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Posts tagged with: conducting due diligence

THE CLIENT CONUNDRUM

A mistake lawyers make is treating all clients the same. It’s a mistake shared by other professions as well. They’re not all the same. The issues clients face, and the solutions they deserve, are as varied as life itself.

 

R. Kymn Harp
Robbins, Salomon & Patt, Ltd.

With the rise of technology and the commoditization of legal services, nuance can be lost. Precise solutions to particular problems may be neglected while cookie-cutter boilerplate is offered as a cheap substitute. Not that all boilerplate and technology is bad – they can provide huge benefits when applied correctly. But just as a mass-produced size 9 leather dress shoe may be ideal for some, it is of little comfort or use to an athlete with a size 10 foot.

 

Automation is a cost-saver, no doubt. But is it a reasonable substitute for thoughtful analysis and tailor-made solutions to client specific problems?

 

There may be areas of life where commoditized legal services represent a reasonable tradeoff. Perhaps consumers engaged in everyday transactions are adequately-served by inexpensive one-size fits all solutions. Even a consumer buying a home – often touted as the largest single transaction most consumers will make in their lifetime – may be well-served by inexpensive boilerplate solutions on most occasions. In the world of consumer transactions and consumer finance, there is a protective overlay of consumer protection laws and oversight that will often fill in the gaps left by a one-size fits all approach.

 

But what about most commercial transactions? Buying or starting a business? Investing in commercial or industrial real estate? Raising capital from third parties? Entering into a partnership agreement or limited liability company operating agreement for a commercial venture where someone else is in control, and uses or controls your money – or where you use or control someone else’s money? Are these circumstances where one-size solutions and documentation make sense?

 

How do you protect yourself if something goes wrong? Experience shows something can always go wrong. And when things go wrong in a commercial transaction, expensive lawsuits often follow.

 

Business people consider themselves to be intelligent, reasonable beings. When they invest in a business or real estate project they expect it will succeed. If they thought otherwise, they would not make the investment. That would be foolish, and they know for certain that they’re not foolish. If it fails, they conclude it had be someone’s fault – but it certainly wasn’t theirs.  They must have been duped. Information must have been withheld. They must have been lied to or cheated.  The other party must at least be incompetent if not downright crooked.

 

You may laugh, but that’s often how it happens. You may be one hundred percent competent and above-board. You may have understood and discussed the risks to the point where you are certain that your partners or investors understand the risks as well – but if you’re the promoter of the failed business or investment, or you’re in charge of making management decisions – you should expect to find yourself staring down the business end of a double-barreled lawsuit claiming the loss is your fault – even if you lost money as well, and even if nothing you did or could have done resulted in the loss. Changing economic circumstances, business and lifestyle trends, and other factors far beyond your control may be the reason for the loss, but you will be blamed. How do to protect yourself?

 

Suppose you’re on the other side. What if you’re the investor or partner asked to invest? What do you look for? What do you require? How do you protect yourself?

 

Clients are not all the same. Commercial transactions are not all the same. The risks and benefits of each investment and business venture are not all the same. The solutions and documentation of each transaction cannot, therefore, be all the same.

 

If clients are engaged in serious business, serious attention is required. Both the attorney and the client need to understand this. Once a deal goes bad, it’s too late to go back and redo what should have been done at the outset.

 

Will doing it right up front cost more?

 

Probably.

 

Will it be worth it if things go poorly?

 

You bet.

 

Should clients buy a size 9 shoe for their size 10 foot?

 

Thanks for listening. . .

Kymn

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NEW BOOK – Illinois Commercial Real Estate

I’m happy to announce that the website for my new book, Illinois Commercial Real Estate is now live.  Visit www.Illinois-CRE.com for a book excerpt.

illinois-commercial-real-estate-book-coverIllinois Commercial Real Estate, Due Diligence to Closing, with Checklists, is intended as a practical handbook for investors, developers, brokers, lenders, attorneys and others interested in commercial real estate projects in Illinois. This book zeros-in on commercial real estate due diligence, and walks the reader through the due diligence process, from conception to closing, with a focus on making sure the commercial real estate project functions as intended after closing.  Checklists are provided as an aid to commercial real estate professionals to assist on evaluation of the property and the transaction on the path toward successful closing. As people in the real estate industry understand, if the deal doesn’t close, it doesn’t count.

I’d like to extend Special Thanks to:

My clients, whose passion for creative commercial development I share;

My partners and staff at Robbins, Salomon and Patt, Ltd., who work with me tirelessly to earn our client’s business every day.

Catherine A. Cooke and Emily C. Kaminski, attorneys at Robbins, Salomon & Patt, Ltd. who provided legal research, advice, counseling, and technical editing;

James M. Mainzer, tax partner at Robbins, Salomon & Patt, Ltd., for his insights and assistance on tax matters;

The editing staff at the Illinois Institute for Continuing Legal Education, for editing early versions of chapters 11, 12, 25, 27 and 28, which were first published in IICLE Practice Handbooks;

Dale V. Weaver, Illinois licensed surveyor, who was kind enough to convert my rough draft drawings into the diagrams included at chapter 25;

. . . and, of course, my friend and valuable resource, Linda Day Harrison, founder of theBrokerList, for her ongoing encouragement and support.

If you are buying, developing, financing, selling, leasing or otherwise dealing with commercial real estate in Illinois, I hope you will find Illinois Commercial Real Estate, Due Diligence to Closing, with Checklists to be a useful resource.

ENJOY!!!

R. Kymn Harp

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Due Diligence Basics – Commercial Real Estate

Due diligence is essential when investing in, developing or financing commercial real estate. You must know the right questions to ask, and where to find the answers. The object is not simply to get to closing, but to assure that the project will function as intended after closing.

R. Kymn Harp Robbins, Salomon & Patt, Ltd.

R. Kymn Harp
Robbins, Salomon & Patt, Ltd.

Due diligence is a standard of conduct. It is the amount of diligent inquiry due under the circumstances of your particular transaction. It requires that you determine, confirm and answer “yes” to every question required to be answered in the affirmative, and that you determine, confirm and answer “no” to every question required to be answered in the negative, for your project to proceed to closing and function as intended after closing.

 

In commercial real estate transactions, there are two layers of due diligence:

  1. Transaction due diligence; and
  2. Property due diligence.

 

TRANSACTION DUE DILIGENCE

In any commercial transaction, transaction due diligence requires that we ask and know the answers to fundamental questions in seven particular areas of concern. These areas of concern include the six elements of every story-line, plus authority of the parties to act.  Transaction due diligence requires that you determine, confirm and know the answers to each of the following:

  1.  Who are the parties to the transaction?

a.  Seller

b. Buyer

c. Lender

d. Tenants

e. Other

2. What property is included?

a. Real estate

b. Personal property

c. Franchise agreements or rights

d. Other

3. Where is the property located?

4. Why is the property being acquired? – Intended use?

5. When must it Close? And other critical dates?

a. Due diligence period

b. Title delivery deadline

c. Survey delivery deadline

d. Financing deadlines

e. Section 1031 identification period and replacement property acquisition deadlines

f. Other critical dates

6. How will the transaction be structured?

a. Sale

b. Lease

c. Section 1031 exchange

d. Seller financing

e. Other transaction structure issues

7. By what authority are the parties acting?

a. Board approval, if necessary

b. Shareholder approval, if necessary

c. Governmental approvals, if necessary

d. Manager authority under LLC Operating Agreement

e. LLC member consent, if necessary

f. Landlord consent, if necessary

g. Lender consent, if necessary

h. Any other required consents or approvals or other sources of authority

When the “what” of Transaction Due Diligence is commercial or industrial real estate, the next step is to conduct an investigation of the property using all appropriate due diligence. Property due diligence is describes below.

PROPERTY DUE DILIGENCE

Property due diligence has four additional areas of concern. As discussed below, the four major areas of concern for property due diligence are market demand, access, use and finances. All of the questions concerning the property that need to be asked and answered when investing in, developing or financing commercial or industrial real estate fall within one or more of these four major areas of concern.

 

Property due diligence requires that you determine, confirm and know the answers to each of the following:

 

 1. Market Demand

a. How will the property be used?

b. Who are the intended users?

c. Is there a need – and more importantly, will there be a need at the time the project is completed?

2. Access

a. How will users get to the property?

b. Are there adequate traffic controls, stoplights, stop signs, etc.?

c. Adequate drives for customers and deliveries?

d. Sufficient roadway stacking room at nearby intersections?

e. Lawful curb-cuts?

f. Full access vs. right-turn only?

g. Adequate parking for business needs (which may be more than zoning requirements)?

h. ADA compliant/handicap accessible?

i. Any other access requirements or impediments?

3. Use

a. Any private land use controls/restrictions on use?

b. Proper zoning?

c. Sufficient parking as required by zoning?

d. Sufficient occupancy capacity?

e. Adequate utility service?

f. If buyer is acquiring the property for its own use, are there any existing tenants or users that must be terminated or removed? Can they be lawfully  removed?

g. Environmental issues? (which may be as much a finance issue as a use issue)

h. Other use requirements or issues?

4. Finances

a. Financing

i.   Appraised value?

ii.  Loan to value – equity requirement?

iii. Terms of financing?

iv.  Lender required due diligence expenses?

v.  Lease subordination required?

x. Subordination Non-Disturbance and Attornment (SNDA) Agreements?

y. Tenant Estoppel Certificates?

vi.  Other lender requirements?

b. Financial Metrics

i.  Real estate taxes and special assessments?

ii. Rehab/repair costs?

iii. User fees and recapture costs?

iv.  Environmental remediation costs?

v.   Leases?

1.  Lease income?

2. Security deposits?

3. Rental abatement?

4. CAM and operating expense reconciliations?

5. Landlord obligations to Tenants for build-out, etc.?

vi.  Other financial benefits and burdens affecting the property?

RESOURCES

Many of the white papers and posts on this blog delve more deeply into due diligence issues and concerns.   You may find particularly useful my post Due Diligence Checklists: for Commercial Real Estate Transactions.

Should you need assistance, we have a number of attorneys at Robbins Salomon & Patt, Ltd. who are experienced commercial real estate practitioners and can help. Do not hesitate to reach out to us. We are always looking for new clients with interesting or challenging projects.

Enjoy!

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NEW: ALTA Land Title Survey Standards

NEW ALTA LAND TITLE SURVEY STANDARDS effective February 23, 2016.

UPDATE:  Effective February 23, 2016, new minimum standard detail requirements for ALTA Land Title Surveys went into effect, replacing the previously existing 2011 Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys.

 

Note that the National Society of Professional Surveyors (NSPS) is the legal successor organization to the American Congress of Surveying and Mapping (ACSM). Accordingly, the new survey standards will be cited as the “2016 Minimum Standard Detail requirements for ALTA/NSPS Land Title Surveys.

 

Several substantive changes have been made in the updated 2016 land title survey standards. A comparison of the 2016 standards to the previous 2011 standards is highlighted on the Red-lined version (click here) showing the changes made. Among the notable changes are changes to the Table A list of Optional Survey Responsibilities and Specifications. The modifications to Table A are largely a result of the 2016 Land Title Survey standards making certain requirements mandatory instead of optional. Additional changes involve reassigned responsibilities (or at least a clarification of responsibilities) for obtaining certain information for use by surveyors in preparing a 2016 ALTA/NSPS Land Title Survey.

 

RSP_LogoHD (3)Update Purchase Agreements to Require Surveys compliant with NEW 2016 ALTA Land Title Survey Standards

 

Especially for commercial or industrial real estate purchase agreements (and financing commitments) requiring ALTA Surveys  prepared after February 23, 2016, be sure to contractually require that they be prepared in accordance the the 2016 Minimum Standard Detail requirements for ALTA/NSPS Land Title Surveys.  Be sure, also, to modify your existing contracts as they pertain to the Table A Optional Survey Responsibilities and Specifications to address the new Table A instead of the version associated with the former 2011 standards.

 

Purchasers should check with their lenders, and with the title insurance company engaged to insure title, to be certain everyone is on the same page, and that all parties understand their respective responsibilities for obtaining documents and information necessary for use by the Surveyor. Lenders and their counsel should do likewise.

 

2016 should be an interesting year for commercial real estate. Best of luck for a prosperous year!

 

Thanks,

Kymn

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Keys to Closing A Commercial Real Estate Transaction

Commercial Real Estate Closings

Anyone who thinks closing a commercial real estate transaction is a clean, easy, stress-free undertaking has never closed a commercial real estate transaction. Expect the unexpected, and be prepared to deal with it.

Harp Author Photo PID 732110I’ve been closing commercial real estate transactions for over 35 years. I grew up in the commercial real estate business.

My father was a “land guy”. He assembled land, put in infrastructure and sold it for a profit. His mantra: “Buy by the acre, sell by the square foot.”  From an early age, he drilled into my head the need to “be a deal maker; not a deal breaker.” This was always coupled with the admonition: “If the deal doesn’t close, no one is happy.” His theory was that attorneys sometimes “kill tough deals” simply because they don’t want to be blamed if something goes wrong.

A key point to understand is that commercial real estate Closings do not “just happen”; they are made to happen. There is a time-proven method for successfully Closing commercial real estate transactions. That method requires adherence to the four KEYS TO CLOSING outlined below: (more…)

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COOL PROJECTS – Real Estate

COOL PROJECTS
Real Estate Projects I Love to Work On.

I love cool real estate projects. Cool projects are why I became a lawyer. Cool projects are why I come to the office each day. Cool real estate projects are why I did not become an astrophysicist (well, one reason – although, that might have been cool too). Cool projects are the reason I live, smile, dance, breath, scour the earth for new deals, jump for joy.

And by “cool”, I don’t mean in a thermal sense – but rather in a “this project is so cool” sense. I am referring to real estate projects that are awesome. Real estate projects that are fun. Real estate projects that make you say “Wow – what a cool project!

R. Kymn Harp Robbins, Salomon & Patt, Ltd.

R. Kymn Harp
Robbins, Salomon & Patt, Ltd.

Cool projects don’t need to be costly projects in major urban centers – although those can be cool too. I’m talking about projects that are creative. Projects that require vision and imagination. Projects that take something mundane and turn it into something special.

Some people think I only like huge projects. To be honest, I do like huge projects, but largely because the huge projects I have worked on also happened to be cool projects.

Redevelopment of the commercial portions of Marina City in downtown Chicago was a cool project. Ground-up development of Sears Centre Arena in Hoffman Estates, Illinois was a cool project. Work on various mixed-use projects around the Midwest and upstate New York have been cool projects. But so has been the much smaller development of an 8,000 square foot microbrewery in the historic Motor Row District of Chicago using TIF financing; development of countless restaurant and entertainment venues throughout the Midwest; conversion of a multi-story industrial building into a high-tech office center; conversion of an outdated office building into a stylish, luxury hotel; adaptive reuse of outdated retail strip centers, bank buildings, city and suburban office buildings, bowling alleys, warehouses, industrial buildings, gas stations, and various small to medium sized special purpose buildings into modern, fully functional jewels – reinvented to provide much needed retail and service amenities for local neighborhoods and communities. It is not the size of the project that makes it cool – or the cost – it is the concept, imagination and creative challenge involved that makes the difference. At least for me.

Cool Projects Test

Here’s a test [call it the “Cool Projects Test”, if you will]:

Which of the following projects is more likely to end up on Kymn Harp’s list of cool projects? (more…)

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DUE DILIGENCE CHECKLISTS for Commercial Real Estate Transactions

R. Kymn Harp Robbins, Salomon & Patt, Ltd.

R. Kymn Harp
Robbins, Salomon & Patt, Ltd.

 2016 Update:

Are you planning to purchase, finance, develop or redevelop any of the following types of commercial real estate in the USA?

  • Shopping Center
  • Office building
  • Large Multifamily/Apartments/Condominium Project
  • Sports and/or Entertainment Venue
  • Mixed-Use Commercial-Residential-Office
  • Parking Lot/Parking Garage
  • Retail Store
  • Lifestyle or Enclosed Mall
  • Restaurant/Banquet Facility
  • Intermodal logistics/distribution facility
  • Medical Building
  • Gas Station
  • Manufacturing facility
  • Pharmacy
  • Special Use facility
  • Air Rights parcel
  • Subterranean parcel
  • Infrastructure improvements
  • Other commercial (non-single family, non-farm) property

RSP_LogoHD (3)A KEY element of successfully investing in commercial real estate is performing an adequate Due Diligence Investigation prior to becoming legally bound to acquire or finance the property.  Conducting a Due Diligence Investigation is important not just to enable you to walk away from the transaction, if necessary, but even more importantly to enable you to discover obstacles and opportunities presented by the property that can be addressed prior to closing, to enable the transaction to proceed in a manner most beneficial to your overall objective. An adequate Due Diligence Investigation will assure awareness of all material facts relevant to the intended use or disposition of the property after closing. This is a critical point. The ultimate objective is not just to get to Closing – but rather to confirm that the property can be used or developed as intended after Closing.

The following checklists – while not all-inclusive – will help you conduct a focused and meaningful Due Diligence Investigation. (more…)

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COMMERCIAL LANDLORD-TENANT – Part 2 – The Covenant of Quiet Enjoyment

R. Kymn Harp Robbins, Salomon & Patt, Ltd.

R. Kymn Harp
Robbins, Salomon & Patt, Ltd.

Catherine Cook Shareholder at Robbins, Salomon & Patt, Ltd.

Catherine A. Cooke
 Robbins, Salomon & Patt, Ltd.

This is Part 2 of a multi-part series of articles discussing the duties, rights and remedies of commercial real estate tenants in Illinois. Part 1, entitled “Getting It Right” discussed the importance of clarity in lease drafting, and the potential for unintended leasehold easements for parking, and other uses.

In March 2015, the Illinois Institute for Continuing Legal Education (“IICLE”) published its 2015 Edition practice handbook entitled: Commercial Landlord-Tenant Practice. To provide best-practice guidance to all Illinois attorneys, IICLE recruits experienced attorneys with relevant knowledge to write each handbook chapter. For the 2015 Edition, IICLE asked R. Kymn Harp and Catherine A. Cooke to write the chapter entitled Tenant’s Duties, Rights and Remedies. We were, of course, pleased to oblige. Although each of us represent commercial landlords at least as often as we represent commercial tenants, a clear understanding of the duties, rights and remedies of commercial real estate tenants is critical when representing either side of the commercial lease transaction.

The following is an excerpt (slightly edited) from our chapter in the 2015 Edition. We hope you find this excerpt, and the excerpts that will follow, informative and useful. Feel free to contact IICLE  directly to purchase the entire volume.

The COVENANT OF QUIET ENJOYMENT
What Is It? — General Principles

It has long been the law in Illinois that a covenant of quite enjoyment is implied in all lease agreements. Blue Cross Ass’n v. 666 N. Lake Shore Drive Associates, 100 Ill.App.3d 647, 427 N.E.2d 270, 273, 56 Ill.Dec. 290 (1st Dist. 1981); 64 East Walton, Inc. v. Chicago Title & Trust Co., 69 Ill.App.3d 635, 387 N.E.2d 751, 755, 25 Ill.Dec. 875 (1st Dist. 1979); Berrington v. Casey, 78 Ill. 317, 319 (1875); Wade v. Halligan, 16 Ill. 507, 511 (1855).

A covenant of quiet enjoyment “promises that the tenant shall enjoy the possession of the premises in peace and without disturbance.” [Emphasis in original.] Checkers, Simon & Rosner v. Lurie Co., No. 87 C 5405, 1987 WL 18930 at *3 (N.D.Ill. Oct. 20, 1987). This does not mean, however, that no breach of the covenant of quiet enjoyment may be found in a leasehold without a finding that the lessor intended to deprive the lessee of possession. Blue Cross Ass’n, supra, 427 N.E.2d at 27. It simply means that a tenant must actually be in possession of the premises to claim a breach of the covenant of quiet enjoyment. If the tenant has already vacated the premises before the disturbance has commenced, no breach of the covenant of quiet enjoyment occurs. Checkers, Simon & Rosner, supra, 1987 WL 18930 at *3.

RSP_LogoHD (3)An implied covenant of quiet enjoyment includes, “absent a lease clause to the contrary, the right to be free of the lessors’ intentional interference with full enjoyment and use of the leased premises.” Infinity Broadcasting Corporation of Illinois v. Prudential Insurance Company of America, No. 86 C 4207, 1987 WL 6624 at *5 (N.D.Ill. Feb. 9, 1987), aff’d, 869 F.2d 1073 (7th Cir. 1989), quoting American Dairy Queen Corp. v. Brown-Port Co., 621 F.2d 255, 258 (7th Cir. 1980).

If the landlord breaches the covenant of quiet enjoyment, the lessee may remain in possession and claim damages for breach of lease. In such case, the measure of damages is the difference between the rental value of the premises in light of the breached covenant of quiet enjoyment and the rent that the tenant agreed to pay under the lease, together with such special damages as may have been directly and necessarily incurred by the tenant in consequence of the landlord’s wrongful act. 64 East Walton, supra, 387 N.E.2d at 755.

Although Illinois cases defining the precise scope of a covenant of quiet enjoyment are rare, BLACK’S LAW DICTIONARY, pp. 1248 – 1249 (6th ed. 1993) defines “quiet enjoyment” in connection with the landlord-tenant relationship as “the tenant’s right to freedom from serious interferences with his or her tenancy. Manzaro v. McCann, 401 Mass. 880, 519 N.E.2d 1337, 1341. (Ringing for more than one day of smoke alarms in an apartment building could be sufficient interference with the tenants’ quite enjoyment of leased premises to justify relief against the landlord.).”

HOW THE COVENANT OF QUIET ENJOYMENT MAY APPLY— CASE LAW

In Blue Cross Ass’n v. 666 N. Lake Shore Drive Associates, 100 Ill.App.3d 647, 427 N.E.2d 270, 273, 56 Ill.Dec. 290 (1st Dist. 1981), the First District Appellate Court discussed the covenant of quiet enjoyment in the lease as granting the tenant a right of quiet and peaceful possession and enjoyment of the whole premises and equated a breach of quiet enjoyment under a lease to a private nuisance. “A private nuisance in a leasehold situation is ‘an individual wrong arising from an unreasonable, unwarranted or unlawful use of one’s property producing such material annoyance, inconvenience, discomfort, or hurt that the law will presume a consequent damage.’ ” Id., quoting Great Atlantic & Pacific Tea Co. v. LaSalle National Bank, 77 Ill.App.3d 478, 395 N.E.2d 1193, 1198, 32 Ill.Dec. 812 (1st Dist. 1979).

The tenant had entered into a five-year lease on August 22, 1978, with a five-year renewal option, for approximately 53,000 square feet of the (more…)

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Commercial Landlord-Tenant Issues – PART 1 – Getting it Right

R. Kymn Harp Robbins, Salomon & Patt, Ltd.

R. Kymn Harp
Robbins, Salomon & Patt, Ltd.

Catherine Cook Shareholder at Robbins, Salomon & Patt, Ltd.

Catherine Cooke
 Robbins, Salomon & Patt, Ltd.

In March 2015, the Illinois Institute for Continuing Legal Education (“IICLE”) published its 2015 Edition practice handbook entitled:  Commercial Landlord-Tenant Practice. To provide best-practice guidance to all Illinois attorneys, IICLE recruits experienced attorneys with relevant knowledge to write each handbook chapter. For the current edition, IICLE asked R. Kymn Harp and Catherine Cooke of Robbins, Salomon & Patt, Ltd., Chicago, Illinois, to write the chapter entitled Tenant’s Duties, Rights and Remedies. We were, of course, pleased to oblige. Although each of us represent commercial landlords at least as often as we represent commercial tenants, a clear understanding of the duties, rights and remedies of commercial real estate tenants is critical when representing either side of the commercial lease transaction.

The following is an excerpt (slightly edited) from our chapter, Tenant’s Duties, Rights and Remedies appearing in the 2015 Edition of IICLE Commercial Landlord-Tenant Practice. We hope you find this excerpt, and the excerpts that will follow, informative and useful. Feel free to contact IICLE directly to purchase the entire volume.

How Commercial Lease Issues Commonly Arise – Getting it Right

Commercial real estate leases, like virtually all documents and agreements relating to commercial real estate transactions and interests, are, to a very large extent, consistent only in their variety. In commercial real estate practice, there are few, if any, “standard form” documents or agreements. To be sure, there are provisions in commercial real estate leases that any experienced practitioner would expect to see, and there are some generally applicable legal concepts that apply, but the variety of issues that may arise — and the language used in each commercial lease — will directly and materially impact the “duties, rights, and remedies” of a tenant under any commercial lease.

The best answer to most questions about what are the rights, duties, and remedies of a tenant under a commercial real estate lease is “It depends.” What does it depend on? It depends primarily on what the parties to the lease — the landlord and tenant — intended, as (presumably) reflected by the express terms and conditions of the lease. However, two common challenges frequently exist, and they apply equally to commercial tenants and commercial landlords. They are (a) poorly written lease provisions that do not clearly and definitively set forth the intention of the landlord and tenant in a way that cannot reasonably be misunderstood and (b) inclusion of perceived “standard boilerplate” provisions in a lease without fully understanding their legal or practical affect on the leased premises, the parties, and the greater project of which the leased premises may be a part. When the intent of the parties is not abundantly clear, a court may find the answer implied by the facts and circumstances.

GENERAL LEASE PRINCIPLES AND RULES OF CONSTRUCTION

A “lease” is generally described as a contract for exclusive possession of land and improvements for a term of years or other duration, usually for a specified rent or other compensation. Urban Investment & Development Co. v. Maurice L. Rothschild & Co., 25 Ill.App.3d 546, 323 N.E.2d 588, 592 (1st Dist. 1975); Feeley v. Michigan Avenue National Bank, 141 Ill.App.3d 187, 490 N.E.2d 15, 18, 141 Ill.Dec. 187 (1st Dist. 1986).

In determining the duties, rights, and remedies of a tenant under a commercial lease in Illinois, the general rules of contract construction will apply. Walgreen Co. v. American National Bank & Trust Company of Chicago, 4 Ill.App.3d 549, 281 N.E.2d 462, 465 (1st Dist. 1972); Feeley, supra, 490 N.E.2d at 18; Chicago Title & Trust Co. v. Southland Corp., 111 Ill.App.3d 67, 443 N.E.2d 294, 297, 66 Ill.Dec. 611 (1st Dist. 1982). Interpretation of a lease is a question of law when the terms are plain and unambiguous. Madigan Bros. v. Melrose Shopping Center Co., 123 Ill.App.3d 851, 463 N.E.2d 824, 828, 79 Ill.Dec. 270 (1st Dist. 1984).

“An ambiguous contract is one capable of being understood in more senses than one; an agreement obscure in meaning, through indefiniteness of expression, or having a double meaning.” Advertising Checking Bureau, Inc. v. Canal-Randolph Associates, 101 Ill.App.3d 140, 427 N.E.2d 1039, 1042, 56 Ill.Dec. 634 (1st Dist. 1991), quoting First National Bank of Chicago v. Victor Comptometer Corp., 123 Ill.App.2d 335, 260 N.E.2d 99, 102 (1st Dist. 1970). However, the mere fact that the parties to a lease “dispute” the meaning of a lease provision and assign conflicting interpretations does not render the provision “ambiguous.” McGann v. Murry, 75 Ill.App.3d 697, 393 N.E.2d 1339, 1342 – 1343, 31 Ill.Dec. 32 (3d Dist. 1979); St. George Chicago, Inc. v. George J. Murges & Associates, Ltd., 296 Ill.App.3d 285, 695 N.E.2d 503, 506 – 507, 230 Ill.Dec. 1013 (1st Dist. 1998); Ford v. Dovenmuehle Mortgage, Inc., 273 Ill.App.3d 240, 651 N.E.2d 751, 745 – 755, 209 Ill.Dec. 573 (1st Dist. 1995). Whether ambiguity exists is a question of law for the court. Advertising Checking Bureau, supra, 427 N.E.2d at 1042; Pioneer Trust & Savings Bank v. Lucky Stores, Inc., 91 Ill.App.3d 573, 414 N.E.2d 1152, 1154, 47 Ill.Dec. 36 (1st Dist. 1980).

It is well-settled in Illinois that, when construing a written lease, the court must give words their commonly accepted meaning and must construe every part with reference to all other portions of the lease “so that every part may stand, if possible, and no part of it, either in words or sentences, shall be regarded as superfluous or void if it can be prevented.” Kokenes v. Cities Service Oil Co., 24 Ill.App.3d 483, 321 N.E.2d 338, 340 (1st Dist. 1974), quoting Szulerecki v. Oppenheimer, 283 Ill. 525, 119 N.E. 643, 646 (1918). See also Southland, supra, 443 N.E.2d at 297.

In construing a lease, the instrument is to be considered as a whole and the primary object is to derive the intent of the parties. However, a contract must be enforced as written, and when the terms of a lease are clear and unambiguous, they will be given their natural and ordinary meaning. Gerardi v. Vaal, 169 Ill.App.3d 818, 523 N.E.2d 1327, 1331, 120 Ill.Dec. 416 (3d Dist. 1988).

The foregoing sounds pretty straightforward, but unless attorneys and their clients draft leases with a comprehensive understanding of the interplay between particularly drafted provisions and every other part of the lease — including so-called “standard boilerplate” provisions — they may find themselves surprised by what they have “agreed to.”

PRACTICE POINTER

 Drafting a commercial real estate lease is similar to drafting any other commercial document, except that the meaning and intent of contractual lease provisions are colored by an extensive body of underlying real property law that has developed over the centuries.

A commercial real estate lease should say what the parties mean and mean what it says. Words have meaning; phrases have meaning; each provision has meaning. The interplay of words, phrases, and all provisions in a lease will help determine the meaning of each other word, phrase, or provision. See Kokenes, supra, 321 N.E.2d at 340; Szulerecki, supra, 119 N.E. at 646.

PRACTICE POINTER

 Be sure the words and phrases you use mean what your client believes they mean before proceeding.

 If there are provisions of a commercial real estate lease you do not fully understand — including provisions you believe are “standard boilerplate” provisions — you need to learn what they mean and how they affect other parts of the lease, and your client’s rights, duties and remedies, before advising your client to proceed.

The following discussion highlights some areas in which the rights, duties, and remedies of the commercial real estate tenant (and, by mirror image, the landlord) appear not to have been what one or the other party thought they were. (more…)

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POP QUIZ! — Commercial Real Estate Due Diligence

R. Kymn Harp Robbins, Salomon & Patt, Ltd.

R. Kymn Harp
Robbins, Salomon & Patt, Ltd.

I read once that if you took all the lawyers in the world and laid them end to end along the equator — it would be a good idea to leave them there.

That’s what I read. What do you suppose that means?

I have written before about the need to exercise due diligence when purchasing commercial real estate. The need to investigate, before Closing, every significant aspect of the property you are acquiring. The importance of evaluating each commercial real estate transaction with a mindset that once the Closing occurs, there is no going back. The Seller has your money and is gone. If post-Closing problems arise, Seller’s contract representations and warranties will, at best, mean expensive litigation. CAVEAT EMPTOR! [“Let the buyer beware!”]

Paying extra attention at the beginning of a commercial real estate transaction to “get it right” can save tens of thousands of dollars versus when a deal goes bad. It’s like the old Fram® oil filter slogan during the 1970’s: “You can pay me now – or pay me later”. In commercial real estate, however, “later” may be too late.

Buying commercial real estate is NOT like buying a home. It is not. It is not. It is NOT.

In Illinois, and many other states, virtually every residential real estate closing requires a lawyer for the buyer and a lawyer for the seller. This is probably smart. It is good consumer protection.

The “problem” this causes, however, is that every lawyer handling residential real estate transactions considers himself or herself a “real estate lawyer”, capable of handling any real estate transaction that may arise.

We learned in law school that there are only two kinds of property: real estate and personal property. Therefore – we intuit – if we are competent to handle a residential real estate closing, we must be competent to handle a commercial real estate closing. They are each “real estate”, right?

ANSWER: Yes, they are each real estate. No, they are not the same.

The legal issues and risks in a commercial real estate transaction are remarkably different from the legal issues and risks in a residential real estate transaction. Most are not even remotely similar. Attorneys concentrating their practice handling residential real estate closings do not face the same issues as attorneys concentrating their practice in commercial real estate.

It is a matter of experience. You either know the issues and risks inherent in commercial real estate transactions – and know how to deal with them – or you don’t.

A key point to remember is that the myriad consumer protection laws that protect residential home buyers have no application to – and provide no protection for – buyers of commercial real estate.

Competent commercial real estate practice requires focused and concentrated investigation of all issues material to the transaction by someone who knows what they are looking for. In short, it requires the experienced exercise of due diligence.

I admit – the exercise of due diligence is not cheap, but the failure to exercise due diligence can create a financial disaster for the commercial real estate investor. Don’t be “penny wise and pound foolish”. If you are buying a home, hire an attorney who regularly represents home buyers. If you are buying commercial real estate, hire an attorney who regularly represents commercial real estate buyers.

Years ago I stopped handling residential real estate transactions. As an active commercial real estate attorney, even I hire residential real estate counsel for my own home purchases. I do that because residential real estate practice is fundamentally different from commercial real estate.

Maybe I do harp on the need for competent counsel experienced in commercial real estate transactions. I genuinely believe it. I believe it is essential. I believe if you are going to invest in commercial real estate, you must apply your critical thinking skills and be smart.

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POP QUIZ:

Here’s a simple test of YOUR critical thinking skills:

Please read the following Scenarios and answer the questions TRUE or FALSE: (more…)

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