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How Could I Be So Stupid?

Simple documents often provide easy opportunities to make big mistakes. Lease amendments, particularly those dealing with extension of the term and expansion of the premises, are good examples.

When we negotiate and draft a lease, we almost always rely heavily on a comprehensive form. Mistakes can occur when using a form, but they are rarely attributable to forgetting important issues.

Problems with term extension and expansion amendments usually arise when we forget to review and analyze the provisions of the existing lease - and leases of other tenants - to determine whether they have an unintended impact on the new transaction. These mistakes are typically discovered at the worst possible time. Here are some examples:

Term Extension Pitfalls * Forgetting to eliminate an existing option to extend when the term extension was intended to replace that option. The problem is attributable to the boilerplate provision that the extension is upon the same terms and conditions as those in effect during the initial term.

* Forgetting to eliminate (or appropriately modify) any tenant improvement allowance, free rent period or similar concession contained in the existing lease.

* Forgetting to obtain any guarantor's consent to the extension. Also, if the current tenant is an assignee and the prior tenant is still liable under the lease, forgetting to obtain the consent of the prior tenant. The guarantor and such prior tenant should also confirm thatthey will remain liable throughout the extended term - if that is the understanding.

* Forgetting to modify the percentage rent break point when a new minimum rent is agreed upon during the term extension. Note: This problem does not arise when there is a "natural" break point calculated by subtracting minimum rent.

* Forgetting that other tenants have rights of first offer or expansion that encumber the premises. Usually such expansion rights are expressly subordinated to other tenants' options to extend. Only carefully drafted expansion rights are also subordinated to term extensions that are created by future separate agreements replacing existing options to extend. Note: When drafting such subordination provisions, a landlord should attempt to preserve flexibility by providing that an extension agreement, in lieu of an existing option to extend, does not have to be on the precise terms as the option to extend.

Expansion Pitfalls * Forgetting (in connection with an expansion into existing space) that other tenants have rights of first offer or other rights with respect to the expansion space. Note: Preceding comments relating to the tension between term extension agreements and holders of rights of first offer are also generally applicable to expansion agreements.

* Forgetting (in connection with an expansion into common areas) to review parking ratio requirements and permissible building area restrictions in other tenants' leases.

* Forgetting to review use restrictions in other tenants' leases. If the expanding tenant is an anchor tenant, other leases should have carved out the anchor's building from their use restrictions. These leases should also have carved out the premises of pre-existing tenants of any size with potentially conflicting uses. These leases may not, however, have carved out expansions by the anchor or the pre-existing tenant.

* Forgetting to increase minimum rent per sq. ft. of the expansion space by an amount that will be sufficient to increase total rent for the aggregate space to the extent intended. If percentage rent is being paid with respect to the existing space, total rent may not increase to the extent intended if the addition of the expansion space does not cause total gross sales to increase proportionately to the increase in square footage.

* Forgetting to consider that anchor tenant leases may contain definitions of floor area that limit future expansion of the shopping center. A supermarket lease, for example, might exclude mezzanine space from floor area. A lower rent and CAM-sharing obligation of the supermarket tenant was probably the only anticipated result.

However, if the local zoning codes require the inclusion of all or a portion of the mezzanine for parking ratio calculations, some GLA might need to be eliminated from the proposed expansion if parking is limited.

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