1. Back to the Basics: Commercial Leasing for Lenders
Julie Schoepf
Dinsmore & Shohl LLP, Cincinnati, Ohio
Susan Cornett
Thompson Hine LLP, Dayton, Ohio

2. Commercial Lease Review Confirming the Basics
Complete
Tenant Identity
Premises
Term
Renewal Options
Termination Options

3. Show me the Money: Rent Base/Minimum/Fixed Rent Additional Rent
What is included
When is it due
Escalation vs Pass-through
Caps on increases or Gross up provisions
Percentage Rent

4. Rent - Pay Attention to:
Rent concessions
Confirm all rent is due and payable without deduction, setoff or counterclaim
Consider adding a carve-out and/or limiting any such rights via SNDA
Rent payment due date
Confirm no payments due more than 30 days in advance
Rent adjustment provisions
Initial or Renewal Term?
Fixed amount or tied to CPI?

5. Show me the Money: Security Deposits
Requirement / Amount / Collection
Obligation to Replenish
Form
Cash
Letter of Credit
Landlord draw rights; triggers
Ability to pledge to Lender

6. Protecting the Collateral: Insurance
Tenant’s Responsibility
Commercial general liability insurance
All-Risk Policy covering Tenant’s personal property and leasehold improvements
Landlord’s Responsibility
Liability, fire and extended coverage on the Building/Project/Center as a whole
Name Landlord and Lender as additional insureds

7. Insurance, continued: Waiver of subrogation Endorsements
Depending on the nature of the Tenant and/or the property, it may be appropriate, or Lender may expect, Tenant to carry all insurance (including insurance typically carried by the Landlord)
Compare against Lender’s insurance requirements

8. Casualty/Condemnation - Pay Attention to:
Landlord Rebuild/Restore Obligations
Termination Rights
Landlord
Tenant
Inconsistencies Lease and Loan Documents
Abatement Rights
Business interruption insurance

9. Initial Construction - Pay attention to:
Landlord build-out obligations
Clear obligations
Budget
Status of Landlord's work
Tenant acceptance of demised premises
Tenant in occupancy and paying contractual rent
Issuance of Certificate of Occupancy

10. Initial Construction, continued
Avoid: Lender becoming obligated to complete the Landlord's work or paying tenant allowances
Escrow at closing
Recourse Carveout
Estoppel / SNDA
Avoid: Lender liability for Landlord warranties
Avoid: Lack of clarity surrounding Tenant Allowances

11. Repairs & Maintenance Typical Landlord Responsibilities:
Typical Tenant Responsibilities:
Roof
Foundation
Exterior walls (other than store fronts and plate glass)
Utility lines to the point of connection to the Demised Premises
Other structural portions and common areas (parking lots, driveways, landscaping etc)
Interior of the Demised Premises
Non-structural portions (e.g. walls, ceiling, flooring, entry and interior doors)
Plumbing fixtures,
Light fixtures
Mechanical systems within the Demised Premises

12. Repairs & Maintenance (cont.)
Typically pass-through to the Tenant as Additional Rent
Things to look for:
Does “repair” include replacement
Is HVAC maintenance/replacement specifically addressed
Non-standard maintenance/repair obligations of the Landlord

13. Alterations
Landlord is typically permitted to make alterations/modifications to the common areas so long as it does not reasonably interfere with Tenant's use
Things to look for:
Any Tenant alteration rights without the Landlord's prior written consent
Do leasehold improvements automatically belong to Landlord upon Lease expiration
Tenant obligation to remove leasehold improvements

14. Americans with Disabilities Act (“ADA”) Issues
General Requirement: Landlords and Tenants must "remove architectural, and communication barriers that are structural in nature, in existing facilities ... where such removal is readily achievable“ to ensure that disabled individuals have complete access to goods and services
This is a very litigious area.
Lease determines which party has legal responsibility for barrier removal since it governs which party has the legal authority to modify/alter the Demised Premises
Best Case Scenario:
A covenant to comply with all laws obligates the covenanting party to comply with ADA at its own expense, unless ADA compliance is expressly carved out.
Note: if a structural modification is required due to a change in the law after the Lease is signed, Landlord will generally be held responsible regardless of any such covenant

15. Assignment and Subletting
Best Case Scenario: Tenant has no rights to assign or sublet
Typical Scenario: Tenant may not assign or sublet without Landlord’s consent, except for certain permitted assignments
Loan Documents should give Lender the right to approve any assignment or sublease whenever Landlord has a consent right

16. Assignment and Subletting
Key clauses to look for:
Controlling interest transfers in Tenant = Assignment
No release of Original Tenant following an assignment
Limit permitted transfers and include restrictions that preserve the credit of the Tenant and the value of the Lease

17. Tenant Defaults and Landlord Remedies
Landlord and Lender Concerns are typically aligned
Confirm default provision does not provide unusual cure periods
Check for typical remedies including termination of lease, termination of possession, self-help and monetary damages

18. Landlord Defaults and Tenant Remedies
Landlord defaults are often not directly addressed
Lender should look for protections in the event of Landlord’s default including:
providing that covenant to pay rent is independent,
prohibiting termination,
waiving special, consequential or punitive damages and
limiting liability to Landlord’s interest in the premises

19. Landlord Defaults and Tenant Remedies
If Tenant has the right to terminate, Tenant should be required to provide notice to Lender and an opportunity to cure
Carefully review Tenant self-help and offset rights and consider adding protections in the SNDA
Confirm cure periods in the SNDA provide ample time for Lender to cure if Landlord fails to do so within the allotted time period – Lender should have the time to obtain possession if possession is necessary to cure

20. Lender Protections
The loan documents should provide that Landlord may not terminate or amend leases in without Lender’s consent except for leases below a certain square footage that meet other requirements
Tenants should be required to enter into a SNDA and provide an estoppel at Lender’s request

21. SNDAs – Critical Elements
Subordination – including to renewals
Attornment
Non-disturbance
Lender right to notice and cure
Limitation of Lender’s liability
Lender consent to amendments

22. Estoppels – Critical Elements
Lease in full force and effect
No amendments except as stated
Rent and paid-to date
Commencement and termination dates
Security Deposit
Tenant acceptance of premises / in occupancy
Landlord delivery of premises and payment of required allowances / completion of Landlord work
Any outstanding defaults/ disputes
Any claims of offset

23. Special Tenant Rights of Concern to Lenders
Rights to purchase (including rights of first offer and rights of first refusal)
Termination rights
Offset Rights

24. Continued Due Diligence after Loan Closing
Lender right to request estoppels from time to time
Follow up on any missing documents
Require that copies of all lease documents be delivered to Lender, even if consent is not required
Proactively review rent rolls and other property reports to spot issues and confirm Landlord’s compliance with leasing restrictions and covenants