1. Use of the Premises

Leases dictate how your entire property functions. Strong “Use Provisions” clearly define what activities are allowed within each space. These provisions should work together with the use provisions of other tenants to create a positive environment and to create a strong mix of tenants. Well-drafted Use Provisions can build synergies and help you avoid conflicts between (and also with) tenants.

2. Risk Management: Insurance & Indemnification

Commercial leases allocate risk between you and your tenant. Clear provisions define each party’s responsibilities and help reduce risk, such as requiring both to maintain insurance. These provisions may also include “indemnification,” where one party agrees to cover the other’s losses in certain situations. This applies to both individual premises and overall common areas of your property. Getting this right is crucial for minimizing risk.

3. Optimizing Tenant Contributions

Leases come in many structures. A Ground Lease allows a tenant to build and maintain their own building on your property. In contrast, a common NNN lease means you, the landlord, take on significant responsibility for maintaining the property outside the tenant’s space but then bill most of those costs back to the tenants. Every lease structure has its own considerations to protect your interests. A well-crafted lease makes the property easier to manage, with tenants contributing fairly to the upkeep. Mistakes in this area can leave you responsible for costs you shouldn’t have to bear.

4. Tenant Creditworthiness

Reliable, creditworthy tenants are essential. Thorough tenant screening, including reviewing financials and guarantor qualifications, is key. Leases with poorly drafted “assignment provisions” can create loopholes that allow tenants to escape their financial obligations and possibly leave you with an occupant who is unable to meet its financial (and other) obligations.

5. Clarity on Maintenance: Defining Responsibilities

A well-maintained property attracts and retains quality tenants. Well drafted lease terms outlining who is responsible for what repairs and upkeep minimize confusion and prevent future disputes.

6. Lease Duration and Renewal Options

The length of the lease and the terms for renewal can significantly impact both landlords and tenants. Rent escalation clauses are discussed below.  Tenants also frequently desire lease renewal options and early termination conditions.  Understanding these terms (which are not often beneficial to landlords) is essential in determining whether to include them in a lease and also helps in planning long-term investments and maintaining stable occupancy rates.

7. Rent Escalation Clauses

Addressing how rent will increase over the term of the lease is crucial. This can be based on fixed increases, percentage increases, or tied to an index like the Consumer Price Index (CPI). Clear rent escalation clauses help avoid disputes and ensure the investment keeps pace with inflation and market conditions.

8. Subleasing and Assignment

Tenants might want the flexibility to sublease or assign the lease to another party. Provisions governing subleasing and assignment can protect landlords by ensuring new tenants meet financial and operational criteria. This also helps in maintaining the integrity and quality of tenants in the property.

9. Default and Remedies

It is essential to define what constitutes a default under the lease and the remedies available to the landlord. Remedies can include late payment penalties, rights to terminate the lease, or re-enter the premises. Clear default and remedy provisions provide a legal framework to address breaches of the lease agreement.

10. Environmental and Compliance Issues

Including provisions that address hazardous substances, environmental responsibilities, and compliance with local laws and regulations can help prevent future liabilities. This can be particularly important for properties used in connection with certain industries that use materials or generate waste that might impact the environment.

11. Tenant Improvements and Alterations

Clarifying who is responsible for tenant improvements and any initial as well as subsequent alterations to the leased premises is vitally important. This includes specifying the approval process, standards for construction, and responsibilities for restoration at the end of the lease term.

Crafting effective commercial leases requires a comprehensive approach. Consulting with experienced legal counsel ensures your leases are strong, enforceable, and contribute to the long-term success of your property.

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LIBOR has served as the benchmark interest rate for over 30 years and is currently tied to over $200 trillion in contracts and debt obligations. LIBOR serves as the underlying interest rate for multiple types of contractual obligations including business loans, mortgages, and even student loans. However, given the recent LIBOR rate setting manipulation scandal and its declining reliability, the United Kingdom’s Financial Conduct Authority has agreed to stop publishing the LIBOR, and banks will no longer be obligated to make LIBOR submissions, after December 31, 2021. SOFR is calculated daily based on overnight cash lending between banks collateralized by the United States Treasury in the repurchase agreement market. According to the Federal Reserve, SOFR is much more resilient than LIBOR is numerous ways including its transparency and the fact that it is more representative of the way financial institutions fund themselves today. The Federal Reserve began publishing daily SOFR rates on its website on March 2, 2020.

The ARRC has created the Paced Transition Plan to give guidance and encourage the adoption of SOFR here in the United States. The ARRC has recommended that contracts stop referencing LIBOR as the benchmark interest rate starting as early as this year in order to facilitate a smooth transition to SOFR by the end of 2021. Some financial institutions have already begun the transition process to SOFR, such as Freddie Mac, which will no longer purchase LIBOR Adjustable Rate Mortgages beginning January 1, 2021.

In addition to providing a transition timeline, the ARRC recommends that LIBOR contracts should, as soon as possible, include ARRC recommended, or substantially similar, fall back language. Two approaches for fallback language have been enumerated by the ARRC for those instances where a contract is still using LIBOR as an interest rate or for those previously executed contracts that do not provide for an alternative to LIBOR. The first approach, the “hardwire approach”, specifically sets forth a replacement benchmark interest rate that will be applied at the end of LIBOR and indicates the procedures that will be used to calculate and institute the new interest rate within the contract. Alternatively, the “amendment approach” permits the parties to a contract to amend the agreement at a future date, once LIBOR is phased out, and determine the new interest rate then, while still outlining the procedures that will govern selecting the replacement index. The hardwire approach eliminates the need for an amendment down the road for LIBOR based contracts by including language that addresses the potential replacement, while the amendment approach may work best for those older contracts that may not have anticipated the end of LIBOR. Either way, it is imperative that both approaches address how the new interest rate will be determined.

Whether it be assistance amending an executed contract or current debt obligation that does not include replacement language for LIBOR, or assistance navigating new contract negotiations and loan agreements, our experienced team of attorneys here at Dawda are ready to advise and help guide you through the transition away from LIBOR.

Written by Associate, Kathryn Kaleth.

The post Transitioning Away from LIBOR: What’s Next? appeared first on Dawda PLC.