or from any cause whatsoever, exc arising from the gross negligence or willful misconduct of landlord or its agents, empl oyees or contractors. Tenant shall prote ct, indemnify and hold the landlord entities har mless from and against any and all loss, cl aims, liability or costs (including cour t costs and attorney's fees) incurred by reason of (a) any damage to any property or any injury to any person occurring in, on or about the

2 Premises or the Shopping Center to the extent that such injury or damage shall be caused by or arise from any actual or alleged enant, its agents, servants, em ployees, invitees, or visitors to meet any standards act, neglect, fault, or omission by or of t imposed thing whatsoever done by the uct or management of any work or by any duty with respect to the injury or damage; (b) the cond nt's failure to comply with transactions of the tenant conc any tenant in or about the Premises or from erning the Premises; (c) tena and all governmental laws, ordinances and regulations applicable to the condition or use of the Pr emises or its occupancy; or ( d) e of any covenant or agreement on the part of the tenant to be any breach or default on the part of tenant in the performanc y of this Lease with respect to an cle shall survive the termination performed pursuant to this Lease. The provisions of this Arti claims or liability accruing pr ior to such termination. exculpation indemnification and . First, in the exculpation, the tenant There are two key protections fo r the landlord in this clause: gs that are not due to the landlord's negl against the landlord that arise from thin igence waives, or agrees not to pursue, any claims or willful acts. The logic behind this is th at the tenant's insurance should cover th ese kinds of losses and, as long as the la ndlord is repair not directly responsible for the loss, the landlord should not be held responsible. This is especially true for the landlord's e tenant does not have any recourse (other than y negligent in getting the repairs made, th obligations. Unless the landlord is grossl to sue for breach of the lease) against th e landlord and the tenant's insurance should cover his losses. The second half of thi s ility on the tenant for losses that arise out of the tenant's fault, work, breach clause, the indemnification, places responsib of the lease, or failure to abide by applicable go in many ways is a means of determining vernmental regulations. Again, this clause read in conjunction with the article regarding insurance whose insurance should cover various incidents and should be sitors," but tenants ar e in the best position to control requirements. Some tenants may obj ect to their responsibility for "invitees or vi the actions of these persons. If this is the tenant's insurance should be at risk for the the actions of such persons and therefore only issue, "invitees or visitors" may be deleted. be given except on a very limited basis for Often, a tenant will request mutual indemnifi cation from the landlord. This should not the lease, and the tenant's sole recourse shall be to perform specific covenants under breach of the landlord's obligations to correct the situation and offset rent. The tenant sha ll not be allowed to sue the landlord for damages. 3. Insurance: oughout the Term: (a) a Commercial Tenant shall keep in force thr y or policies to protect land lord General Liability insurance polic or to any invitee of tenant in lting from any accident occurri ng in or against any liability to the public cidental to the use of or resu ss than $1,000,000.00 per occurrence and not less than $2,000, 000.00 in the annual upon the Premises with a limit of not le from time to time, covering bodily injury and property damag e aggregate, or such larger amount as landlord may prudently require liability and $1,000,000.00 products/completed ope rations aggregate; (b ) Business Auto Liability co vering owned, non-owned and hired vehicles with a limit of not less than $1,000,000.00 per accident; (c) insurance protecti ng against liability under Worke r's Compensation Laws with lim its at least as re ployers Liability with limits of $500,000. 00 each accident , quired by statute; (d) Em oyee; (e) All Risk or Special Form coverage protecting tenant $500,000.00 disease policy limit, $500,000.00 disease - each empl g, floor coverings, panelings, decorations, against loss of or damage to tenant's al terations, additions, improvements, carpetin bout the Premises to the full replacement value of the onal property situated in or a fixtures, inventory and other business pers rance with limit of liability repres enting loss of at least approximate property so insured; and, (f) Bu siness Interruption Insu ly six months of income. Each of the aforesaid policies shall (a) be provided at tenant 's expense; (b) name the landlo rd and landlord's mortgagee as a minimum Best's rating of "A:VII" during the Term; and (d) additional insureds; (c) be issued by an insurance company with ty (30) days prior written notice (ten days for non-payment of provide that said insurance shall not be cancelled unless thir licies or certificates thereof shall be delivered to landlord premium) shall have been given to landlord; and said policy or po by tenant upon the Commencement Date and at least thirty ( 30) days prior to each renewal of said insurance. certain minimal leve ls of insurance to make sure that the va rious liabilities t hat tenant undert akes Tenant is required to maintain have some insuranc e backing them up. These levels shoul d be considered as minimums and may be under the lease will increased in appropriate circumstances. Fo r instance, where an anchor tenant is taki ng a particularly large space or its busine ss involves an extraordinary number of visitors or delivery persons or the term runs for a longer than normal time, it might be advisable for higher limits to be set. Most tenants will h in their standard po licies, with the except ion of the have the amounts set fort lost business if there is an ant business interruption insurance. This insurance pays the tenant for incident that prevents the ten portant from the landlord's viewpoi nt because it gives so me assurance that th e tenant will not go out of from operating. This is im business if such an incident occurs, and through insurance, to co ntinue paying rent and other the tenant will have the ability, charges as they become due. It is different from rental abatem ent insurance because it pays the tenant's business losses, not t he landlord's rent losses. Often, a tenant will argue for the deletion of business au to liability and workers' compensation insurance when no work is bein g so. performed by the tenant. While this should int" if the tenant threatens to make it be resisted, it should not become a "deal po A lso, many larger tenants will seek to avoid obtaining third-part y insurance in favor of self-ins urance. If the landlord is unab le to change the tenant's po sition on this issue, a minimum net worth (usually $100 million) is required, to gether with the requireme nt that the tenant's net worth not decrease by more than 10% in any one year. The tenant shoul d have the burden of providing satisfaction to the landlord of the tenant's net worth. g ation: 4. Waiver of Subro

3 So long as their respective insurers so permit, tenant and landlo rd hereby mutually waive their re gainst spective rights of recovery a extended coverage, All Risks or other insur ance now or hereafter existing for the bene each other for any loss insured by fire, fit of r such policies. Each party shall obtain ent of the net insurance proceeds payable unde the respective party but only to the ext any special endorsements required by their insurer to evidence compliance with the aforementioned waiver. Waiver of subrogation is an area that onl y insurance agents and very picky and troublesome tenants care about. As both the eg, landlord and tenant carry insurance that covers various losses, both benefit from a waiver of subrogation ( if the landlord causes tenant will look to its casualty insu nant's equipment, the rer will not have t he right the fire which destroys the te rance and that insu er the tenant or the landlo rd has insurance covering a loss, to sue the landlord). In plain English, this provision means that if eith first to the insurance rather t han suing the party at fault. If the insurance is inade both parties will look en the quate, however, th lease determines who is liable to whom. Also r the same loss, the lease would govern , if both parties are carrying insurance fo whose policy would pay. 5. Liability of Landlord (if premises is a shopping center): gainst If landlord shall fail to perform any covenant, term or condition of this Lease, and if tenant shall recover a money judgment a landlord, the judgment shall be satisfied sale received upon execution of the judgment and levy aga inst only out of the proceeds of as the same may then be encumbered, and neither landlord nor a the right, title and interest of landlord in the Shopping Center ny of its partners shall be liable for any defic in no event shall tenant have the right to levy execu tion iency. It is understood that Shopping Center. The right of execution shall be subordinate an d against any property of landlord other than its interest in the subject to any mortgage or other encumbrance upon the Shopping Center. No trustee, shareholder, officer, member, director, employee, parent or subsid iary company, landlord affiliate or partner of landlord shall in any event or at any time be personal ly liable for the payment or performance of any obligation required or permitted of landlo rd under this Lease or under any documen t or other process shall be sought or obtained, and no judicial executed in connection herewith. No attachment, execution, writ proceeding shall be initiated by or on behal s or landlord's assets (other than landlord' f of tenant, against landlord personally ord interest in the Shopping Center) as a result of any such failure , breach or default and neither they nor landlord nor any landl affiliate shall be liable for any deficiency. dangerous of all the deadly sins if the land lord allows it to be negotiated. The limit ation of This provision may, in fact, be the most ffiliated with the landlord sh ften, a tenant wi ll want evidence that a ould be of primary concern. O liability against all individuals a the concept. In other situati ons, a tenant may insist on ha ving landlord has an equity investment in the project before agreeing to e rd may collect. The landlord shoul d make certain these amounts hav recourse against future rents or other proceeds that a landlo not already been pledged to a lender before agreeing to commit them to a tenant. It should be noted that several key lease provisions (use, altera subletting, default and remedies , etc.) tions, repair, assignment and that such provisions are less are not discussed in this article. This is not meant to suggest ve. It important than those analyzed abo simply means that such provisi ons generally are the subject of much negotiation, and the landlord often c oncedes more than it originally wanted to do and also has se veral varying "hot buttons" or positions depending on the particular situation. The five deadly sins either do not elicit the same adverse response from scope that they do not leave m uch the tenants, or are so narrow in "wiggle" room to negotiate. and are both members of Chicago's D'Ancona & Pflaum. J. Kelly Bufton Ira Fierstein © Copyright 2007, Law Journal Newsletters

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