How to Use a Conforming Lease Without Getting Hurt

Be careful when you use an existing tenant's lease as the basis for a new lease with the tenant on additional space in the same building or center, or on another building or center you own, warns Denver attorney Neil B. Oberfeld.

Although you and the tenant can save a lot of time and legal costs by agreeing to “go by” the tenant's existing lease when drafting a new lease for the additional space, you can't just copy the existing lease whole.

No two deals are exactly alike, points out Oberfeld. So you must identify—and change—the inappropriate, unacceptable, or outdated provisions in the existing lease (often called the conforming lease).

But those changes can slip through the cracks once you and the tenant have agreed to use a conforming lease. That could lead to a lease that doesn't protect you or that's unclear—and could lead to serious disputes between you and the tenant. Or the tenant may not have realized what changes were needed and may give you a hard time during the final lease negotiations.

To help you protect your interests and promote smoother negotiations, Oberfeld recommends putting a clause in your letter of intent to address how the new—or “go by” lease—will differ from the conforming lease.

Using a clause like this should help you make sure that the differences will be properly addressed, with a minimum of discord. There's a Model Clause on p. 7 that you can adapt and use for this purpose.

What to Cover in Letter of Intent

Using a conforming lease makes sense if you can use enough of its provisions to speed up the process and reduce your costs, says Oberfeld. That means you should first review the conforming lease to look for inappropriate, unacceptable, or outdated provisions.

Then, if you and the tenant agree to use a conforming lease, Oberfeld suggests that you cover the following points in the letter of intent, as our Model Clause does:

Use of conforming lease. Make it clear that you'll use a conforming lease to:

• Identify which lease is being used as the conforming lease;

• Explain that you're using the conforming lease to expedite negotiations; and

• Say that you and the tenant accept the provisions of the conforming lease without needing further substantive negotiations [Clause, par. a].

Changes already agreed to. Say that the new lease will reflect any additional or changed provisions that appear elsewhere in the letter of intent [Clause, par. b(i)]. For example, there may be provisions in the conforming lease that aren't acceptable to you for this lease. Or you and the tenant may have already negotiated some changes. To avoid confusion, you want to make clear that the provisions in the letter of intent take precedence, Oberfeld says.

Site-specific differences. Say that the new lease will differ to reflect the different features and location of the new space [Clause, par. b(ii)]. In most situations, some of the basic business points for the new deal will have to be different from those in the conforming lease, says Oberfeld. That's because the rent, size, location, and quality of the new space probably aren't identical to the tenant's existing space, he explains.

For example, if the tenant's new space is located in a building in a major city, its minimum rent will most likely be higher than the minimum rent for its other space that's located in a suburban area, he explains.

Differences in local laws. If the tenant's new space and existing space aren't in the same locality, differing laws may apply to them, says Oberfeld. Make it clear that the new lease will reflect those differences [Clause, par. b(iii)].

For example, the area the new space is in may have special zoning restrictions unlike those that apply to the tenant's existing space. The conforming lease probably doesn't take those special zoning restrictions into account and will need to be changed, he explains.

Differences from your new lease form. The conforming lease may be based on a lease form you no longer use and that's outdated. If that's the case, you can say that the new lease must be updated to reflect any changes in the standard form you now use as a starting point for your leases, Oberfeld says [Clause, par. b(iv)].

But expect a savvy tenant to argue against this, he warns. It will say that deferring to an updated lease form would substantially change the deal and defeat the purpose of agreeing to conform the leases.

Practical Pointer: If you know when drafting a lease with a new tenant that the tenant will want to sign several leases with you over time, it's a good idea to treat the original lease as a prototype, says Oberfeld. That means you should take extra care when drafting it, he says, since you know that you're likely to use it again in the future.

CLLI Source

Neil B. Oberfeld, Esq.: Member, Isaacson, Rosenbaum, Woods & Levy, PC, 633 17th St., Ste. 220, Denver, CO 80202-3622; (303) 292-5656; noberfeld@IRWL.com.