Avoid Five Pitfalls When Leasing to a Non-U.S. Tenant
Common misconception: Leasing to a foreign business is no different from leasing to a U.S. business. Truth: Leasing to a non-U.S. business raises special legal considerations. The problem is that standard boilerplate leases aren’t designed for—and thus frequently fail to address—these challenges. Here are five common pitfalls of leasing to non-U.S. tenants and how to avoid them.
1. Tenant Doesn’t Have Sufficient Assets in U.S.
Pitfall: You may be unable to enforce lease payment obligations and court judgments against tenants who keep their assets outside the U.S.
Solution: Before signing the lease, confirm that the tenant keeps adequate assets in the U.S. and add lease language expressly requiring the tenant to maintain U.S. assets at no less than that level during the lease term.
2. Tenant’s Guarantor Doesn’t Have Sufficient Assets in U.S.
Pitfall: The same risk regarding the lack of U.S. assets applies when the tenant’s guarantor isn’t from the U.S.
Solution: There are three basic options:
- Require the tenant to provide a U.S. guarantor;
- If a non-U.S. guarantor can’t be avoided, ensure it maintains assets in the U.S. that are adequate to secure the tenant’s obligations; or
- Instead of having a guarantor, use a letter of credit, security deposit, or other method to secure the tenant’s lease obligations.
3. Tenant’s Agents Are Outside the U.S.
Pitfall: You may be unable to serve notices or bring eviction or court actions to enforce the lease if the tenant’s legal representatives are all located outside the U.S.
Solution: Require the tenant (and guarantor) to appoint one or more local “agents” authorized to accept notices, service of process, and other legal documents on their behalf.
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4. Tenant Isn’t Subject to U.S. Law
Pitfall: Non-U.S. tenants may claim that the lease is governed by non-U.S. law and try to make you go to their home country to sue them.
Solution: You should be sure you can rely on U.S. law and courts to adjudicate lease disputes by addressing the issue in three lease provisions:
- A choice-of-law clause indicating that the lease is governed by U.S. law;
- An acknowledgement-of-jurisdiction clause stating the tenant’s agreement to “submit to the jurisdiction” of not just U.S. courts but also the courts in your particular state, both state and federal; and
- An acknowledgement-of-judgment clause indicating the tenant’s agreement to be bound by the final judgment of the U.S. courts designated above.
5. The Tenant Has Sovereign Immunity
Pitfall: If the non-U.S. tenant is a government entity rather than a private business, you face the additional concern of a federal law called the Foreign Sovereign Immunities Act (FSIA), which bans private lawsuits against foreign governments.
Solution: There are two ways you can get around the ban and sue a tenant protected by the FSIA. The first is where the tenant’s government waives its FSIA immunity. Consequently, you should include a lease clause clearly indicating that the tenant is waiving its immunity.
The other way around the FSIA private litigation ban is when the lawsuit is allowed under an exception to FSIA immunity. For a commercial lease, the key FSIA exception is the one allowing for lawsuits in disputes flowing directly from “commercial activity” the foreign sovereign conducts in the U.S. Courts have consistently recognized entering into a commercial lease to be the kind of “commercial activity” triggering the exception.
The catch: For the waiver to be enforceable and the commercial activity to apply, the person who signs the lease on the sovereign tenant’s behalf must have authority to bind the sovereign. This can be tricky to prove because of the split among courts in what constitutes “authority” under the FSIA:
- Federal courts in Washington, D.C.; Maryland; West Virginia; Virginia; North Carolina; South Carolina; Mississippi; Louisiana; Texas; California; Arizona; Hawaii; Nevada; Idaho; Montana; Oregon; Washington; and Alaska require that the individual have actual authority to waive immunity.
- By contrast, federal courts in New York, Connecticut, Vermont, Alabama, Florida, and Georgia recognize FSIA waivers as valid even when the individual had only “apparent authority” to sign them.